A market-based instrument for renewable energy : Modelling a dynamic price function for local areas

This thesis describes the current situation of the electrical grid on a general level and contemporary support policies for residents who feed renewably produced electricity into the grid within a Swedish context. It shows which issues currently exists and suggests a new way to value overproduced renewable electricity which is not self-consumed. This way is called a dynamic price function (DPF), and this thesis models, simulates and analyzes the DPF in order to create an economic incentive to support the balance of the electrical grid – one of its most important parameters. The suggested DPF could potentially work with any renewable source in any area, but the focus in this thesis has been on solar power-systems for households in local areas. While the currently support policies, which uses static models to value overproduced renewable electricity, have created important incentives for the initial penetration of solar power among local residents they do not scale well as the share of renewable production on a local level increase. This might cause negative impacts on the electrical grid. The thesis’ results show that by designing the DPF in certain ways it is possible to create an economic incentive for different behaviors. The most promising design incorporates three different incentives at the same time and they are: 1) to incentivize the initial penetration of solar power in local areas which do not have any production, 2) to incentivize a higher share of solar power, but not too high, and 3) to procure storage possibilities for overproduced electricity. These incentives do not only encourage a more even geographical distribution of solar power, but also allow for a higher share of solar power in the energy system without risking the balance of the grid.