Can you teach old electricity markets new tricks in a renewable future

Transcription

1 World Congress of Environmental and Resource Economists Can you teach old electricity markets new tricks in a renewable future Karsten Neuhoff Climate Policy Department, German Institute for Economic Research Economics Department, Technical University Berlin June 2018, in Gothenburg, Sweden

2 1 Moving beyond today s electricity demand : Flexibility and efficiency for reliable, affordable, and climate friendly energy services Disctrict heating. Coal Oil Gas Other RE Power (RE) Power (non RE) Household Commerce and Services Mining and manufacturing Transport Basierend auf: AG Energiebilanzen (2016) 2

3 2 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) Karsten Neuhoff

4 3 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 4 on DIA-CORE (2016): The impact of risks in renewable energy investments and the role of smart policies Karsten Neuhoff

5 4 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 5

6 5 The case for long-term 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) 6 Neuhoff, Ruester and Schwenen (2016). Power Market Design beyond 2020: Time to Revisit Key Elements? The Energy Journal Karsten Neuhoff

7 6 Short-term market design open for all technologies Hours before real time % forecast error wind 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 7 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 Karsten Neuhoff

8 7 Wind power technologies: Output depends on wind speeds Source: Neuhoff, May and Richstein (2017): Anreize für die langfristige Integration von erneuerbaren Energien: Plädoyer für ein Marktwertmodell. DIW Wochenbericht. System-friendly wind turbines produce more in medium wind speeds, where especially long-term market values are expected to lie higher

9 8 Considering locational cost-element in tariff / PPA contract: Example German remuneration - adjusted for wind output Lower tariff for resource-rich sites; site quality evaluated ex-ante and adjusted every five years

10 9 Challange: Future revenue receive insufficient at investment stage Revenue Sichere Secure Erlöse revenues Additional revenue Unsichere Insecure revene Erlöse Secure revenue allow debt finance: Low financing cost Insecure revenue only relevant for equity: Financing cost for additional investments of system friendly turbines high Betrieb, Operation, Wartung, Maintenance, Balancing Balancing Operational years Implied discounting of revenue: 1,7% 10% Weight on revenue in years 11-30: 61% 35% Karsten Neuhoff, Nils May, Jörn Richstein, DIW Berlin,

11 10 Reflection of long-term benefits with market value model Set market value prior to investment Simulate hourly power prices for reference year Calculate hourly production of installation for reference year Marketvalue factor: Difference between average power price obtained by installation compared to national average for technology group. Offers in RE auction are adjusted by market value factor System friendly turbines and locations are more competitive Allows investors to internalyse system benefits Applied in Mexico, implicitly used in RE auctions by US utilties Karsten Neuhoff, Nils May, Jörn Richstein, DIW Berlin,

12 11 Effect of market value model Benefit Long-term system benefits can be reflected (also with respect to location) Minimises regulatory risks and thus financing costs Neutral on design of technology Enhances liquidity through competition across locations and turbine types Is the devil in the details? Requires parameterisation but similar to requirements for network expansion Assumptions on network expansion impacts opportunities for expansion Assumptions on flexibility in system impacts incentives for PV direction Annual re-calculation of market value factor Karsten Neuhoff, Nils May, Jörn Richstein, DIW Berlin,

13 Vielen Dank für Ihre Aufmerksamkeit. DIW Berlin Deutsches Institut für Wirtschaftsforschung e.v. Mohrenstraße 58, Berlin Redaktion Karsten Neuhoff