Welfare Effects of Dynamic Electricity Retail Pricing in The Presence of Variable Renewable Energy Supply And Planning Reserve Margin Constraints

Transcription

1 Welfare Effects of Dynamic Electricity Retail Pricing in The Presence of Variable Renewable Energy Supply And Planning Reserve Margin Constraints Christian Gambardella, RDIII (ESED),PIK Potsdam Michael Pahle, RDIII (ESED), PIK Potsdam Wolf-Peter Schill, EVU, DIW Berlin BELEC 05/28/2015

2 Content 1. Motivation & Research Questions 2. Method 3. Preliminary Results 4. Conclusion & Omitted Factors 2

3 MOTIVATION & RESEARCH QUESTIONS 3

4 Motivation & Research Questions Challenge : Growing Need for Power System flexibility Source: California ISO to accommodate fluctuating electricity supply from increasing shares of variable renewable resources (vres) 4

5 Motivation & Research Questions Competition among various Flexibility-Options Storage Facilities Transmission capacity to adjacent markets Flexible (Quick-start) Power Plants Demand Response General Intuition: As renewables continue to grow, the value of demand response increases and consequently more demand response options will be used. Agora Energiewende

6 Motivation & Research Questions Fundamental Market Flaw: Price Inelasticity of Demand Real electricity market allocation significantly inefficient: p t Q oo Q p S p p p p oo Q tttt Q tttt q t 6

7 Motivation & Research Questions Large Welfare Gains from Dynamic Retail Pricing (DRP) Study Market System Own-Price Elasticity DRP share [% of total demand] Total Annual Welfare Gains Borenstein (2005) CAISO to to to 1098 $mio. Alcott (2012) PJM , and to to 2483 $mio. Typically large welfare gains left on the table even at moderate elasticity to price and DRP share assumptions; Results highly sensitive to elasticity assumptions; Welfare effects of dynamic pricing could be pronounced in a system with large-scale fluctuating renewable energy supply 7

8 Motivation & Research Questions Problem I: Allocative Inefficiency increasing with deployment of vres p t Q oo Q p S p p p p oo Q tttt Q tttt q t 8

9 Motivation & Research Questions Problem I: Allocative Inefficiency increasing with deployment of vres p t Q oo Q p SvRES p p p p p p oo Q tttt Q tttt p oo q t 9

10 Motivation & Research Questions Problem II: Distortionary Planning Reserve Margin Constraints RM% RM% p t SDICAP SCICAP Q p Entry q t 10

11 Motivation & Research Questions Is there a Growing Need ( value ) of price responsive demand as vres supply shares increase? 1. Are overall welfare gains from dynamic (real-time) retail pricing larger in a vres dominated market than in a market w/o vres supply? 2. What welfare gains could accrue from dynamic capacity pricing (DICAP) when a planning reserve margin for firm capacity is implemented? 3. Is DICAP more beneficial than further increasing the share of real-time priced (RTP) customers? 11

12 Main Preliminary Findings Yes 1. But not unless vres shares reach a certain threshold in gross electricity consumption. 2. Introducing dynamic capacity pricing (DICAP) can be more beneficial in a high vres market. 3. Introducing DICAP can be more beneficial than increasing share of realtime priced consumers after a certain RTP customer share has been reached. 12

13 METHOD 13

14 Method: Long-Run Equilibrium Model (Borenstein &Holland 2005; Alcott 2012) CICAP DICAP sells to buys from Wholesale Market Producer Q S, K D, aa t K V Capacity Market Q t, w t, K Retailer K D, ρ RR Q t S KD 1+RR ρ t = p t c D 1 + RR Q mmm = K D Retail Market α Q t D, p t e, p t c, p c 1 α Q t D, p e, p c RTP Consumer Flat Consumer

15 Method: Numerical Analysis Mixed Complementary Problem (MCP) in GAMS; Model calibrated to German 1. Clearing price and load data (2013), 2. RES infeed data/availability factors (2013); Time resolution: 8760 hours; Own-Price Elasticity = -0.05; Stylized Technology Portfolio: K V (Wind, Solar), K D (Coal, Lignite,Gas, Oil); Scenarios: Comparative Statics regarding Total Welfare Changes Reserve Margin Constraint (RM) = Peakdemand + 5% DICAP RTP Share [1%- 100%] vres share = 0% vres share > 0% (Carbon Pricing) CICAP RTP Share [1%- 100%] vres share = 0% vres share > 0% (Carbon Pricing) 15

16 PRELIMINARY RESULTS 16

17 Total Annual Welfare Gains from Increasing RTP Consumer Shares [mio /a] 1200 TCS No-RES Market 1000 TCS RES Market (48% - 52%) 800 TCS RES Market (57%-62%) 600 TCS RES Market (63%-68%) ,2 0,4 0,6 0,8 1 RTP Share 17

18 CDF Price (DICAP) for Increasing RTP Shares (1% to 20%) 18

19 CDF Price (DICAP) for Increasing RTP Shares (1% to 20%) 19

20 CDF Quantity Changes for Increasing RTP Shares (1% to 20%) 20

21 Total Welfare Gains from Introducing Dynamic Capacity Pricing [mio /a] TCS No-RES Market TCS RES Market (48% - 52%) TCS RES Market (57%-62%) TCS RES Market (63%-68%) TCS from RTP under CICAP (63%-68%) ,2 0,4 0,6 0,8 1 RTP Share 21

22 CONCLUSION 22

23 Conclusion Substantial welfare gains (consumer surplus gains) from introducing and increasing dynamic/real-time retail pricing (electricity and firm capacity). even at moderate elasticity assumptions. Results highly sensitive to price elasticity (gains more than twice as large for given RTP shares when elasticity -0.1) Growing Need : Welfare Gains from RTP comparatively larger with high shares of vres supply in GEC. Yet, there could be a critical vres share after which this is the case in a genuine long-run equilibrium. Given a planning reserve margin for firm capacity, passing through capacity costs time-varyingly becomes more welfare enhancing in a market with vres. Dynamic Capacity Pricing could entail larger welfare gains than increasing share of RTP consumers. 23

24 Omitted Factors in Our Approach Transmission capacity scarcity ignored: Given locational marginal pricing, welfare gains may be underestimated for given vres shares. If T&D charges are passed on as constant adders, nothing changes qualitatively and quantitatively. Zero-cross-price-elasticity, i.e. no load-shifting: Welfare gains may be underestimated regarding both types of long run equilibria with and without vres (still critical vres share may be lower). Trade-off to other flexibility options from a system-cost-perspective ignored. Heavily dependent on cost assumptions Non-convexities in (dispatchable) electricty generation ignored: Start-up and ramping costs may be larger in a vres market. Implies relatively larger efficiency gains of price responsive demand 24

25 References Alcott, H., Real-Time Pricing and Electricity Market Design. Working Paper, NYU (March). Available at: Time%20Pricing%20and%20Electricity%20Market%20Design.pdf Borenstein, S., Holland, S., On the Efficiency of Competitive Electricity Markets with Time-Invariant Retail Prices. RAND Journal of Economics, Vol. 36, No. 3, pages Borenstein, S., The Long-Run Efficiency of Real-Time Electricity Pricing. The Energy Journal, Vol. 26., No. 3 (April), pages Connect Energy Economics, Aktionsplan Lastmanagement. Endbericht einer Studie von Connect Energy Economics. Studie im Auftrag von Agora Energiewende. 25

26 BACK UP 26

27 Retail Real-Time Prices Under Dynamic and Constant Capacity Pricing Price [ /MWh] 140,00 120,00 100,00 Energy & Capacity Price DICAP Energy & Capacity Price CICAP Energy Price Constant Capacity Adder 80,00 Dynamic Capacity Adder 60,00 40,00 20,00 0, Hour 27