Renewable energy: regulatory and market issues

Transcription

1 Renewable energy: regulatory and market issues László Szabó Please feel free to add your logo here! www. erranet.org

2 Outline Renewable electricity outlook Policy context Technology development Regional outlook Investment challenge Integration challenge Regulatory challenge 2

3 Major pillars of RES-E policy Supply security increasing energy independence Climate change avoiding CO 2 emissions Industrial policy green jobs and technology export 3

4 Externalities in electricity generation Conventional technologies, generally over 80 /MWh Wind external cost below 10 /MWh PV external cost generally below 25 /MWh * Technology development would further reduce external costs of PV Source: ECOFYS

5 g CO2-eq / kwh In the 2DS, electricity becomes a near zero carbon fuel by DS 2DS World European Union United States China India ASEAN Carbon intensity drops by 90% by 2050 in the 2DS (IEA) 5

6 Technology learning Source: Fraunhofer

7 Technology Levelsied Costs Source IEA: Medium-Term Renewable Energy Market Report

8 New built electricity generation in Europe: RES-E Overall 80% share of RES in new investments. Source: WindEurope (February 2017) 8

9 Global RES power net additions IEA scenarios under BAU and accelerated cases - Shift to China and other Non-OECD Source IEA: Medium-Term Renewable Energy Market Report

10 Regional Outlook on RES support schemes 10

11 European Union 2020 targets: Binding national targets, with legal actions and sanctions if 2020 targets are not met National implementation NREAPs 2030 targets: 27%, but binding at EU level, no national targets. (This level might be elevated to 30% according to present negotiations between EC, Parliament and Council) The 2322/2014 EU Communication sets up new state aid rules for RES support: From 2017 RES support could only be granted through competitive tendering (FIP or GC) Exemptions: demonstration plants, smaller sized plants (under 1 MW) RES electricity must be sold on the product market Balancing costs must be paid by RES producers In case of negative prices RES-E production should not be supported to produce 11

12 EU Winter Package 1 Main findings of the RES and Market Design IAs: improved electricity market, revised ETS could deliver investments in the most mature renewable technologies by 2030 less mature renewable electricity technologies will need some support At the beginning of the period, over-capacity, the imbalance on the ETS market and low wholesale electricity market prices and high RES-E technology costs make market only driven investment difficult support schemes will still be needed at least for a transitional period RES IA investigates options to ensure that if and where support is needed, it is cost-effective RES-E: Some technologies would be viable exclusively from market revenues but the 2030 target would not be reached 12

13 EU Winter Package 2 Planned next steps: Let the market reveal the true price of RES-E (auctioning of support) Mandatory partial opening of support schemes (10 % till 2025, 15% afterwards) Lower the cost of capital (aligning support schemes, support mature technologies) Further simplify administration (e.g. under 50 kwautomatic approval after 6 month) RES heat- gap filler 1 % growth/year, District Heating: RES and Waste heat access to network RES-Transport: cap on food based biofuel, 2nd generation biofuel targets (6.8% by 2030) 13

14 Middle East and North Africa Source IEA: Medium-Term Renewable Energy Market Report 2016 O: recently opened, : under review: : closed or suspended for new entrant 14

15 Europe Source IEA: Medium-Term Renewable Energy Market Report

16 Asia and Pacific Source IEA: Medium-Term Renewable Energy Market Report

17 Investment challenge 17

18 Potential impact of INDCs on global cumulative investment in the power sector, IEA WEO

19 Definition of LCOE LCOE equation: - I t = investment cost - M t = operation and maintenance (O&M) costs in year t. - F t = fuel costs in year t. - E t = electricity generated in year t. - r = discount rate (expected return) - n = planned (or regulated) support period or lifetime Used to compare technologies under similar assumptions 19 19

20 Financing costs can dominate all other costs for renewables Solar PV Source: IEA 20 20

21 WACC figures DiaCore (wind onshore) WACC estimations can change significantly in developing markets, even in SEE Change between Source: Diacore, Ecofys

22 RES integration challenges 22

23 Typical problems of intermittent RES-E Distance to load high transmission related cost Intermittency additional reserve needs, loop-flows Source: Swinder (2008) 23

24 System impacts Due to low or close to zero variable costs in competitive electricity markets wholesale electricity price will reduce Have twofold effect on consumers: A positive impact as wholesale price will drop, also appearing in end-user price A negative one, as subsidy is financed by RES surcharge, which will increase end-user prices Conventional producers will see smaller utilisation rates and reduced margins As in many countries gas based power plants are still required to serve as balancing entities, they still have to be kept in the market 24

25 Merit order effects of RES P D support for renewables Merit order! Original Curve S1 S2 Biomass Biomass P 1 P 2 Coal Gas Oil Curve with FIT on wind Nucl. (Wind) nuclear coal gas oil Q Q 1

26 Merit order effect 2 Wholesale price reduction reduces the revenues of traditional producers missing money problem On the long term traditional producers delay investments This effects reduces the burden on end users but there is a price increasing effect by the RES surcharge to cover subsidies (usually higher) Volatility of wholesale price increases (due to intermittent technologies) which can partly reduces the price reduction effect 26

27 Integration costs Source: UECKERDT

28 Additional impacts of higher RES deployment Intermittent technologies (PV, wind) Variable production Uncertainty in production Production is location specific - As electricity is not a homogeneous product intermittent production has its price - Other, traditional producers operate at lower utilisation level - Uncertainty in production forecast - Other producers have to step in to balance the unexpected deviations -Placing production in distant location has higher costs - Due to network constraints, it does matter where the new capacities are located profile costs - balancing cost - grid costs Source: Ueckerdt 2013 But: Do they earn sufficient money to stay on the market on the long term? 28

29 Integration costs 2 Source: UECKERDT

30 Cannibalisation effect Definition: Renewables tend to earn less than average market price with increasing market share Mechanisms: with higher deployment levels, VRES generators reduce wholesale price in their respective production hours. e.g. PV in the summer daily hours. This reduces their benchmark prices, and their economic benefits. Coordination of day-ahead, intra-day and balancing markets can help to reduce these system wide impacts 30

31 Impact of higher PV deployment on Wholesale Prices Source: REKK,

32 Regulatory tasks Network integration issues 32

33 Regulatory tasks Contribute to the design of RES-E support schemes (production price support or quota obligation schemes) Regulate grid access and integration for RES-E connection queue management grid connection and cost allocation rules balancing and settlement rules, e.g. intra-day remuneration for additional reserve needs License and monitor the RES-E market Provide RES-E certification Promote cross-border cooperation in RES-E utilization 33

34 Grid integration issues Methods determining the maximum intermittent RES-E capacity to be connected to the grid Methods handling the queue of renewable generation projects waiting for system connection Tariff methods determining the connection charge of RES producers Potential regulatory incentives for DSOs connecting new renewable generators System balancing needs and rules 34

35 Asymmetric incentives for RES-E generation versus network RES-E generation: fast; attractive; simple incentives Network upgrade: slow; complicated; counter-incentives Integrated resource and network planning Sufficient incentives for transmission and distribution upgrade is key 35

36 Regulatory tasks Designing tariff schemes 36

37 Support schemes 1 Investment support schemes Investment grants, supported investment credits, tax credits (US) Tradable green certificate schemes (quantity based) RES-E obligation on retailers Two products (sources of revenue) by RES-E generators: electricity and Green Certificate; both tradable GC price is determined by supply and demand Feed-in tariff or feed-in premium schemes (price based) Priority dispatch obligation Who is the party to purchase RES-E? 37

38 Support schemes 2 Functioning principle: Support renewables through their production Create an almost financial instrument: High upfront investment cost is covered by a fix cash-flow attached to the RES-E production up to years Supplementary tools: priority connection, priority dispatch Three fundamental instruments: Feed-in Tariffs (FIT): Support RES-E price is fixed, production quantity is flexible Feed-in Premium (FIP): higher market orientation, support explicitly over market price Green Certificate (GC): Supported RES-E quantity is fixed, price becomes volatile FIT is more effective to promote RES-E. Also it was more popular/applied in the EU and in other countries. BUT: EU 2015 step: phasing out FIT based support schemes 38

39 The second-best regulation subsidies to RES generation P D support for renewables P 1 P 2 Average cost based supply curve!! S Supply of renewables Supply of non-renewables Q Q 1

40 Support Schemes Feed-in Tariff (FIT) Costs, prices MC renewable P FIT P p Q p Q FIT FIT support / kwh Market price kwh Two main characteristics of FIT schemes: Obligatory takeover of electricity Fixed purchase price, independently from market price In the EU the favorite supply tool It is one of the most effective tool, but not the most cost efficient It is most suitable to apply in the early phase of the RES deployment, but can lead to over-subsidisation and overshootings 40

41 P FIP P p Support Schemes: Feed-in Premium (FIP) Costs, prices Market price + FIP Premium / kwh FIP efficient Market price FIP over support time MC RES Electricity is sold on the product market Once sold, gets premium as well Premium systems are more efficient than FITs Higher risks for green producers Closer to market operations Various forms: fixed or variable premiums Also cap and floor values FIPs get higher and higher shares in the EU RES support systems More market oriented instrument Could also be applied in competitive tendering schemes

42 electricity renewable attributes Support schemes: Green certificates (GCs) Buyer A Producer of Buyer B Renewable electricty Consumers are obliged to buy certain amount of green certificates (GCs) Authority checks at the end of the years if sufficient GCs are purchased GCs are tradeable Physical trade of electricity and green attributes are separated and sold separately Green producers sell electricity on the traditional product markets, while GCs on the green certificate markets Non-compliance is punished it is important to set fines at reasonably high levels Although one of the most market based instrument, there is a mixed picture in those EU countries applying GC schemes 42

43 RES support tools and risks Source: Dr. Corinna Klessmann, 2014, Ecofys

44 FIT Does it follow technology learning curves? 44

45 EU State Aid Rules and Renewable Support The 2322/2014 EU Communication sets up new state aid rules for RES support: From 2017 RES support could only be granted through competitive tendering (FIP or GC) Exemptions: demonstration plants, smaller sized plants (under 1 MW, or 6 MW wind) RES electricity must be sold on the product market Balancing costs must be paid by RES producers In case of negative prices RES-E production should not be supported to produce Opening up support schemes with other Member States 45

46 RES auction design elements main questions to be answered What is auctioned? How much is auctioned? How should the winners be selected? How should the price be determined? - Technology-specific / neutral - Output-based / investment grants - Sliding / fixed premiums - Support duration, adjustment - Single-item / multiple items - Volume (capacities / budget) - Price-only - Multiple criteria - Pay-as-bid - Uniform / pay-as-cleared Should there be special bidding rules? - Price caps / floors - Quotas for diversity Should there be safeguards? SOURCE:EU AURES project, Pre-qualification rules - Penalties (non-compliance/delays) 46

47 Trade-offs in auction designs Low entry barrier Low participatory risk Uniform conditions amongst bidders Competition High realisation rate Pre-qualification conditions Penalties Give preferential treatment to small players Many participants Transparency Source: Finger, 2016 Simple, transparent rules Pre-defined rules, definitions 47 47

48 German and Greek PV tenders DE GR 2017 Price trends between 2015 and 2017 Eurocent/kWh Only PV technology Why do we observe this difference between DE and GR for 2017? 48 48

49 RES auctions results PV and wind technology auctions: Source: Fortum 2016 PV: Germany: latest 2017 PV auction: 56 /MWh, Greece /MWh, Off-shore wind: Denmark 2016: /MWh; DE, DK 2017: zero premium (Dong) 49 49

50 THANK YOU FOR YOUR ATTENTION! László Szabó W Web: