京都大学大学院 経済学研究科 再生可能エネルギー経済学講座

ディスカッションペーパー No.67

京都大学大学院経済学研究科
再生可能エネルギー経済学講座
ディスカッションペーパー

Higher Stakes, Lower Gains:
Analyzing the Revenue Cannibalization Effect of Renewable Energies inthe Electricity Market with PyPSA-Japan2050 Model2024 年 3 月
March 2024

Zhang Tuo
Assistant Professor,
Research Project on Renewable Energy Economics,
Graduate School of Economics, Kyoto University

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京都大学大学院 経済学研究科 再生可能エネルギー経済学講座

Higher Stakes, Lower Gains:
Analyzing the Revenue Cannibalization Effect of Renewable Energies in theElectricity Market with PyPSA-Japan2050 Model

Zhang Tuoa
a. Assistant Professor, Research Project on Renewable Energy Economics,
Graduate School of Economics, Kyoto University

Abstract: Previous research has highlighted the challenge of integrating renewable energies into
electricity markets, particularly in maintaining market value amidst the increasing penetration. This
paper builds on this foundation, exploring how renewable energies can be effectively promoted as a
primary power source in Japan's electricity market post-grid parity. It delves into the trend of
declining market value for renewables with increased market shares, influenced by their intermittency
and non-dispatchability. With renewables reaching grid parity, the study, using the PyPSA-Japan2050 Model, confirms the revenue cannibalization effect in Japan's solar, offshore, and onshore wind
sectors, noting market value declines as penetration grows. We propose that enhanced carbon pricing
policies could mitigate this decline, offering new strategies for sustainable energy development. We
also consider the role of demand response mechanisms, such as electric vehicle batteries, in enhancing
market value and stabilizing energy prices.

Keywords: Renewable Energy Integration, Market Value Dynamics, PyPSA-Japan-2050 Model,
Carbon Pricing Policy, Demand Response Mechanisms

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ディスカッションペーパー No.67

1 Introduction
Renewable energy sources, particularly wind and solar power, have entered an eraof grid parity, signifying their competitive cost against conventional energy (Oskouei& Mohammadi-Ivatloo, 2020; Wang, Hasanefendic, Von Hauff, & Bossink, 2022; Yan,
Yang, Elia Campana, & He, 2019). Consequently, the effective market integration ofrenewables emerges as a pivotal issue in policy-making and academic research (Hu,Harmsen, Crijns-Graus, Worrell, & van den Broek, 2018). Yet, this transition presents
marked market challenges, especially during large-scale integration. The inherent
intermittency and non-dispatchability of wind and solar power progressively diminish
their market value, reflecting the intricate dynamics of renewables in the market andtheir profound impact on pricing structures (Hirth, 2013; Hirth, Ueckerdt, & Edenhofer,2016).
Prior studies have found that with the increasing share of variable renewableenergies in the electricity market, market prices generally show a downward
trend(Brown & Reichenberg, 2021; Eising, Hobbie, & Möst, 2020). This is largely due
to the extremely low or near-zero marginal costs of wind and solar power generation,
gradually displacing more expensive traditional generators (Hirth, 2013). Market prices
are often determined by the marginal cost of the last generator meeting demand, thus
during peak wind and solar generation, market prices are driven down. This pricereduction, especially for wind and solar generators, is known as the "Revenue
Cannibalization Effect", where their highest output coincides with lowered prices(Liebensteiner & Naumann, 2022; Oskouei & Mohammadi-Ivatloo, 2020).
As of 2022, Japan's solar installation capacity surged to 83 gigawatts, surpassing
natural gas to become the most widely installed generation technology1. This milestoneunderscores a significant shift in the country's energy landscape, reflecting Japan's
ongoing transition towards renewable energy sources in its pursuit of sustainable energy
policies and environmental targets. According to the Ministry of Economy, Trade andIndustry (METI), solar power accounted for 8.3% and wind power for 0.9% of Japan's
energy market share in 2022. However, with the significant deployment of renewableenergies, the occurrence of the Revenue Cannibalization Effect in its electricity market
is a subject of investigation. This study will first conduct an analysis using historical
data to examine the specific impact of renewable energies on the electricity market.
Then, we will explore the evolutionary dynamics of solar and wind power within

1 According to the Renewable Capacity Statistics 2023 published by the International Renewable
Energy Agency, as of March 2023, Japan's solar energy installation capacity reached 79 gigawatts(GW). Concurrently, data from the Agency for Natural Resources and Energy's Monthly Electricity
Survey Statistics indicate that the installed capacity for liquefied natural gas (LNG) stands at 77.34
GW. Consequently, solar energy has surpassed natural gas generation to become the largest electricity
generation technology in Japan in terms of installed capacity.

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ディスカッションペーパー No.67

Japan's electricity market and assess their influence on market in the long run.

1.1 The Impacts of Renewable Energy’s Integration to Japan's Electricity
Market
The variability of renewable energy output has significantly impacted the supply
and demand balance in Japan's electricity market. According to the ISEP report (2023),
in 2022, at certain times, the output from variable renewable energy sources constituted
up to 69% of Japan's total electricity consumption. A notable instance, sourced from thesame report, occurred on May 4, 2022, at 11 AM, when solar power generation in the
Kyushu region exceeded the total regional electricity demand by 4.9%2.

Figure 1 “Duck Curve” and “Peak Shifting” phenomena in the national power market in Japan
Note: The vertical axis represents the residual electricity demand (in MWh, left panel) and the system price in JPEX(in JPY/kWh, right panel), and thehorizontal axis shows different times of the day. The graph uses line colors to differentiate each year's residual demand patterns. The solar icon depicts the daytime
impact of solar power generation, which is the duck-shaped curve.
Data source: Japan Electric Power Exchange (JEPX)As it continues to manifest, the 'Duck Curve' phenomenon in the residual electricity
demand has become increasingly pronounced. The Duck Curve represents a curve thatshows the difference between solar output and overall regional electricity demandthroughout the day, i.e., the residual demand. This phenomenon poses potential
challenges to the flexibility of traditional power systems and has significant
implications for the electricity market. The accompanying diagram illustrates a
noticeable trend of rising electricity prices during early morning and evening peak

2

ISEP (2023). "2022 Share of Electricity from Renewable Energy Sources in Japan(Preliminary)." Retrieved from https://www.isep.or.jp/en/1436/, accessed on December 6th, 2023.
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ディスカッションペーパー No.67

hours. This surge in power prices during these peak periods is known as the 'Peak
Shifting' phenomenon, reflecting the dynamic interplay between renewable energy
input and demand-driven electricity pricing in modern electricity markets.
The left panel of Figure 1 demonstrates the "Duck Curve" phenomenon in Japan's
electricity market from 2016 to 2022. The figure clearly illustrates that, with eachpassing year and increased solar power generation, there is a progressive decrease indaytime residual demand, followed by a rapid increase towards the evening. This trend,
particularly pronounced in 2022, suggests a significant rise in solar power generation.
The reduction in solar power at the early evening peak necessitates other power sources
to meet demand, creating this distinctive demand pattern.
The right panel in Figure 1 illustrates the trends in electricity prices (in Yen/kWh)across various times of the day from 2016 to 2022. Notably, there was a significant
increase in electricity prices during the evening hours, especially in 2021 and 2022,with a peak nearing 30 Yen/kWh in 2022. In contrast, from 2016 to 2020, the prices inthis period were relatively stable with minor fluctuations. During the day, particularlyaround noon, a downward trend in prices was observed, likely due to the high output ofsolar power increasing the electricity supply, thus lowering the price. This grapheffectively showcases how electricity prices evolve over time and with changes inrenewable energy production, highlighting the impact of market supply and demand
dynamics on pricing.
1.2 Declining Market Value of Solar Output
Figure 2 illustrates the relationship between the penetration rate of photovoltaic(PV) output and the unit revenue of PV stations in the wholesale electricity market from2016 to 2023. The unit revenue is calculated using a weighted average price method,
multiplying each hour's solar power generation by the market price at the same hour todetermine hourly solar power revenue3. This is then summed across all hours in a week
and divided by the total solar generation of that week to yield the weekly averagerevenue per kWh of solar power. The findings indicate a significant downward trend in
the unit revenue of PV stations as the PV output penetration rate increases from 2.5%
to 20%, falling from around 10 Yen/kWh to less than 5 Yen/kWh. The decline is more
pronounced when excluding the impact of the 2022 Ukraine conflict-induced natural
gas price rise on wholesale prices. This analysis reveals the increasing revenue pressure
on PV stations as their capacity in the power market grows.

3 The unit revenue calculations in this study assume renewable energy sources, such as solar andwind power, trade in the electricity wholesale market. This theoretical scenario contrasts with thecurrent practice in Japan, where a significant portion of renewable energy is compensated at the FeedIn Tariff (FIT) rate, not through market transactions. This assumption is made to explore the potential
market dynamics and economic viability of renewable energy under full market integration.
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ディスカッションペーパー No.67

Figure 2 Weekly Solar Output Penetration and Wholesale Electricity Market Pricing Dynamics

Data source: Japan Electric Power Exchange (JEPX)
1.3 Market Value of Wind Output
Figure 3 shows that between 2016 and 2023, the proportion of wind energy inJapan's total electricity generation displayed fluctuations but no significant upward or
downward trends, contrasting with photovoltaic power. Despite some influence of wind
output variability on the revenue per unit of electricity for wind farms, it didn't exhibit
the substantial negative correlation seen in PV power. A pertinent reason for the muted
presence of the Revenue Cannibalization Effect in wind energy within Japan's market
may be attributable to the overall smaller installed capacity of wind power. With wind
power's generation output accounting for less than 2% of the total, its impact on themarket is currently not as pronounced as solar energy. This smaller scale of wind energy
generation, in contrast to solar power, means that its influence on market dynamics,
particularly in terms of revenue volatility, remains relatively limited at this stage inJapan's electricity market.
To sum up, the above historical review of solar energy development in Japanreveals a declining trend in market value with increasing market penetration. Thisobservation raises a crucial question about the long-term trajectory of this trend. The
subsequent parts of this study aim to construct a long-term simulation model to deeply
analyze this phenomenon, exploring the future role and economic viability of renewableenergy in the electricity market.

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ディスカッションペーパー No.67

Figure 3 Weekly Wind Output Penetration and Wholesale Electricity Market Pricing Dynamics

Data source: Japan Electric Power Exchange (JEPX)

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京都大学大学院 経済学研究科 再生可能エネルギー経済学講座

2 The PyPSA-Japan-2050 ModelIn this study we build an optimal dispatch model named the PyPSA-Japan-2050
model in order to explore the long-term Revenue Cannibalization Effect in the Japaneseelectricity market, Our model is based on the open-source PyPSA package, which is a
widely used tool in analyzing power systems and markets, particularly for integrating
renewable energy(Hörsch, Hofmann, Schlachtberger, & Brown, 2018; Parzen et al.,2022). It employs an optimal power dispatch model, focusing on minimizing electricity
generation costs while adhering to system constraints like demand, capacity, andstability. This approach is crucial for long-term planning in power economics, handlingvariable capacities and demand fluctuations(Brown, Hörsch, & Schlachtberger, 2017).
The model's importance is underscored by its application in key studies, where it
addresses the complexities of renewable integration and grid management.
The optimal power dispatch model, a constrained optimization problem, aims tobalance the power system efficiently and economically. The following equation outlines
the multi-period cost function:𝑐 , 𝑔 ,

𝑐 , ℎ ,,,

𝑜 ,,𝑔 ,,𝑤,𝑐𝐹

𝑜 ,,ℎ ,,

𝑠𝑢𝑐 , ,

𝑠𝑑𝑐 , ,,

The cost function spans multiple periods, capturing the dynamic nature ofelectricity generation costs over time. This function integrates various cost components,
operational costs ∑ , 𝑐 , 𝑔 , , fuel expenses ∑ , 𝑐 , ℎ , , and potential emissionsrelated charges∑ 𝑐 𝐹 . It is structured to reflect the total cost of electricity generation
by aggregating these elements, thereby offering a nuanced understanding of how costs
evolve and impact the energy market over different temporal stages. This formulation
is particularly relevant for analyzing long-term trends and shifts in the power generation
sector.

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ディスカッションペーパー No.67

Figure 4 The basic structure of electricity network in Japan
Source: Agency for Natural Resources and Energy
https://www.meti.go.jp/shingikai/enecho/denryoku_gas/saisei_kano/pdf/035_02_00.pdf

2.1 The Scope of the Model
Our model represents an integrated energy market composed of nine dispatch
regions in Japan, connected by twelve interregional transmission lines(Figure 4). This
interconnected framework forms the backbone of Japan's electricity market,
underpinning the government's power planning and policy decisions. Rather thanoperating in isolation, these regions work in concert to ensure a stable and efficient
distribution of electricity. The structure of these nine regions is central to thedevelopment of energy policies and the strategic direction of Japan's energy future,facilitating the country's transition to a more sustainable and resilient power system.
The time frame extends up to 2050, with 2023 as the base year. For years leading
up to 2030, we adhered to the Japanese government's mid-term targets for the powersystem and renewable energy development. By contrast, for the period from 2030 to2050, our model incorporates authoritative forecasts such as the capital and operations
and maintenance (O&M) costs of renewables. This approach ensures that the model
accurately reflects Japan's power market operations and effectively assesses thecomprehensive performance and potential value of renewable energy in the market.

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ディスカッションペーパー No.67

2.2 Renewable Energy Development Planning
In setting the baseline scenarios for renewable energy integration, our analysis andallocation were guided by Japan's policy objectives. For solar power, we followed theJapan Solar Energy Association's 2030 target, setting a total integration goal of 125GW
for residential, non-residential, and agricultural solar power. Onshore wind power
allocations were based on data from the Wind Power Association, distributed acrossvarious regions. Offshore wind targets were set in line with the “Offshore Wind Industry
Vision 2030,” with distribution across different areas. These settings help assess thecapacity and distribution of solar and wind power in each region and the impact of thesepolicies on the overall power system and market structure. Additionally, long-termgoals such as renewable energy development plans for 2030, 2040, and 2050 wereconsidered, along with their contributions to greenhouse gas emission reduction andmeeting electricity demand.
2.3 Electricity Demand Forecasts
In this study, guided by the forecasts in the IPCC's Sixth Assessment
Report(Sakamoto, 2023), we examined the evolution of Japan's future energy demand.
Our focus was on how electrification and sector coupling are transforming energy
demand patterns, especially in the residential, industrial, commercial, andtransportation sectors. As shown in Figure 5 (left), with the progress of electrification,
the electricity demand in the transportation sector has significantly increased, soaring
from 1,730 TWh in 2020 to nearly 20,000 TWh by 2050. Additionally, electricity
consumption in the industrial, commercial, and residential sectors also shows a steady
growth trend, mainly driven by the increased demand from electrification.
We also utilized hourly regional electricity demand data provided by Japan's ninemajor electric power companies for the year 2020. From this, we forecasted detailed
hourly electricity demands for Japan from 2023 to 2050. This data enabled us toconstruct models of future electricity demand for each region at different times,
ensuring accurate capture of the temporal variations in electricity consumption. This
offers a solid data foundation for assessing future electricity supply strategies andenergy policy adjustments, allowing for in-depth analysis of the dynamics of electricity
market demand.
2.4 Fossil Fuel Phase-out Settings
The Japanese government has committed to halting the construction of new coalfired power stations and gradually reducing dependence on coal energy, yet a specificphase-out timetable has not been established. In April 2023, at the G-7 Environment
and Energy Ministers Meeting held in Sapporo, ministers from participating countries
pledged to accelerate the phasing out of fossil fuels like natural gas to achieve net-zerogreenhouse gas emissions by 2050, but no definitive end date for coal power usage was2024 年 3 月

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set. As the host nation of the meeting, Japan maintained a cautious stance on setting a
specific timeline for phasing out coal, considering its reliance on coal energy at least
for the majority of the 2030s. Therefore, we assume that coal-fired power plants will be
gradually decommissioned following the end of their operational lifespans.
2.5 Cross-regional Transmission Line Reinforcements
The Japanese Ministry of Economy, Trade and Industry has recently proposed aplan for constructing an undersea power transmission line. This project aims to connect
Hokkaido with the Tokyo metropolitan area via the Sea of Japan, thereby enhancing theelectricity transmission capacity between these two regions. The planned transmission
line is expected to have a capacity of 2 million kilowatts, equivalent to the output of
two nuclear power stations. Currently, the interconnection line capacity between
Hokkaido and Honshu is just 900,000 kilowatts. The long-term plan is to increase thiscapacity to 1.2 million kilowatts by the fiscal year 2027. The construction of thisundersea transmission line is projected to boost the current power transmission capacity
by 3.5 times and is scheduled to become operational in the early 2030s (See Figure 5,
right panel).

部門別電力需要
14000
1973

12000
10000
億KWH

173
8000

2000

運輸部門

2646

家庭部門
3548

6000
4000

3146

3048

3268

業務部門
産業部門

4568

0
2020

2050

Figure 5 Demand Forecasts (left panel) and Transmission line reinforcement plan (rightpanel)

2.6 Flexible Sources
In this study, flexible energy sources are primarily provided through two key
methods: (1) Pumped Hydroelectric Storage: This method involves using excess
electricity during periods of low demand to pump water to higher elevations, which is2024 年 3 月

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ディスカッションペーパー No.67

then released to generate electricity during periods of high demand. Pumped
hydroelectric stations provide additional power during peak electricity demand and helpbalance the grid when demand is low. (2) Electric Vehicles (EVs): Electric vehicles
serve not only as transportation means but also as flexible loads and storage units forthe power grid. Through smart charging technologies, EVs can charge during times ofabundant electricity supply and feed electricity back to the grid during high-demand
periods, playing a crucial role in balancing grid loads.
The integration of these flexible energy sources is vital for balancing thefluctuations in power supply caused by renewable energy sources. They enhance thestability and efficiency of the power system, especially in scenarios with highproportions of renewable energy integration. By judiciously utilizing these flexible
sources, the power system can be effectively supported to maintain stability andefficiency while meeting the ever-changing electricity demands.

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3 Theory and Scenario Settings
The definition of market average price for each generation technology is describedby Formula (1). This formula illustrates the calculation of the market average price𝑝̅
for a specific technology (tech) using a weighted average method. Here, 𝑔
represents the electricity generation by the technology at time 𝑡 , and 𝑝 is thecorresponding market price at that time. The numerator calculates the total revenue
generated by the technology across all time periods, while the denominator is the total
electricity generation by the technology in the same time frame.
𝑝̅

∑

∗𝑝

𝑔
∑

The market value (𝑀𝑎𝑟𝑘𝑒𝑡𝑉𝑎𝑙𝑢𝑒1𝑔) of a specific technology is defined as thediscounted value of its average market price ( 𝑝̅

) over time. This formula

incorporates the concept of time value of money, where γ represents the time horizon
and 𝑖 is the discount rate. The market value is calculated by discounting the average
market price for each year at the discount rate and then summing these values over thetime period. This definition allows for the assessment of the overall market performanceof different technologies, taking into account the time value of money, thereby
providing a more comprehensive evaluation of their long-term economic viability.
𝑀𝑎𝑟𝑘𝑒𝑡𝑉𝑎𝑙𝑢𝑒

𝑝̅
1 𝑖

2

According to Brown and Reichenberg (2021), through solving the Kuhn-Tucker
Conditions of the cost-minimization problem, the following first-order condition holds
under the condition of a fully competitive market equilibrium:

𝑀𝑎𝑟𝑘𝑒𝑡𝑉𝑎𝑙𝑢𝑒

𝐿𝐶𝑂𝐸

3

This equation states that in a fully competitive market, the market value(𝑀𝑎𝑟𝑘𝑒𝑡𝑉𝑎𝑙𝑢𝑒of a given technology is equal to its levelized cost of electricity(𝐿𝐶𝑂𝐸). The levelized cost of electricity represents the average cost per unit ofelectricity generated over the lifetime of the technology, taking into account all relevantcosts such as capital, operation, maintenance, and fuel costs. This equilibrium conditionreflects the point at which the revenue from electricity generation matches the costs,

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leading to a situation where no technology earns extra profits over the long term in a
fully competitive market.
Similarly, according to Brown and Reichenberg (2021),in the presence of a carbon
tax, the following first-order condition should be satisfied:𝑀𝑎𝑟𝑘𝑒𝑡𝑉𝑎𝑙𝑢𝑒

𝐿𝐶𝑂𝐸

𝑒

∗𝑝

4

In this equation, 𝑒is the emission intensity (e.g., tons of CO2 per MWh) of thetechnology, and 𝑝is the price of carbon (e.g., per ton of CO2). This conditionindicates that the market value of a technology, when accounting for carbon pricing,should equal its levelized cost of electricity plus the additional cost imposed by its
carbon emissions multiplied by the carbon price. Essentially, this integrates the external
cost of carbon emissions into the economic evaluation of different electricity generation
technologies. It reflects the economic principle that incorporating environmental
externalities into market prices can lead to more efficient and sustainable energy
production choices.

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4 Baseline Results
Building upon the model settings reported in the previous sections, this chapter
presents the results of the baseline scenario from the PyPSA-Japan-2050 model.

Figure 6

Electricity Mix Forecast in 2030 and 2050

Figure 6 illustrates the simulated results from our Python Japan-2050 model for theyears 2030 and 2050 regarding Japan's electricity mix. It is evident from our baselinemodel scenario that in the year 2023, renewable energy sources such as solar
photovoltaic and onshore wind generation contribute to approximately 30% of theenergy mix, which is in line with mid-term target by the government. By the year 2050,
the proportion of renewable energy is projected to increase further, with the largest
share being attributed to onshore wind power, accounting for 41%, while the share ofoffshore wind power is also significant, similar to solar energy, at around 18%.
Consequently, the overall proportion of renewable energy sources is expected to reachclose to 80%.

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Figure 7 Yearly Average Market Price Trajectories from 2025 to 2050 for all generation techs

We are more concerned on the change of market prices for different generation
technologies. Figure 7 depicts the evolution of average market prices for different typesof electricity generation from 2025 to 2050. It reveals a consistent decline in the market
prices for solar and both onshore and offshore wind energy, although the dynamics andrates of this decrease vary. Conversely, the average market prices for conventionalenergy sources are on an upward trend due to two main factors: an anticipated increasein overall electricity demand by 2050 and a rise in the cost of traditional energy sources
within the same timeframe. These trends indicate that with the large-scale grid
integration of renewable energy, the market's demand, and pricing expectations for
dispatchable and flexible generation sources are likely to increase.

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Figure 8 Solar Penetration and Average Market Prices (2023-2050)

Figure 8 demonstrates a significant downward trend in the average market price of
solar energy as its penetration in the electricity market increases. Specifically, as solar
energy's market share grows from 7.5% to 25%, its average market price drops fromapproximately 10 JPY/kWh to around 3 JPY/kWh. The fitted curve reveals that the rateof decline in solar energy's market value accelerates with increased penetration,
particularly noticeable when the market share exceeds 10%. The decline slows downslightly once it surpasses 20%. This trend underscores the challenges solar energy faces
in maintaining its economic competitiveness in the market as its presence grows.
In the context of electricity markets, the long-term supply curve is more complex
than in traditional competitive markets. While conventional markets feature ahorizontal long-term supply curve indicating equilibrium at zero profit, electricity
markets exhibit a stepped merit-order curve. This reflects the varied costs of generation
technologies. As renewable energy enters the market, initially there's a high suppliersurplus due to their low marginal costs, but as their penetration grows, the market priceoften matches the marginal cost of renewables themselves, leading to a reduction in the
supplier surplus for renewable energy. This shift highlights the distinct characteristics
of energy market equilibria, contrasting sharply with the standard zero-profit conditionof long-term equilibria in conventional markets.

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5 The Impacts of Carbon Pricing
In light of the imperative to combat climate change and its adverse effects, carbon
pricing, through mechanisms such as emissions trading schemes and carbon taxes, isincreasingly being recognized and implemented globally as a critical strategy towards
the decarbonization of economies. Tracing back to Pigou's foundational work, carbon
pricing is designed to internalize the negative externalities of greenhouse gas emissions
by assigning a cost to the release of CO2 and other greenhouse gases(Brown &Reichenberg, 2021). Japan's electricity market is also moving towards decarbonization
with the phased introduction of a carbon trading scheme aimed at achieving carbon
neutrality by 2050.
Through integrating the cost of emissions into production costs and incentivizing
all energy producers to reduce emissions, carbon pricing affects high CO2-intensity
power plants more significantly, altering the merit order curve and leading to higher
electricity prices when fossil-fueled plants are the marginal production units, thereby
increasing the market value of renewable energy(Liebensteiner & Naumann, 2022).

Figure 9 Comparison of Solar Market Prices under Carbon Pricing Policy with the Baseline
Scenario

Figure 9, Figure 10 and Figure 11 juxtapose the market values of solar photovoltaic,
onshore wind, and offshore wind energy under a carbon pricing policy scenario against
our baseline scenario. These illustrations reveal that the market values of all threerenewable energy sources diminish as their market penetration rates increase, owing totheir variability. It is observed that in 2025, when the utilization of fossil fuels is stillwidespread, the carbon pricing policy significantly boosts the market value of
renewable energies. However, as time progresses and the use of fossil fuels declines,

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particularly with the gradual decommissioning of coal-fired power units, the impact ofcarbon pricing policy on the market value of renewable sources diminishes and evengradually dissipates.

Figure 10 Comparison of On-shore Wind Market Prices under Carbon Pricing Policy with
the Baseline Scenario

Figure 11 Comparison of Off-shore Wind Market Prices under Carbon Pricing Policy with
the Baseline Scenario

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ディスカッションペーパー No.67

6 The Impacts of Demand Response: Case of EV Batteries
Theoretically, the implementation of demand response measures, such as
integrating electric vehicles (EVs) into the power system, has the potential to mitigate
the decline in market value caused by increased penetration of renewable energy. EVs
can be charged during periods of abundant and lower-priced electricity supply, andreduce charging or even feed electricity back to the grid during peak demand times,
thereby balancing the supply and demand in the power system. This not only enhances
the flexibility of the power system but also helps stabilize market prices and alleviatethe "Revenue Cannibalization Effect" generated by renewable energy sources.
As depicted in Figure 12, the participation of electric vehicle (EV) batteries as ademand response tool in the electricity market leads to significant changes in the market
price of solar power. The yellow curve reflects the trend of solar energy market prices
without EV battery demand response, while the green curve represents the scenario
with EV battery demand response in play. The chart demonstrates that in the initialstages, when solar penetration is low, the storage capability of EVs significantly
enhances the market value of solar power, approximately by two yen per kilowatt-hour.
However, as the proportion of solar energy in the power mix increases, this priceadvantage gradually diminishes, underscoring the critical role of demand response inmaintaining the market competitiveness of renewable energy sources.

Figure 12 Solar Market Value and Penetration: The Impact of Electric Vehicle Demand
Response

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ディスカッションペーパー No.67

Figure 13 illustrates the optimal dispatch of Japan's electricity market on October
6th and 7th, 2050, as simulated by the PyPSA model. In the dynamics of the 2050
electricity market, we observe a significant impact of large-scale solar power generation
under favorable weather conditions on grid scheduling. Particularly on days with
abundant solar radiation, the high output from solar generation not only drives theenergy absorption of pumped hydroelectric storage facilities but also fully utilizes thestorage capabilities of electric vehicle (EV) batteries. This effectively mitigates thecurtailment issues caused by excess solar capacity, essentially enhancing the market
value of solar energy. Furthermore, during peak periods, such as morning and evening
peaks, the discharge function of EV batteries helps to reduce peak electricity prices,
decreasing the market value of reliance on traditional generation technologies likenatural gas, thereby alleviating the overall electricity burden.

Figure 13 Demand Response in 2050: The roles of EV Storage on Optimal Electricity Dispatch

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7 Conclusion and Policy Implications
This study embarked on addressing the critical challenge of integrating renewableenergies into Japan's electricity markets while maintaining their market values, in theface of increasing penetration rates. An analytical review of historical data laid thefoundation for a comprehensive understanding of the current state, revealing a
concerning trend of declining market value for solar energy. This downward trajectory
was observed even as solar energy attained grid parity, emphasizing the need forstrategic policy interventions. Furthermore, our investigation utilized the PyPSAJapan-2050 Model to simulate long-term market dynamics, which provided insights
into the revenue cannibalization effect particularly pronounced within Japan's solar,
offshore, and onshore wind sectors. The model's projections highlighted that without
policy action, the growing share of renewables would likely lead to further decreases
in market prices, adversely affecting the economic attractiveness of these energy
sources.
This study also shifted focus to examine the influence of carbon pricing anddemand response policies on the renewable energy market. Through theimplementation of a carbon pricing policy, it was found that there is a significant
potential to enhance the market value of renewable energies by making fossil-fuelbased electricity generation less competitive. However, the effectiveness of this policy
showed a diminishing trend over time as the reliance on fossil fuels reduced and as coal
power plants began to phase out. Demand response mechanisms, such as the integrationof electric vehicle batteries into the power grid, were also found to be instrumental.
These mechanisms help stabilize the market price of electricity and can mitigate therevenue cannibalization effect by allowing renewable energies to better match supply
with demand fluctuations. Our findings confirm that both carbon pricing and demand
response policies are effective tools in the quest for a sustainable energy market.
However, their efficiency is not uniform and is subject to change over time and withvarying market conditions. It is imperative that policy-makers and industry
stakeholders consider the dynamic nature of these tools and their long-term
implications on the market.
In conclusion, this paper underscores the necessity of a multifaceted approach topolicy-making that includes both market-based incentives and regulatory support toensure the successful integration and sustainability of renewable energies. The
sustainable future of energy requires not only technological innovation but also
adaptive and forward-thinking policy frameworks that can support the evolving energy
ecosystem.
Furthermore, the study emphasizes the future perspective of renewable energy

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22investment decisions. Investors need to focus not only on current returns but also on a
forward-looking consideration of long-term market forecasts, making it a core part oftheir investment strategy. Particularly in light of the potential decline in the market
value of solar energy due to policy interventions like Feed-in Tariffs (FiTs),
understanding this long-term trend is crucial for investors. The potential downward
trend in market value not only indicates uncertainty in investment returns but may also
have a lasting impact on investor confidence and the overall health of the market.
Therefore, a thorough analysis of market trends and understanding their impact on
investment decisions is vital for guiding investments in renewable energy, ensuring its
sustainability and competitiveness in the future energy landscape.

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