Energy market impact of renewable energy source

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1 Energy market impact of renewable energy source Calabria A., Capata R., Di Veroli M., Sangiorgio S. Dept. of Mechanical and Aerospace Engineering Sapienza Università di Roma Rome, Italy Abstract New energy scenarios see renewable energy is no longer as marginal sources, but as actresses able to change the energy market. The past few years have seen the energy market more fluid than that of past decades, the constant growth of the renewable component of the global energy mix has changed the relationship between offer-demand and also because of the changing geopolitical conditions, there has been a constant reduced costs of fossil fuels. This article intends to put highlight, in Italian, as the market fossil fuels is influenced by the penetration of renewable energy. In addition, by relating the benefits (economic and externalities), obtained from the dissemination of renewable, with the costs for promoting the development of renewable energies. Keywords Energy Balance; Energy Efficiency; CO 2 saving; Renewable Energies; Energy Market I. INTRODUCTION This article aims to investigate whether there is a relationship between the spread of renewable energies, especially those electrical (especially wind and photovoltaic), and the cost of electricity. The Italian case will be considered and evaluated, whereas this nation is practically characterized by the lack of fossil fuels, and has a high energy potential in terms of renewable energy sources. Having regard to the nature of the study, that requires the use of statistics and data on annual scale, and considering that the data of 2014 are not yet available, it refers to previous years for the analysis of consumption, production from renewable sources and for energy costs (especially of electric kwh). Before analyzing how the cost of energy (with particular reference to electrical) is influenced by the penetration of renewable energy in the market, it is clear that the factors involved in defining the energy unit costs are various. In addition, such analysis results to be contextualized in an economic context, where the energy demand contraction, due to the economic crisis, has interested all productive sectors and, consequently, the energy consumption. It is clear that the reduction of the price per unit of energy cannot be attributed solely to the diffusion of renewable energy, but this is definitely one of the most important causes. Another aspect that has to be considered is the natural balance of the offer-demand. This balance is regulated by the crude oil production, the availability of natural gas, from the geopolitical stability of the producer countries etc. II. THE ITALIAN ENERGY SYSTEM: CONSUMPTION The run-up to 2020, the year for which specific objectives have been identified in relation to the environment and energy, has necessitated, at European level, the launching of an intensive dialogue between EU institutions and Member States to adopt new energy policies. Italy aim is to respond, on the one hand, to the challenge posed by climate change and, secondly, to the need to ensure the competitiveness of the production system through economically efficient solutions, without being less security of supply and stability, in the long term [1]. The solutions proposed by the European Community are: The adoption of a restricted target for reducing greenhouse gas emissions of 40% compared to 1990 levels, with a redefinition of the operating mode of the Emission Trading system, to mitigate the problem of CO2 quotas surplus through the constitution of a reserve for market stability; Setting a constrained target on renewable energy, for the whole of the European Union, which accounted for 27%, for which achievement is left to the Member States the flexibility to transform its energy system into the most appropriate way, according to national needs; The definition of a role for energy efficiency, to be determined after the assessment of the action plans [1],[2]. Italy, as a country of the European Community, has set itself target quotas relating to the production of energy from renewable sources. The increase of the percentage of energy from renewable sources has been pursued mainly through incentives, to make economically possible, and often, more remunerative, the renewable energy plants. The aim of these policies was to obtain the following results: compliance with the European Directives, gases reduction in general, a pollutant emissions reduction. In March 2013, after an extensive public consultation process, was approved by inter-ministerial Decree Economic Development Environment (D.M. March 8, 2013), the National Energy Strategy (SEN), the first programming document and sectors address, more than twenty years since the first National Energy Plan [3]. In line with the prospects outlined at the European level in the Energy Roadmap to 2050, the National Energy Strategy /15/$ IEEE 581

2 contemplates a double Horizon 2020 and 2050; this should allow a gradual overcoming European objectives envisaged by the " " Package [4]. The expected results are: reduction of energy costs and gradual alignment of sale prices to European levels. It is estimated to save about $ 9 Billion a year on national electricity and gas bills, as the difference between $ 13.5 Billion of savings and about 4-5 Billion of additional costs compared to passing all European environmental objectives to Are included: the reduction of greenhouse gas emissions of 21% compared to 2005 (18%) and the European goal the reduction of 24% of primary consumption compared to inertial (20%) and the European goal achieving 19 20% of renewable energy impact on gross final consumption (17%) and European objective. We expect that the first source become renewable in the electricity sector like gas with a 35-38%. greater safety, less dependence of supply and greater system flexibility. There will be a reduction of foreign energy bill of about $ 14 Billion a year, by reducing from 84% to 67% of foreign dependence. This equates to approximately 1% of additional GDP and current values, is enough to bring on the balance of payments. positive impact on economic growth with about billion of investments between now and 2020, either in green and white economy (renewable energy and energy efficiency), both in the traditional sectors (electrical and gas networks, gas plants, storage, oil and gas development). It is private investment, partly supported by incentives, and with significant impact in terms of competitiveness and sustainability of the system [1],[4]. These objectives, in part already achieved, are and will be pursued through the following measures: promoting energy efficiency; modernization of the system of sector governance, for making it a more effective and more efficient decisionmaking processes. Hereinafter, the first results obtained by these policies up to 2020, are presented. The strong expansion of renewable energy sources and the growth of electricity share generated by photovoltaic and wind power, has, in fact, changed the offer/demand ratio of energy besides change daily and monthly curves of electricity production from conventional sources. In practice, it appears that, by 2020, the share of final consumption, covered by renewable sources, could reach 19%, exceeding the fixed target [1,][2]. III. EVOLUTION OF DIFFUSION OF RENEWABLES The spread of renewable energies in Italy is linked and deeply dependent on incentive policies which allowed the diffusion and development of renewable energy, as shown in Fig.1 and Fig.2. The mechanisms of incentives and "special purchase" of electricity were manifold. Below is an overview that includes both those still active, and those no longer operative [5],[6]. A. National Energy Price Committee 6/92 National Energy Price Committee 6/92, also known as CIP 6/92, is an incentive mechanism for electricity produced from renewable and renewable-assimilated sources, consisting of a form of remuneration administered through an energy incentive rate whose value is updated over time. Conceptually it can compose as a Comprehensive Tariff since the remuneration recognized implicitly includes both an incentive component and a component of the electricity input enhancement on the net. Currently it can no longer access this mechanism. It continues, however, to have effect in respect of those installations that have signed the Convention during the operating terms. promoting a competitive gas market, integrated with Europe with aligned prices, with the opportunity to become the primary southern European hub; development of a fully integrated efficient electricity market with the European one, with competitive prices and gradually integrated renewable production; sustainable development of renewable energy; Fig. 1. Trend of the overall share of renewable energy [5]. restructuring of the refining and fuel distribution network, towards a more sustainable framework and with European levels of competitiveness and quality of service; sustainable development of domestic production of hydrocarbons, with important economic and employment benefits and respecting the highest international standards in terms of safety and environmental protection; Fig. 2 - Share of renewable energy: actual consumption and target 2020 [5]. 582

3 B. Energy Bill Energy Bill (EB) is the incentive mechanism dedicated to solar photovoltaic and thermodynamic solar. For both types of installations, it consisted originally in a fixed incentive award granted on the basis of the energy produced, which the manufacturer could associate a second income, arising from the use of energy. In the case of photovoltaic plants this scheme has been revised many times over the course of 4 years, by changing the value of the incentive and the means of access; the last is the fifth Conto Energia (Italian Ministerial Decree 7/5/2012). Fig. 3 shows the number of plants started up with EB for each year, in the period , while Fig. 4 shows the cumulative number of plants in the same period. C. Green Certificates Green Certificates (GC) are awarded in proportion to the energy produced by renewable sources plants and cogeneration plants combined with district heating (Legislative Decree No. 28/2011). The number of GC is different, depending on the type of source and intervention systems made. Renewable producers can sell the acquired GCs, thus creating an additional revenue that the remuneration of the electricity produced. The GC market demand is based on the obligation, created by electricity manufacturers and importers from conventional sources, to enter into the electrical system a given proportion of energy production from renewable sources. The subjects obliged to fulfill this obligation to be in possession of the corresponding number of GCs. D. Comprehensive Rates This is a fixed withdrawal rates of electricity fed into the network. The value includes both the incentive component and the sales component of electricity. Talking about Comprehensive Rates (CR) referred essentially to those introduced by law No 244/2007 and adjusted by D.M. 12/18/2008, reserved for systems with power up to 1 MW (200 kw for wind farms). Fig. 3 - Average power of plants started up with the EB [5]. Fig. 4 - Cumulative number of plants started exercise with the EB - period [5]. E. Other Forms of Incentives The Ministerial Decree of July 6, 2012 has established new ways of promoting the production of electricity from installations powered by renewable sources, other than photovoltaics. The plants are encouraged on the basis of net energy input: up to 1 MW with Comprehensive tariff; those over MW with an incentive equal to the difference between the reference rate and the hourly price of energy. Direct access to incentives is guaranteed only for small installations, for others there will be procedures to register and/or auction. F. Electricity Dedicated Retirement Electricity Dedicated Retirement(EDR) represents a simplified mode available to producers for placing on the market of electricity, putting their surplus into the grid. It consists in the transfer to the GSE, and the consequent remuneration, of the inserting electricity and related fees for the use of the network. The only power plants with nominal power rate lower than 10 MVA or if powered by solar, wind, tidal, wave, geothermal, hydro or other renewable sources, are admitted to the EDR. Access to the EDR is in alternative to the other incentives. G. On-site Exchange The On Site Exchange (OSE) provides the user, owner of the producing plant, a refreshment of the costs for purchasing of electricity consumed, based on the value of energy produced and placed on the network by the installation. The renewable energy plants and high-efficiency cogeneration plant (up to 200 kw) were able to access the OSE incentive. Access to this mechanism is in alternative to the other incentives. Incentive policies on thermal energy and energy savings include: White Certificates (WC), Energy efficiency certificates (EEC), Cogeneration Thermal Energy Account (TEA). IV. PRIMARY ENERGY EXPLOITATION It is important to enlighten that our country has a great capacity for transformation of primary energy. This situation is evident by comparing the energy transformation index, defined as the ratio of gross final consumption of energy and domestic consumption of primary energy, in major EU countries, as shown in Fig. 5. The penetration of renewable energy sources is certainly less easy in the Italian situation than in other EU context. As a result, the share of final consumption covered by the 19% renewable by 2020, assumes much greater importance in the Italian context compared to other EU cases. V. ENERGY MARKET TRENDS AND THE COST OF ELECTRIC KWH In order to highlight how the growing penetration of renewable sources could affect the cost of kwhe, here will be analyzed the trend of the cost of energy in recent years. 583

4 Firstly it is necessary to remark how the cost of energy supported by the end user, is composed by multiple entries, of which only one, is represented by production cost. This value affects on average less than 50%. The other components are represented by: network costs taxes general system charges. The following is the trend of the price of electricity for a household consumer type; Fig. 6 shows how the total is splitted into their components. Placing the analysis solely on "energy component", there is a energy deflation, that has brought the cost of kwh in the first quarter of 2015 to values determined in 2006, except for a peak between 2008 and The reduction of production cost coincides with the "massive" encouragement and diffusion of renewable sources as is shown in Fig. 6. It is also to be highlighted that the same period has been, and continues to be, affected by an economic crisis which actually reduces energy demand [8]. VI. ELECTRICITY FROM RENEWABLES AND COMPETITION IN THE ELECTRICITY MARKET To evaluate the impact of renewable on the electricity market, it is necessary to considerate what happened in May In those days, for the first time, in the South of Italy the electrical energy market exchange reached the zero euro value per MWh and this value remained for several hours, due to the presence of a high concentration of photovoltaic systems. As a result of what happened in that area in 2 days, as it yo say energy at zero marginal cost for several hours, the national average price became lower, as shown in Fig.7 [13]. Ultimately, renewables, which produce at zero marginal cost (fuel must not be purchased), have produced more energy than required, pushing off-market the fossil fuel plants. In March 2012 PV's contribution was 3.2 times higher compared to March 2011 and up by nearly 30% compared to July 2011, until then record month for PV production. The demand for electricity-a decrease of 5.2% compared to March was covered by the 6.4% PV. Fig 5- Capacity for transformation of primary energy [5],[7]. Fig. 6 - Trend in the price of electricity for a domestic consumer [3]. Fig. 7 MWh price on the "market of the day before" [9]. VII. EFFECTS OF RENEWABLE ENERGY The benefits of incentive policies, spread also to other aspects besides those already mentioned including: Reducing CO2 emissions. It is clear as the alternately use of renewable energy sources to fossil fuels, reduces the gases emissions, in particular CO2. Fig. 8 shows the trend in CO2 emissions: besides a reduction of energy consumption, there is a more evident reduction of CO2 emissions. Increased employment. Referring to the renewable sector, it is evident that renewable energy development has achieved an increase in employment in this sector, as is shown in Fig. 9 below. Specific cost reduction of plant powered by renewable sources. Fundamental objective of promoting renewable energy, practically achieved, is to make the technology competitive with traditional sources, reaching grid parity. For example, Fig 10 shows the trend of the cost of photovoltaic plants in recent years. Today, photovoltaic technology is competitive with traditional sources of energy if it is accepted a payback time over than 10 years (no incentives). It should be noted that the reduction in the cost of energy has paradoxically reduced competitiveness, for example of PV, compared to fossil fuels; a major cost of dispatching of energy would reduce the payback time without incentive. 584

5 Fig. 8 - Trend of CO 2 emissions [10]. Fig. 9 - Economic benefits and exploitation of employment in renewable energy sector [10]. The promotion of electricity produced by photovoltaic plants (energy bill), admitted to incentives introduced by Government Directive 7/6/2012; The purchase of electricity from producers with a GSE agreement, within one of incentive mechanisms and electricity withdrawal (CIP 6, EDR, OSE or CR solutions) The retirement of Green Certificates. In 2013, the difference between costs (15.1 billion euros) and revenues (3.3 billion) caused an economic need of A3 of 11.8 billion euros. The revenue from A3 collected from distributors connected to the national grid by the year 2013 was about 12.5 billion euros, as shown in Fig.11, so there was an economic surplus of about 700 million euros [14],[15]. Assuming to use the rates established through the directive 2013/405/R/com, which updates the A3 tariff component for the last quarter of 2013, annual spending for the A3 extra-cost can be redeployed to an audience of type customer, as shown in table I. economic need (bn ) Fig.11 - Economic needs and proceeds of component a3 in 2013 (MLD ) [11]. TABLE I. ESTIMATED A3 BURDEN CHARGED TO END USERS IN 2013 Fig Study on the investment costs of photovoltaic (specific cost /W) [11]. VIII. COST OF INCENTIVES FOR RENEWABLE AND GRID PARITY The management of incentive and electricity withdrawal mechanisms, generates costs linked to incentives, to the energy purchase, and to Green Certificates (and revenue). Economic resources required for the financing mechanisms managed by GSE, i.e. the coverage of expenses arising from the difference between costs and revenues, are financed by the A3 tariff component, applied to general information bills, paid by the final consumer. The costs incurred by the GSE in managing mechanisms dedicated to renewable and assimilated are attributable mainly to the following reasons: Customer type Home resident with 3 kw of power and economy for kwh / year Home resident with 3 kw of power and economy for kwh / year Low voltage with 10 kw of power and fuel for kwh / year Medium voltage with 500 kw and hours / year of use In high voltage with 3 MW and hours / year of use IX. CONCLUSIONS / year Based on what we just discussed and assumed, as proposed by TERNA, the incidence of the cost of renewable energy is equal to 2 /MWh per percentage point of renewable energy, with an annual consumption of about 300 million MWh/year (2013 TRIAD data) and assessing equal to 15% (2015, as shown in Fig. 1) produced by renewable energy (total savings of 30/MWh), one might assume thatto date, renewable save in energy bills about $ 9 billion/anno (2 /MWh% x 15% x 300 x 106 MWh/year). By comparing the obtained savings with the costs incurred in the bill for the A3 it could be argued that, in fact, the 585

6 incidence of the cost of renewable energy is equal to about $ 2.8 billion/year and that, if related to domestic cost of 3 kw, it would weigh about 21 /year against the advantages already mentioned. In Italy, despite the economic crisis, is undoubted the dependence of the electricity unit cost reduction from the production of approximately 15% of energy from renewable sources. The current stop of incentive policies for renewable sources, justified by the supposed reaching grid parity and achieving the objectives of the European Community, led to a stand-still of renewable energy. Achieving grid parity is practically not pursued because, paradoxically, the reduction in the cost of energy (caused also by renewable), has once again brought "out of business" the renewable plants, making them economically and financially not sustainable, considering the current energy costs. Considering these aspects, it is necessary to reconsider the opportunity to reintroduce targeted incentive tools, that can ensure sustainable growth again to the same trends of recent years. X. REFERENCES [1] M. Pavan, What's up in Italy? Market liberalization, tariff regulation and incentives to promote energy efficiency in end-use sectors, Proceedings of the 2002 ACEEE Summer Study on Energy Efficiency in Buildingsp, pp , [2] U. Farinelli, "Renewable energy policies in Italy," Energy for sustainable development, vol. 8.1, pp , [3] [4] A Clô, S. Verde, : il teorema della politica energetica europea Energia, n. 4, [5] [6] [7] Power statistics and trends 2013, Eurelectric, [8] [9] G.B. Zorzoli, L elettrone flessibile, QualEnergia, December [10] [11] Rapporto Attività 2013, GSE, [12] V. Canazza, Il mercato elettrico italiano: stato dell arte e Prospettive, REFe, [13] Il Mercato Elettrico del GME: finalità, organizzazione e funzionamento, GME, [14] E. Pedrocchi, L Italia e il costo dell energia La Termotecnica, [15] G.B. Zorzoli, I due volti del mercato elettrico, EGL Italia AIEE, [16] Energy production and imports, Eurostat, [17] Overarching National Policy Statement for Energy (EN-1), Department of Energy & Climate Change, July [18] Le caratteristiche del settore energetico in Italia, Ambrosetti The European House, [19] G. Surdi, Verso una politica industriale dell energia?, eprints.luiss.it, [20] E. Di Giulio, S. Migliavacca, Emission Trading Scheme: mercato e impatto sui prezzi dell elettricità, Rivista Energia, n.1, [21] C.Böhringer, T.F. Rutherford, R.S.J. Tol The EU 20/20/2020 targets, [22] EU Commission, Impact assessment. Package of Implementation measures for the EU s objectives on climate change and renewable energy for 2020, SEC, vol.85/3, [23] F. Gobbo, E. Cassetta, Promozione delle fonti rinnovabili di energia, ricerca e politiche industriali, «Italianieuropei», n. 1, pp , [24] R. Segers, Three options to calculate the percentage renewable energy: An example for a EU policy debate, Energy Policy, n. 36, pp , [25] Z. Zheng, R. Xiao, H. Shi, G. Li, X. Zhou, Statistical regularities of Carbon emission trading market: Evidence from European Union allowances, Physica A: Statistical Mechanics and its Applications, Vol. 426, pp. 9-15, May [26] G. Daskalakis, D. Psychoyios, R.N. Markellos, Modeling CO 2 emission allowance prices and derivatives: Evidence from the European trading scheme, Journal of Banking and Finance, Vol.33, Issue 7, pp , July