Remuneration of RES and conventional power: Convergence or continued divergence?

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Gilbert Willis
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1 Remuneration of RES and conventional power: Convergence or continued divergence? Katherina Grashof Institut für ZukunftsEnergieSysteme (IZES)/ Free University of Berlin 18th REFORM Group Meeting Climate Policy Strategies and Energy Transition Salzburg, August 26 30, 2013

2 Central question Presentation structure Shall F-RES power ultimately be marketed through a power market based on marginal costs - and should we push for this now? On a meta level: Do we try to deal with tomorrow s questions using yesterday s answers? 2 [Leprich, Hauser, 24. Juli 2012]

3 Central question Presentation structure Shall F-RES power ultimately be marketed through a power market based on marginal costs - and should we push for this now? On a meta level: Do we try to deal with tomorrow s questions using yesterday s answers? 3 [Leprich, Hauser, 24. Juli 2012]

4 Presentation structure 1. Marketing of conventional and renewable power 2. The idea of market integration of RES 3. Effects on dispatch of fluctuating renewables (F-RES) 4. Effects on technical lay-out of fluctuating renewables (F-RES) 5. Effects on risk allocation 4 [Leprich, Hauser, 24. Juli 2012]

5 My questions to you 1. How to adress this quite economic issue from a political scientist perspective? 2. What are your arguments with regard to the question? 5 [Leprich, Hauser, 24. Juli 2012]

6 Source: IZES 2012 Flexibility options to complement Wind & PV 6 [Leprich, Hauser, 24. Juli 2012]

7 Spot market price ( /MWh) Power Market Merit Order 7 [Leprich, Hauser, 24. Juli 2012] Capacity (MW) Source and : Schlipf 2012

8 Spot market price ( /MWh) Power Market Merit Order = dispatch plant according to marginal costs Dispatchable capacity (MW) RES Nuclear Lignite Hard coal Natural gas Oil IZES 8 [Leprich, Hauser, 24. Juli 2012]

9 Traditional fossil + nuclear power marketing Sell on future market Optimise returns on spot market (day-ahead + intraday market) Example In 2011: Sell 1 MW for for 50/MWh at future market (at fuel costs of 30 /MWh) On : day-ahead market price for is at 40 /MWh: use own plant MAKE or 20 /MWh: buy at power exchange BUY 9 [Leprich, Hauser, 24. Juli 2012]

10 Traditional fossil + nuclear power marketing Sell on future market Optimise returns on spot market (day-ahead + intraday market) (Simple) Theory of liberalised power markets: Power sale returns cover capital (construction) and operational (fuel) costs In practice Largest part of capacity stock built (and payed back) before liberalisation Decicive supportive factors after liberalisation Windfall profits from free emissions trading allowances Premium for CHP plants... Today Power prices too low to cover capital and (hard coal and gas) capital costs of conventional generation 10 [Leprich, Hauser, 24. Juli 2012]

11 Traditional fossil + nuclear power marketing Sell on future market Optimise returns on spot market (day-ahead + intraday market) (Simple) Theory of liberalised power markets: Power sale returns cover capital (construction) and operational (fuel) costs Optimal dispatch of plants = according to their operating (marginal) costs 11 [Leprich, Hauser, 24. Juli 2012]

12 Traditional fossil + nuclear power marketing vs. Traditional RES remuneration through FIT Sell on future market Optimise returns on spot market (day-ahead + intraday market) (Simple) Theory of liberalised power markets: Power sale returns cover capital (construction) and operational (fuel) costs Optimal dispatch of plants = according to their operating (marginal) costs Traditional RES remuneration: Feed-in tariff to cover cap. costs Fixed tariff per kwh fed into the grid, irrespective of time + place Theory behind: Without FIT, renewables are too expensive & risky to compete on the power market Every RES kwh fed into the grid is a good kwh 12 [Leprich, Hauser, 24. Juli 2012]

13 Call for market integration of RES RES should act at the same markets as conventional technologies, earn returns in this competitive environment and bear the market price risks (VKU 2013) 13 [Leprich, Hauser, 24. Juli 2012]

14 Goals associated with F-RES market integration Effects on dispatch of F-RES Switch off RES in times of negative prices Maintenance in times of low prices 14 [Leprich, Hauser, 24. Juli 2012]

15 Goals associated with F-RES market integration Effects on dispatch of F-RES Switch off RES in times of negative prices Maintenance in times of low prices Effects on optimal technical lay-out of F-RES Wind: large rotors, small generators PV: east/west orientation 15 [Leprich, Hauser, 24. Juli 2012]

16 Goals associated with F-RES market integration Effects on dispatch of F-RES Switch off RES in times of negative prices Maintenance in times of low prices System infrastructure Improve RES production forecasts Lower need for grid expansion Effects on optimal technical lay-out of F-RES Wind: large rotors, small generators PV: east/west orientation 16 [Leprich, Hauser, 24. Juli 2012]

17 Goals associated with F-RES market integration Effects on dispatch of F-RES Switch off RES in times of negative prices Maintenance in times of low prices Effects on optimal technical lay-out of F-RES Wind: large rotors, small generators PV: east/west orientation System infrastructure Improve RES production forecasts Lower need for grid expansion Learning for future transition stages Development of F-RES market products 17 [Leprich, Hauser, 24. Juli 2012]

18 Goals associated with F-RES market integration Effects on dispatch of F-RES Switch off RES in times of negative prices Maintenance in times of low prices Effects on optimal technical lay-out of F-RES Wind: large rotors, small generators PV: east/west orientation System infrastructure Improve RES production forecasts Lower need for grid expansion Learning for future transition stages Development of F-RES market products Conceptions of justice level playing field with conventional technologies with regard to market risks 18 [Leprich, Hauser, 24. Juli 2012]

19 Characteristics of conv. vs F-RES technologies 19 [Leprich, Hauser, 24. Juli 2012] Conventional fossil & nuclear F-RES Wind & Solar Storageability Low / expensive Low / expensive Cost structure Significant operating costs Almost only capital costs Forecastability Years ahead, very low outage risk Controllability Current power sale Current dispatch Gas: fast, large range, cheap Nuclear, lignite: slow, limited range, associated with costs Future and spot markets According to merit order Negative bids on power exchange to save costs for Herunterfahren Hours to 1 day ahead, significant weather risk Very fast, only downwards, cheap FIT: TSO sell power day-ahead According to weather conditions Negative bids on power exchange to secure feed-in priority

20 / MWh / MWh Proposition for market integration Because F-RES destroy their own market prices, they need an additional income to market revenues (Raffaele s principle # 2) Replace FIT with fixed premium Full costs: capital + operating costs Fixed premium Feed-in tariff Power market revenues 20 [Leprich, Hauser, 24. Juli 2012] Source of graphics: MVV 2013

21 Effects on F-RES dispatch RES pay negative prices, but also nuclear & Lignite do Conv. Generation here: 29 GW RES: 30 GW 21 [Leprich, Hauser, 24. Juli 2012] Source: Fh ISE 2013

22 Effects on optimal technical lay-out of F-RES Power price developments are highly uncertain over 10 to 20 years Current proposals for fix premiums expect fix premium: 80% of plant refinancing market revenues: 20% of plant refinancing Differences between Options of technical lay-out high & certain enough? 22 [Leprich, Hauser, 24. Juli 2012]

Risk of balancing costs for forecast errors Full costs: capital + operating costs

23 / MWh / MWh Source of graphics: MVV 2013 Effects on risk allocation: investor s perspective Production risk Risk of insufficient revenues over plant lifetime Risk of balancing costs for forecast errors Full costs: capital + operating costs Fixed premium Feed-in tariff Power market revenues 23 [Leprich, Hauser, 24. Juli 2012]

24 Principles of risk allocation Higher risks investors, banks etc. want higher return on investment Different options to allocate risks: give the risk to the acteur who causes the risk can most easily manage the risk can diversify the risk to the highest extent 24 [Leprich, Hauser, 24. Juli 2012]

25 Source: IZES 2012 Preliminary conclusion Too strong market integration today risks F-RES to become flexibility options themselves - instead of pillars of the power system 25 [Leprich, Hauser, 24. Juli 2012]

26 Thank you for your attention! My questions to you 1. How to adress this quite economic issue from a political scientist perspective? 2. What are your arguments with regard to the question? Katherina Grashof Institut für ZukunftsEnergieSysteme (IZES) grashof@izes.de 26 [Leprich, Hauser, 24. Juli 2012]

Negative prices in Germany in 2012 and 2013 und negativer Börsenstrompreise igen die negativer reise im 2013.

27 Negative prices in Germany in 2012 and 2013 und negativer Börsenstrompreise igen die negativer reise im Da r Grenzraftwerke Signal für n im Netz ie Stromund der spark auf eagieren, beiden cht. Number of hours Zahl der negativer 27 [Leprich, Hauser, 24. Juli 2012] Abbildung 1: Anzahl der Niedrigpreisstunden (<= 10 /MWh und <= 0 /MWh), 1. Halbjahr

28 Source: Bofinger forthcoming Remuneration schemes with uniform price Both thechnologies needed to reach RES target Only cheaper thechnology needed to reach RES target 28 [Leprich, Hauser, 24. Juli 2012]

The Challenge and Opportunities of Energy Transformation - A German

The Challenge and Opportunities of Energy Transformation - A German Perspective Presentation for the Annual Meeting of EREA Uwe Leprich Institut for Future uueenergy egysyse Systems s( (IZES) Dublin, March