Electricity market design for high shares of renewables. A study for IEA RETD. Workshop at the International Energy Agency, Paris

Transcription

1 Electricity market design for high shares of renewables A study for IEA RETD Workshop at the International Energy Agency, Paris 30 October 2015

2 Agenda : Welcome lunch and coffee : Introductions and presentation of the study Objectives of the policy paper and presentation of preliminary findings FTI-CL Energy : 1 st roundtable discussion Reflection on the energy-only market Reflection on the prosumer/decentralised market Interactive discussion : Coffee break : 2 nd roundtable discussion Reflection on the state-led hybrid system Reflection on the vertically integrated utility Interactive discussion : Wrap up and close

3 Introductions

4 FTI Consulting is a multidisciplinary international consulting company. NEON is a specialised consulting boutique FTI Consulting activity NEON Consulting activity INTERNATIONAL SCOPE Over 4,200 professionals in 24 countries on 6 continents PROFESSIONAL EXPERTISE Reputable consultats in a variety of domains with respect to international clients ENERGY EXPERTISE FTI-CL Energy experts have advanced expertise in the issues of electricity market design Neon is a Berlin-based boutique consulting firm for energy economics. We combine expertise on economic theory with advanced modelling capabilities and extensive industry experience. Neon specializes in four areas: 1. The economics of wind and solar power 2. Design of spot and balancing power markets 3. System costs / integration costs 4. Open-source power market modelling 4

5 Context and objectives of the study

6 Project context: Toward high shares of renewables in the generation mix The share of variable renewables (VRE) in electricity generation in selected regions In a carbon-constrained world, variable renewables will supply a large share of electricity IEA ETP degrees scenario: VRE represent 30-45% in most world regions by 2050 (other studies provide similar estimates) IEA (2014): Energy technology perspectives, 2DS scenario. 6

7 The 3 stages of RES development Rising share of Renewables Supporting RES development Design of RES support policies RES on the side of power market Mainstreaming RES RES integration into market RE-design of support mechanisms Design power market around RES Changes to market design for high shares of RES Allowing phase out of support for mature technologies Focus of this study These challenges will play out differently depending on the power system organisation: In jurisdictions with liberalised power sector: growing concern that competitive wholesale markets co-existing with policy support for VRE deployment may not provide a level playing field and may turn out unsustainable in the long-term In jurisdictions with vertically integrated utilities or hybrid systems: increasing RES capacity run by independent power producers may require revisions of the regulations defining the rules for grid access and system operation, ensuring the level playing field between the IPPs and the incumbent In jurisdictions with active prosumer participation: new questions emerge around the interface between retail and wholesale markets as well as on the regulation of distribution system operators 7

8 Issues associated with significant shares of VRE How to ensure efficient power system operations? What properties do power markets need to support full integration of variable renewables? What type of support policies minimize interferences with the market? What market design and regulations are required to deal with intermittency and maintain system stability? How can incentives be designed to maximise system operating flexibility? How to ensure efficient power system investment and development? How to facilitate financing for capital intensive technologies? Are risk transfer / hedging mechanisms needed? How to coordinate and provide efficient investment signals across decentralised and centralized generation, and network expansion? What kind of policies are needed to support investment in key enabling infrastructure, such as network expansion and storage development? Objectives of the study: a set of policy recommendations Aimed at the reform of the current market and regulatory frameworks. To accommodate high shares of renewable energy, in particular VRE, in a timely, cost-effective and secure fashion. Differentiated between jurisdictions, in particular those with liberalised wholesale markets and countries without. 8

9 International case studies Project structure: three main tasks Focus of this Task 1 workshop Market design criteria and prototype market designs Define a set of basic criteria of a functioning policy, market and regulatory framework based on policy objectives and relevant electricity system fundamentals Identify challenges in meeting these criteria Identify the main attributes of an ideal policy, market and regulatory framework Task 2 Bridge the gap Identify the ways to bridge the gap between today and the long-term ideal described What changes to current frameworks are necessary to make progress towards the ideal frameworks? What determines the pace at which progress can be made? Task 3 Policy recommendations no-regret measures Policy recommendations Proposed next steps Derived from the findings of Task 1 and 2. 9

10 Previous works on the subject of IEA-RETD and IEA This project aims to build on the pre-existing research on the design of electricity systems where variable renewables dominate by: Focusing on the diversity of the power systems and different reforms required in different jurisdictions Applying an approach that uses the ideal market designs in the high-vre future as a starting point IEA-RETD IEA Grid Integration of Variable Renewables (GIVAR) RES-E-NEXT (July 2013) Assessment of issues that will shape power system evolution to high levels of variable RES-E generation. The report considers policy domains, such as securing RES-E generation, Securing Grid Infrastructure, Enhancing Flexibility and Securing Generation Adequacy Phase 1 - Empowering Variable Renewables, Options for Flexible Electricity Systems, 2008 Identified strategic elements to facilitate deployment of VRE OPTIMUM (March 2014) A generic view on challenges and key policy actions necessary to deliver the energy system of a high renewable energy world might look like in 2050, such as political buy-in, energy efficiency, and mobilising investment Phase 2 - Harnessing Variable Renewables: a Guide to the Balancing Challenge (2011) Presents a new method developed by the IEA to shed light on managing power systems with large shares of variable renewables. Written for decision-makers, it explores the twin challenges of variability and uncertainty from a technical perspective. RE-INTEGRATION (January 2015) Discussed criteria and factors on the relative applicability and effectiveness of options for integrating variable RE based on actual interventions to date across 9 jurisdictions Phase 3 - The Power of Transformation Wind, Sun and The Economics of Flexible Power Systems (2014) Provides a detailed economic assessment of the flexible resources (flexible generation, grid infrastructure, electricity storage, demand side integration) that can facilitate VRE system and market integration. RE-PROSUMERS (June 2014) An overview of prosumer-related aspects, focussing on residential solar PV. RE POWERING ELECTRICITY MARKETS Market Design and Regulation during the Energy Transition Can we make market design fit for purpose for decarbonisation? What changes are necessary in Short term markets, Demand response, Transmission investments, Distribution network regulation and Retail pricing? 10

11 Our approach: from the ideal market design toward transition pathways Project phases Inception A variety of current market designs Clustered case studies Task 3 Policy recommandat ions Task 2 Transition pathways Analytical framework of Task 1 may be adjusted as a result of the results in Task 2 and 3 Task 1 Prototypes and blueprints Focus of this workshop Markets time scale Spot markets Ancillary services Int l market integration Reducing political risks... Policy making as a search process: gradual adjustments, stakeholder involvement, learning time / VRE share Methods Literature reviews Bilateral interviews Case study analysis Workshop 11

12 Key challenges for power system with high shares of VRE

13 /MWh Three main challenges of VRE to power systems Capital intensity Limited predictability and variability Decentralized and scattered generation Wind CCGT CAPEX OPEX 13

14 Three main challenges of VRE to power systems Capital intensity Limited predictability and variability Decentralized and scattered generation Cost recovery VRE are capital intensive Flexibility resources are capital intensive Cost of capital Capital costs (expected rate of return / WACC) becomes major driver of power system costs Optimal generation mix shifts Shift towards mid- and peakload thermal plants Transition towards new mix needs to be managed Time horizon of power system operations shortens Operational planning horizon shortens Rates of change become larger (e.g. residual load ramp rates) Transmission grid Good sites for wind and solar power are often far from load centres Distribution grid Larger share of generation is connected to distribution grid Assurance of system stability Higher demand for AS New constraints of AS provision (e.g. few thermal plants left) 14

15 Criteria for an ideal power market design with high shares of VRE

16 The wide scope of market design and policy frameworks Governance and institutional framework (roles of policy, independent regulator, etc.) Market design shapes the incentives under which all these decisions are taken Wholesale market RES support Retail market Market design consists of a set of rules specified by policy and regulation at multiple layers, implemented in a large number of different laws, administrative orders, and market provisions. Balancing and ancillary services Infrastructure regulation (transmission, distribution) 16

17 Market design challenges by time frame Decisions in the electricity sector Liberalised markets Vertically integrated regulated utilities Conventional generation capacity Decades ahead Long-term investment decisions Transmission and distribution network Wind and solar capacity Flexibility resources Years ahead Months ahead Price signals from short-term markets (spot market and ancillary services) Dedicated long-term price signals (e.g. technologyneutral capacity markets or support schemes) Generation and transmission expansion planning Grid access and compensation rules for independent power producers Short-term operational decisions Unit Commitment and dispatch Ancillary services procurement Balancing Transmission congestion management D-1 D Real time Day ahead markets Intra-day markets Real time (balancing) markets Market splitting and re-dispatch Medium-term and short-term optimization Dispatch of independent power producers

18 Three main challenges of VRE to market design Capital intensity Limited predictability and variability Decentralized and scattered generation Cost recovery: Credible investment incentives Credible investment signals Implications for the design of energy markets, capacity markets, support schemes Cost of capital: limiting risk exposure Exposure to risk, including policy risk, is a fundamental factor determining total system costs if the system is capitalintensive Trade-off between policy flexibility and regulatory risk Price volatility More volatile prices Product definition (e.g., peak/off-peak) looses relevance Spot market design Reduced gate closer Higher frequency Both day-ahead and intra-day Assurance of system stability Need for new AS products, e.g. providing system inertia Redesign AS to allow VRE participation Coordination between generation and grids Increased investment demand requires new approach to TSO and DSO regulation Locational price signals for generators needed Prosumers Retail prices becomes investment signal Base for taxes and grid fee erodes Many small producers need access to wholesale markets 18

19 Criteria for ideal market design with high level of VRE Ultimate goal Economic welfare (subject to meeting the policy objectives and operational constraints) High-level criteria Efficient dispatch Efficient investment Appropriate risk allocation Appropriate rent allocation Pricing externalities Dispatch signals Investment signals Appropriate risk allocation Robust to market power Environmental externalities Specific criteria Ancillary services Geographical coordination Coherence short/long-term RES support schemes Minimizing financing costs Reducing policy risk Stranded assets management Avoid windfall profits Power system externalities Locational signals 19

20 The diversity of power systems and implications for market design Vertically integrated monopolist Vertically integrated monopolist + IPPs Single Buyer as a national genco, disco or disco, or a combined notional gencotransco or transco-disco + IPPs Many discos and gencos, including IPPs, transco as a Single Buyer with Third- Party access Power market of gencos, discos and large users, transco and ISO 20 Source: FTI-CL Energy analysis based on various sources including World Bank

21 Stylized models of power system organization: 4 different prototypes Real-world market and policy design is diverse, complex, multi-level and path-dependent. To address this diversity in a transparent way, we propose to study a small number of power system prototypes Each real-world market represents a combination of these prototypes Each prototype allows to focus on a specific aspect of market design Power system prototype Aspect of market design Case studies Energy-only market Prosumer market State-led hybrid system Vertically integrated utility Credible energy & AS spot and forward price signal Distributed generation, selfconsumption, distribution grid Design of state-led capacity contracts and markets Regulation, market access for third parties Texas, Australia, Nord Pool Germany, Australia, France Brazil, UK South Africa, Japan, Quebec 21

22 Toward an ideal market design for each prototype

23 Energy Only market Critical elements of ideal market design Element of market design Design of spot and ancillary services markets Locational price signals Forward markets / hedging products Challenge presented by VRE Shift of the operational timeframe to real-time Increased capital intensity and price variability New requirements for AS products, and new constraints to provide them Increasing distance between generation and consumption Classical product definitions loose relevance (e.g., peak / off-peak) Increased capital intensity and price variability Ideal market design elements Move the spot price reference to the real-time price, e.g. Absence of barriers between real-time and ID/DA markets Single price imbalance prices Credible scarcity pricing Scarcity pricing mechanisms based on operating reserve demand curves Non-distortive market power and manipulation legislation Efficient valuation of flexibility services Spot ancillary services products (operating reserves) Technology-neutral balancing responsibility Ensure locational differentiation of energy prices perceived by generators to ensure transmission/generation coordination Nodal or zonal energy prices Network injection charges Fostering the liquidity of long-term markets Market makers New financial products to hedge against all spot products (e.g. operating reserves) Forward financial transmission rights 23

24 Prosumer market Critical elements of ideal market design Element of market design Retail pricing DSO regulation Market access Challenge presented by VRE Prosumers investment incentives Tax base erosion Regulation for (smart) grid investments Geographic coordination Market access for many small-scale actors Ideal market design elements Acknowledge the new role of retail prices: not only cost recovery, also generation and investment incentives Opt 1: finance certain retail price components from other sources (capacity-based fees, general budget,...) Opt 2: tax self-consumed electricity as well Coordinate distribution grid and generation investments to incentivize investment and innovation Opt 1: cost-reflective grid fees (connection and/or usage) Opt 2: zoning for distributed generation investments Provide market access: consider risk and transaction costs Opt 1: single-buyer model should not be the SO Opt 2: competing aggregators, prosumers can choose Opt 3: aggregators + market access of last resort Balancing and pricing rules should be size-neutral 24

25 State-led Critical elements of ideal market design Element of market design Integrated resource planning / coordination Interface between market and state driven operational processes Structure of the state-led capacity contracts Challenge presented by VRE Increasing distance between generation and consumption Increased capital intensity and price variability Shift of the thermal plants towards mid- and peak-load Shift of the operational timeframe to real-time New requirements for AS products, and new constraints to provide them Shift of the thermal plants towards mid- and peak-load Ideal market design elements Efficient resource planning and procurement process Transparent process for determination of investment needs Transparent and non-discriminatory process for tendering and allocation to third parties Ensure the state driven processes do not distort the short-term price signals required for flexibility resources Avoid rolling the short-term products into the capacity contracts Ensure the capacity contracts do not prevent the incentives for efficient short-term operation Induce efficient investment in all types of capacity coordinated with network development Induce the optimal volume of capacity including volume of VRE consistent with the social cost of emission to the society Ensure that for each technology the contracts reward the specific value that this technology provides to the system Allow coordinating the investment in generation with the existing and future transmission and distribution networks 25

26 Vertically integrated utility Critical elements of ideal market design Element of market design Challenge presented by VRE Ideal market design elements Regulatory framework Resource planning and procurement process Rules for the third-party access Cross border trading arrangements Achieving the optimal generation mix under the decarbonisation constraints Achieving the optimal generation mix under the decarbonisation constraints Increasing distance between generation and consumption Operational timeframe shift towards real-time System stability through ancillary services and demand response The shift of operational timeframe to real-time Ensure efficient investment, including renewable, with no undue rent transfers through regulatory mechanisms Incentive regulation to invest in the renewable generation to meet the applicable environmental targets The regulatory framework should ensure an efficient risk sharing between customers and the utility. Efficient resource planning and procurement process Transparent process for determination of investment needs Transparent and non-discriminatory process for tendering and allocation to third parties No discrimination against IPP s for the short-term dispatch Efficient IPP s investment (timing and location) Ensure efficient short-term trade with neighbouring utilities Introduce bilateral and or organised energy cross-border trading May require reforms in the direction of those in the Energy Only prototype 26

27 Next steps

28 Next steps: Study timing 28

29 Appendix - Bibliography

30 References Abbad, J.R., Electricity market participation of wind farms: the success story of the Spanish pragmatism. Energ Policy 38, Barquin, J., Rouco, L., Rivero, E., Current designs and expected evolutions of Dayahead, Intra-day and balancing market/mechanisms in Europe, in: OPTIMATE (Ed.). Batlle, C., Pérez-Arriaga, I.J., Zambrano-Barragán, P., Regulatory design for RES-E support mechanisms: Learning curves, market structure, and burdensharing. Energ Policy 41, Borggrefe, Neuhoff, K., Balancing and intra-day market design: options for wind integration, in: Initiative, C.P. (Ed.), European Smart Power Market Project. Chao, H.-p., Efficient pricing and investment in electricity markets with intermittent resources. Energ Policy 39, Cossent, R., Gómez, T., Olmos, L., Large-scale integration of renewable and distributed generation of electricity in Spain: Current situation and future needs. Energ Policy 39, Cramton, P., Ockenfels, A., Economics and design of capacity markets for the power sector. mimeo. De Vos, K., De Rijcke, S., Driesen, J., Kyriazis, A., Value of Market Mechanisms Enabling Improved Wind Power Predictions: A Case Study of the Estinnes Wind Power Plant. El Gammal et al. (2015), PV development as prosumers: the role and challenges associated to producing and self-consuming PV electricity Eurelectric, RES integration and market design: are capacity remuneration mechanisms needed to ensure generation adequacy? Euroelectric, Prosumers an integral part of the power system and the market EWEA, MARKET DESIGN A position paper from the European Wind Energy Industry Gawel, E., Purkus, A., Promoting the market and system integration of renewable energies through premium schemes: A case study of the German market premium. UFZ Discussion Papers. Glachant, J.M., Henriot, A., Melting-pots and salad bowls : the current debate on electricity market design for RES Integration. MIT CEEPR. Gottstein, M., Schwartz, L., The role of forward capacity markets in increasing demand-side and other low-carbon resources: experience and prospects. Montpelier, Vt.: Regulatory Assistance Project. Green, R., Electricity Wholesale Markets: Designs Now and in a Low-carbon Future. Energ J, Henriot, A., Market design with wind: managing low-predictability in intraday markets. Henriot, A., Vazquez, M., Hallack, M., Glachant, J.M., LDP Academic Roundtable Redesigning Gas and Electricity Markets to Work Together. Hiroux, C., Saguan, M., Large-scale wind power in European electricity markets: Time for revisiting support schemes and market designs? Energ Policy 38,

31 References Hogan, W.W., Electricity Wholesale Market Design in a Low-Carbon Future. Harnessing Renewable Energy in Electric Power Systems: Theory, Practice, Policy, 113. Holttinen, H., Meibom, P., Orths, A., van Hulle, F., Lange, B., O'Malley, M., Pierik, J., Ummels, B., Tande, J.O., Estanqueiro, A., Design and operation of power systems with large amounts of wind power: Final report, IEA WIND Task 25, Phase one VTT Technical Research Centre of Finland Helsinki. Jenkins, J.D., Economic regulation of electricity distribution utilities under high penetration of distributed energy resources : applying an incentive compatible menu of contracts, reference network model and uncertainty mechanisms KEMA, Distributed generation in Europe - Physical infrastructure and Distributed Generation Connection. Keppler, J.H., Cometto, M., Short-term and Long-Term System Effects of Intermittent Renewables on Nuclear Energy and the Electricity Mix. Newbery, D., Neuhoff, K., Market design for large shares of renewables: time and space, EPRG Spring Seminar, Cambridge. Perez-Arriaga, I.J., Managing large scale penetration of intermittent renewables. MIT. Perez-Arriaga, I.J., Batlle, C., Impacts of intermittent renewables on electricity generation system operation. Economics of Energy and Environmental Policy 1. Pérez Arriaga, J.I., Ruester, S., Schwenen, S., Batlle, C., Glachant, J.-M., From distribution networks to smart distribution systems: Rethinking the regulation of European DSOs. Think Final Report ( eui. eu), European University Institute. Pérez-Arriaga, I.J., Bharatkumar, A A Framework for Redesigning Distribution Network Use of System Charges Under High Penetration of Distributed Energy Resources: New Principles for New Problems Sáenz de Miera, G., del Río González, P., Vizcaíno, I., Analysing the impact of renewable electricity support schemes on power prices: The case of wind electricity in Spain. Energ Policy 36, Smeers, Y., Study on the general design of electricity market mechanisms close to real time. Commissioned by: The Commission for electricit and Gas Regulation (CREG). Sovacool, B.K., The intermittency of wind, solar, and renewable electricity generators: Technical barrier or rhetorical excuse? Util Policy 17, Vandezande, L., Meeus, L., Belmans, R., Saguan, M., Glachant, J.M., Well-functioning balancing markets: A prerequisite for wind power integration. Energ Policy 38, Weber, C., Adequate intraday market design to enable the integration of wind energy into the European power systems. Energ Policy 38,

32 Thank you for your attention Fabien Roques Senior Vice President COMPASS LEXECON Dmitri Perekhodtsev Vice President COMPASS LEXECON dperekhodtsev@compasslexec on.com Lion Hirth Neon neue energieökonomik GmbH hirth@neon-energie.de