Work

Can Europe’s decarbonisation goals offset the merit-order effect and support renewable energy value factors?

Year: 2026

Type: article

Abstract: The rapid expansion of variable renewable energy (VRE) in Europe has intensified the merit-order effect and resulted in deteriorating value factors. This raises concerns about the market viability and future investments in VRE technologies. This paper examines how the market value and value factor of VRE technologies may evolve across Europe towards 2050, using the Balmorel energy system model. Three scenarios are analysed, reflecting different levels of sector coupling, each stress-tested against five sub-scenarios that capture uncertainties in technology costs and fuel prices. The results highlight that sector coupling and cross-border interconnections play a decisive role in stabilising value factors and mitigating the self-cannibalisation of VRE. Higher flexibility systems reduce average wholesale electricity prices, but improve value factors, and vice versa in systems with limited flexibility. Sensitivity analysis indicates that the effects of technology cost uncertainties and fuel price shocks are more pronounced in the near term. Both the metrics under such sensitivities tend to converge towards the Base case projections by 2050. The findings emphasise the importance of market value, alongside wholesale prices, as a realistic indicator of VRE profitability and investment signals.

Source: Energy Policy

DOI: 10.1016/j.enpol.2026.115137

Authors: Sumanth Yamujala, Matti Koivisto, Shubham Nayak

Institution: Technical University of Denmark

Language: English

Topic: Integrated Energy Systems Optimization

Subfield: Electrical and Electronic Engineering

Field: Engineering

Domain: Physical Sciences

SDGs: Affordable and clean energy, Climate action, Industry, innovation and infrastructure

Open Access status: hybrid

Estimated APC paid: $3,940