Power market design for Europe

Transcription

1 Permanent Study Group (PSG) Energy European Economic and Social Committee Power market design for Europe How to contribute to Energy Union objectives? German Institute for Economic Research (DIW Berlin) and Technical University Berlin

2 Power market design for Europe: How to contribute to Energy Union objectives? 1. Short-term operation: Market place for all creates synergies and security 2. For investment: Consider two types of generation technologies 3. For non-dispatchable renewables focus on investment framework 4. Debate on generation adequacy / capacity mechanism

3 1a Short-term market design open for all technologies: Time frame and platform Forecast error of wind declines closer to real time Hours before real time 40% 35% 30% 25% 20% 15% 10% 5% 0 Wind & solar Coal & most gas Can & need to adjust close to real time Require early start-up Ensure deep intraday and real-time markets + and consistent day-ahead markets 3 Clearing platforms or auctions are increasingly used in US and Europe for short-term power markets. Neuhoff, Ritter, Salah-Abou-El-Enien, Vassilopoulos(2016) Intraday Markets for Power: Discretizing the Continuous Trading?, DIW Discussion Papers, 1544, Data from Ignacio de la Fuente, Red Eléctrica de España

4 1b Ensure short-term market open for all technologies: Auctions with capability based bids Respect ramping and start-up constraints of conventional assets Intraday auctions with capability based bids * can accomodate all needs 4 Increase temporal granularity to ensure system balance and use flexibility of wind and solar Further dimensions that good market design needs to ensure: System-wide pooling of reserves Effective use of transmission capacity Neuhoff, Ruester and Schwenen (2016). Power Market Design beyond 2020: Time to Revisit Key Elements? The Energy Journal * also referred to as multi-part or unit based bids (complex bids that can reflect the technical constraints of units)

5 2 Is there a case for continued technology differentiation? Wind and solar PV Fossil fuel based generation and flexibility options Capital costs ~ 80% ~ 30% Main strategic choices New investment decision Location and dimensioning (Re-)investment and retrofit decision Closure Fuel contracting Capacity for government to decide Other aspects High (homogenous technology, competition for entry) RE trajectory required - For grid investment - Supply chain / planning Low (inhomogeneous assets, large incumbent players, information asymmetries) Government choices politically contentious Strategic choices Policy-driven deployment Private sector determined (financed on-balance sheet) 5 Neuhoff, Ruester and Schwenen (2016). Power Market Design beyond 2020: Time to Revisit Key Elements? The Energy Journal

6 3a Make use of renewables to stabilize energy costs Illustration excludes system costs Annuitized Investment (at 5%) for wind and solar generation at scale to replace fossil fuels Annual expenditure CO2 at 30 Euro/t Domestic fossil fuel Imported fossil fuel Similar cost level for serving demand with new wind and solar as with fossil fuel: - Cost of learning investment in wind and solar dominates debate but is sunk. DIW Berlin Calculations based on BP Statistical Review of World Energy; Energy Statistics for the EU-28; Bundesverband Solarwirtschaft e. V.; IEA; European Wind Energy Association; Bundesamt für Wirtschaft und Ausfuhrkontrolle, first published in Energy Journal (forthcoming)

7 3b Financing costs increase with (i) country situation (ii) policy design not addressing market imperfection and policy risk Weighted average cost of capital for wind reported by European investors in 2014 Based 7 on DIA-CORE (2016): The impact of risks in renewable energy investments and the role of smart policies

8 3c Power market and renewable policy needs to focus on risk management 10% ex-post adjustments, country risks 8% Sweden (Certificate Scheme) 4% Germany, revenue guarantee with feed-in 1. Cooperation can reduce financing cost for countries. 2. Policy can reduce financing cost for wind and solar by ensuring long-term stable revenue streams. 3. RE benefit from hedge at times of low power prices: Ensure consumers also benefit at times of high power prices. 8

9 4 Three paradigms of investment for generation adequacy How to define generation adequacy contribution of RE, flexibility options? How to integrate with international partners, heat transport? How to insure consumers against variable fossil energy and carbon prices? Energy & capacity markets F Cost-based regulation Energy only market Open for and benefiting from ALL flexibility options: Address chicken and egg Multi-year hedging contracts required to insure producers and consumers Option of strategic reserve as insurance for regulator How to compete without threat of entry? Regions differ on the emphasis on their paradigm: Change of paradigms puts credibility at risk and creates hold-up. 9 Based on Miller, Bird, Cochran, Milligan, Bazilian, Denny, Dillon, Bialek, O'Malley, Neuhoff, 2013, RES-E-NEXT: Next Generation of RES-E Policy Instruments, Paris, IEA.

10 4 Does Europe require a common paradigm for generation adequacy? Comprehensive capacity mechanisms distort energy markets Scarcity signals for investment and flexibility reduced for neighbor countries Cross-border participation reduces contribution to local generation adequacy -> Independent national implementation conflicts with EU energy objectives Comprehensive capacity mechanisms are technology specific Tenders tech. biased: announcement time, time-lag, contract duration Activation tech. biased: penalty terms, collaterals, warning periods, strike price -> With different technology preferences, EU cannot agree common design Therefore important to strengthen wholesale markets Intraday auctions: reference point for contracting and market based T allocation Remunerate system services and scarcity (operational demand response curve) Avoid increasing counter party risks with excessive retail-competition For (political) insurance of generation during transition use strategic reserve Strengthen EU ETS

11 Power market design for Europe: How to contribute to Energy Union objectives? 1. Short-term operation: Use intraday auctions with capability bids 2. Acknowledge difference between wind/solar and convetionals technologies 3. Wind/solar: Manage policy risk to reduce costs and volatillty for consumers 4. Conventional technologies: Strenghten wholesale market avoid cap mech.

12 DIW Berlin Deutsches Institut für Wirtschaftsforschung e.v. Mohrenstraße 58, Berlin