Merit Order Effect of Wind Power Impact on EU 2020 Electricity Prices

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2 Merit Order Effect of Wind Power Impact on EU 2020 Electricity Prices AEE Wind Energy Convention, Madrid June Jesper Munksgaard Ph.D., Senior Consultant 2

3 Agenda Background Literature review Modeling analysis Conclusions 3

4 Background By 2020 wind power will increase significantly Wind power will reduce average wholesale power price levels For EWEA we have analyzed the price impact when wind power replaces high cost thermal power plants in the merit order curve Study carried out in two phases: I. Review of previous studies II. Analyses made by Pöyry power market model 4

5 A1 What is Merit Order Effect? Marginal costs Merit order effect Demand Coal Gas Renewables Nuclear Wind Generation volume Original merit order curve New merit order curve with additional wind generation 5

6 Diapositiva 5 A1 I exchanged the picture with the latest one form the report where nuclear is inlcuded! Administrator; 10/06/2010

7 Phase I: Literature Review 14 studies within three categories: a) Impact of wind power on spot market prices in a single country b) Costs and benefits of renewable energy support schemes analyze costs and benefits of support schemes from an end-user point of view c) Wind power and the power grid infrastructure i.e. transmission capacities and dispatch mechanisms 6

8 6 Volume effect in billion Euro/year Merit Order Effect in per MWh and billion per year MOE Price and Volume Effect in 2009 Prices t in Euro/MWh MOE Price effect MOE Volume effect Price effect Sensfuss et al., DE Jonsson et al., DK Munksgaard et al., DK Delarue et al., BE Weigt, DE Neubarth, DE 7 1 0

9 Phase Il: Pöyry s Modeling Analysis Aim: To quantify merit order effect from wind power in Europe in 2020 Methodology: Scenario analysis: Compare a Reference to a Wind scenario Marginal cost curves (short term) assuming a long term market equilibrium Grid investments are not considered Pöyry applied The Classic Carbon Model A power and carbon market model for the European power market Conventional investments are determined by the model Model results include wholesale and end-user prices for each market area, trade flows, generation, demand, fuel use, CO2 emissions and the carbon (EUA) price 8

10 Coverage of the analysis EU 27 plus Norway and Switzerland 9000 (2862) (1021) 3000 (143) 2350 (430) 600 (78) (27) 1100 (102) (3180) (54) (3241) (2225) (23903) (472) (384) (150) (35) (3) (995) (127) (20) (10) (3404) 700 (0) (158) (16740) (3736) 8500 (985) Legend: MW installed in 2020 (MW installed in 2008) Total EU 265 GW (65 GW) The figure indicate assumed installed wind capacities in accordance to EWEAs Pure Power Scenario! 500 (0) 9

11 Modeling Analyses for 2020 Two scenarios defined by EWEA: Input Parameter Reference Scenario Wind Scenario Reference Scenario: Renewable power generation mix in 2020 equals in shares the actual mix of No further wind and other RES investments are assumed Fuel prices Wind capacities As 2008 Forecast from IEA Coal: 10.5 /MWh, Gas: 28 /MWh, Oil: 110 $/boe High growth compared to 2008 Wind Scenario: Wind power capacities increased by 300% from 2008 until 2020 (~200 GW) The merit order effect is estimated as difference in market prices between the two scenarios Carbon policies/targets Conventional investments Capacities of RES other than wind EU target: -20% EU target: -20% to 1990 to 1990 CO2 price: 48 /ton CO2 price: 30 /ton According to long run marginal costs As base year 2008 According to long run marginal costs Share as base year 2008 For the same Input Parameter, blue marked cells represent the same value. Red marked cells are representing a different input value compared to the other scenario. 10

12 Results: Merit Order and Volume Merit Order Effect Wind generation displaces conventional gas and coal generation Average power market price in Europe is thereby reduced in Europe Wind generation volume Merit order effect Volume order effect Merit order effect per wind MWh Year TWh/a /MWh bio /a /MWh MOE has been estimated at 10.8 /MWh The Wind Scenario reduce wholesale market revenue by nearly 42 billion per annum 11

13 Price difference in % Wholesale Prices in Europe in 2020 Reference Scenario In Czech, Poland, Hungary and Slovakia average prices are about 50% higher than EU average Average wholesale prices in 2020 Reference 2020 WIND 2020 Price difference Wholesale price in cents per kwh Wind Scenario In Czech, Poland, Hungary and Slovakia the price level is about 15% higher than the EU average 2 0 Austria Belgium Czech Denmark Finland France Germany Hungary Italy Netherlands Norway Poland Portugal Slovakia Slovenia Spain Sweden 12 Switzerland Estonia Latvia Lithuania UK

14 Reference Scenario 2020 Merit Order Curve European power demand is first served by waste, hydro and wind technologies with low short term marginal costs Nuclear provide 780 TWh at marginal costs of on average 1.5 cent/kwh M1.5 Major share of Europe s demand is supplied at cost levels between 5 and 7 cent/kwh, mainly by hard coal technologies Marginal Costs in cent/kwh Equilibrium price 8.58 c/kwh Demand Cumulative generation in TWh Fuel Wind Hydro Nuclear Lignite Coal Peat Biomass HFO Oil Gas Waste Colour At higher cost levels, gas technologies are dominating 13

15 Wind Scenario 2020 Merit Order Curve Merit order curve and its technology mix and sequence very much resembles the Reference Scenario Wind power mainly replaces coal and gas power as compared with the Reference Scenario Marginal cost levels for the conventional technologies vary in the two scenarios mainly due to the resulting difference in the CO2 price Ma arginal Costs in cent/kwh Demand Equilibrium price 7.5 c/kwh Cumulative generation in TWh Fuel Wind Hydro Nuclear Lignite Coal Peat Biomass HFO Oil Gas Waste Colour 14

16 Comparison of the two scenarios merit order curve 18 Fuel price sensitivity in Reference Scenario Merit order effect Costs in cent/kwh Short term marginal Reference Scenario 2020 Wind Scenario 2020 Merit order effect: 1.08 c/kwh Cumulative generation in TWh 15

17 Merit order effect of different sensitivity cases The sensitivity analysis included the increase of the EU GHG reduction target from -20% to -30% and -40% as well as the increase of fuel prices by 25%. 16

18 Conclusions Wind power will have a strong impact on future spot market prices in European power market Previous studies find merit order effects in range 3-23 per MWh Pöyry s analyses find merit order effect of nearly 42 billion per year on European level Wind power reduces EU carbon price level by one third in

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