System Dynamics Simulation to Explore the Impact of Low European Electricity Prices on Swiss Generation Capacity Investments

Abstract

European electricity markets are coping with low energy prices as a result of overinvestments in generation capacity, subsidies for renewables and the financial crisis of 2008. In this chapter we explore the implications of low electricity prices on the Swiss electricity market, which is facing the additional challenge of phasing out nuclear power plants and market liberalization. System Dynamics is utilized to model and simulate the long-term impacts on investments in new generation capacity, security of supply and future electricity prices. Simulation results indicate that the current low electricity prices are likely to persist for another decade. The most likely response to the low prices is an underinvestment in generation capacity, with the risk of scarcity pricing under low security of supply, as it coincides with the decommissioning of nuclear power plants. There is little evidence this will lead to boom-and-bust investment cycles. Finally, in the long-term we observe a shift towards renewable energy sources and natural gas fired power plants, resulting in more volatile electricity prices. These findings are similar to earlier studies of the liberalized German and Belgian electricity markets, which are also facing the challenges of a nuclear phase-out under depressed European prices.