Can an Energy-Only Market Fully Remunerate Investment? Empirical Evidence Since 2005

The challenges of relying upon the Energy-Only Market (EOM) to adequately remunerate power plants have been widely discussed. However very little empirical information is available showing what percentage of the fixed costs have been recovered since liberalisation was introduced. This paper presents the results of a detailed investigation into the level of cost recovery from the wholesale market for thermal, nuclear, and renewable plants in France and Germany for selected years within the period 2005-2019. The analysis shows that only second-generation nuclear plants recovered their full costs; the average level of cost recovery (over the period covered and the two countries taken together) was 40% for CCGTs, 55% for hard coal plants, 30% for wind plants and 60% for utility-scale solar plants. As an alternative means of profitability determination the internal rate of return (IRR) was estimated and found to be below zero for CCGTs and wind plants; coal plants recorded an IRR of 2-3%, nuclear plants 7-8% and PV plants 0-2%. These compare with a typical utility cost of capital of 7%. The investigation also sought to assess whether data on the variability of returns and its comparison with the appropriate stock-market index could help inform the appropriate cost of capital for such power plants. The monthly volatility of returns was much lower than for the stock-market index, although over the period considered large structural shifts in the returns were observed. Therefore there were no results which could be applied in addressing the cost of capital issue. The conclusion is that the returns from the EOM are structurally too low, rather than particularly high risk, so that it is not possible to invest in such plants relying on revenue from the wholesale market alone.