A Green European Energy Market : The Role of Cross-border Trade

A Green European Energy Market : The Role of Cross-border Trade Richard Green and Iain Staffell Imperial College Business School

Research Questions What will the European electricity mix look like in 2050? How important is the ability to move power between regions within Europe? Will current market designs be able to cope? Imperial College Business School 2

Scenarios for 2050 Imperial College Business School 3

TWh / year TWh / year TWh / year CO 2e / year (% of 1990) DECC s 2050 Calculator 3,000 2,500 2,000 1,500 1,000 500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 Energy supply and demand Primary supply 0 2007 2010 2015 2020 2025 2030 2035 2040 2045 2050 Demand 0 2007 2010 2015 2020 2025 2030 2035 2040 2045 2050 Natural gas Oil and petroleum products Coal Agriculture, waste, and biomatter imports Environmental heat Primary electricity, solar, marine, and net imports Lighting & appliances Heating and cooling Industry Transport International shipping International aviation National navigation Domestic aviation Rail transport Road transport Emissions Energy Security Contextual Data Emissions (% of base year) 100% International Aviation and Shipping 75% In the event of a 5 day peak in heating and drop in wind Waste 2007 2020 2030 2050 Land Use, Land-Use Balancing capacity used 32% % 36% 54% 0% 50% Change and Forestry Standby capacity required GWcapacity - - - - - - - Probable annual emissions MtCO2e - Agriculture 25% Industrial Processes Please use the Storage, demand shifting and interconnection lever to choose balancing and storage options Fuel Combustion Target Energy balancing and bio-energy 0% Carbon capture Oversupply and Imports needed -25% Bioenergy credit Fuel TWh / year 2007 2020 2030 2050 Y.04 Coal oversupply (imports) (360) (243) (13) 7 Y.05 Oil and petroleum products oversuppl 73 (515) (632) (696) Total Y.06 Gas oversupply (imports) (270) (223) (352) (198) -50% Y.01 Biomass oversupply (imports) (4) (45) (77) (119) 2007 2010 2015 2020 2025 2030 2035 2040 2045 2050 Y.02 Electricity oversupply (imports) (0) - (0) - Bioenergy contextual data NB: Modelled emissions adjusted to match 2007 actuals. See note below emission table. Source / Use TWh / year 2007 2020 2030 2050 Modelled emissions, net of capture, by sector (Mt CO 2e) Consumption of gaseous hydrocarbons 989 417 417 204 V Supplied from biogas - - - - Sector 2007 2050 % of base IX.a Used in domestic heating 33% - - - yr 200 24 3% IX.c Used in commercial heating 8% - - - I Hydrocarbon fuel power generation V Bioenergy (1) (32) (4%) XI Used in Industry 15% 31% 28% 45% XIV Geosequestration - - - I.a Used in unabated power generation 35% 61% 68% 52% VI Agriculture and waste 66 57 7% I.b Used in CCS power generation - - - - IX Heating 84 - - Detailed paths for UK energy and emissions Users choose between options Electricity output not time-specific Electricity generation 450 400 350 300 250 200 150 100 50 0 2007 2010 2015 2020 2025 2030 2035 2040 2045 2050 Electricity imports Non-thermal renewable generation Nuclear power Carbon Capture Storage (CCS) Unabated thermal generation Domestic demand X Lighting and appliances 3 - - Consumption of liquid hydrocarbons 905 816 767 778 XI Industry 93 57 7% V Supplied from liquid biofuels (0%) 3% 5% 9% XII Used in transport 81% 86% 86% 88% XII Transport 187 175 22% XI Used in industry 9% 9% 8% 6% XV Fossil fuel production 34 10 1% XV.a Used in refineries 6% 5% 5% 5% XVI Transfers 4 1 0% Total 671 291 37% Consumption of solid hydrocarbons 496 322 76 49 % of actual 99% V Supplied from solid bioenergy 1% 8% 52% 100% I.b Used in CCS power plants - - - - NB: Emissions (in blue) are modelled from energy consumption and may not agree precisely I.a Used in unabated power plants 86% 85% 44% 29% with 2007 actuals. However, % of base year figures (in black) have been adjusted by a constant factor so that 2007 modelled emissions match 2007 actual emissions. XI Used in industry 11% 15% 55% 69% IX Used in heating 3% - - - 4

Energy Transfer Reference Case Explore 2050 energy transfer scenarios Simple and transparent methodology Project annual demand for 10 fuels x 8 sectors x 40 countries Synthesise hourly electricity profiles for each country Simulate how and where this electricity will be generated All freely available inside a simple(ish) Excel spreadsheet

The big picture Step 1: Annual energy demand for 2010 Coal Industry Gas Commerce Nuclear Renew. Domestic Biomass Oil Transport

The big picture Step 2: Service demands for 2010 Coal Ind Service demand 290 bn Gas Nuclear Renew. Biomass Oil Com Dom Trn 1164 bn 27.0m houses 2900 HDD 29 CDD 990 bn p-km 620 bn T-km

The big picture Step 3: Project service demands to 2050 Growth levels derived from user-selected scenarios for: Service demand 290 bn Population GDP Energy prices 1164 bn 27.0m houses 2900 HDD 29 CDD 990 bn p-km 620 bn T-km

The big picture Step 3: Project service demands to 2050 Growth levels derived from user-selected scenarios for: Service demand 580 bn Population GDP Energy prices 3020 bn 35.4m houses 2400 HDD 64 CDD 1920 bn p-km 1450 bn T-km

The big picture Step 4: Scenarios for modal split and efficiency Modal split: Electrification / gasification? Planes, trains or automobiles? Batteries, biofuels, or hybrid vehicles? Efficiency: Process improvements Better buildings Gains from fuel switching Service demand 580 bn 3020 bn 35.4m houses 2400 HDD 64 CDD Use scenarios to explore different outcomes 1920 bn p-km 1450 bn T-km

The big picture Step 5: Calculate final energy demand for 2050 Ind Service demand 580 bn Com 3020 bn Dom 35.4m houses 2400 HDD 64 CDD Trn 1920 bn p-km 1450 bn T-km

We need to know the demand for power over time if we are to dispatch generators to meet that demand and estimate their fuel requirements Electricity cannot easily be stored at present Water can, of course A day in the life Generating hourly electricity profiles Future storage technologies may be developed, but will not be free

A day in the life Generating hourly electricity profiles Know the annual electricity requirement for each sector Allocate typical daily profiles to each sector and end-use (e.g. domestic appliances) 200% 150% 100% 50% 0% 0 3 6 9 12 15 18 21 Incorporate daily temperatures for heating and cooling Add stochastic variation to all parameters

A day in the life Example UK daily profiles Validate the method against measured 2010 data GW 60 50 40 30 Winter fortnight Summer fortnight 20 10 Historic Simulated Historic Simulated 0 01-Feb 08-Feb 01-Jul 08-Jul

A day in the life Example German daily profiles Validate the method against measured 2010 data GW 80 Winter fortnight Summer fortnight 60 40 20 Actual Simulated Actual Simulated 0 01-Feb 08-Feb 01-Jul 08-Jul

Then apply to the 2050 data: A day in the life Example UK daily profiles GW 140 Winter fortnight Summer fortnight 120 100 80 60 40 20 0 01-Jan 2010 2050 08-Jan 01-Jul 2010 2050 08-Jul

Generation mix in Europe GW capacity in 2050 Wind 19% Solar 25% Hydro 12% Pumped Storage 5% Marine 0% Geothermal 1% Waste 1% Biomass 2% Oil 1% Gas Boiler 1% Gas CCGT 16% Gas OCGT 2% Nuclear 8% Coal 5% Lignite 2% 18

Dispatching electricity /MWh Net of Renewables Gross Demand Marginal Cost P GW 19

Dispatching electricity /MWh Net of Renewables Gross Demand Marginal Cost P GW 20

Dispatching electricity /MWh P Cost of Unserved Energy / Value of Lost Load Marginal Cost Gross Demand Net of Renewables Load Shedding GW 21

Transmitting electricity Unconstrained line /MWh Local demand /MWh Local demand + exports - imports MC MC P P GW GW Exports and imports between zones allow the prices to equalise 22

Transmitting electricity Constrained line /MWh Local demand /MWh Local demand + exports - imports MC MC P P The charge to use the lines between the zones is equal to the price difference between them GW GW There is no longer enough transmission capacity to equalise the prices 23

The regions within ETRC Nordic British Isles Germany Baltic Iberia France & Benelux Alps Italy Balkans NW Africa NE Africa

Scenarios All use the middle of the road generation mix shown above (not too much of anything!) Scenarios differ only in the amount of inter-region transmission capacity Transmission constraints within regions / countries ignored Scenario 1 business as usual 36 GW Scenario 2 the transmission links of the ECF 40% renewable scenario 75 GW Scenario 3 the transmission links of the ECF 80% renewable scenario 145 GW 25

Modelling hydro GW 140 120 100 80 60 Most regions Alps & Nordic 40 20 0 01-Jan 2010 2050 Demand 08-Jan 26

Results 27

Generation outputs Scenario 1 36 GW transmission Scenario 2 75 GW transmission Scenario 3 145 GW transmission Europe N Africa Europe N Africa Europe N Africa Nuclear 1102 0 1102 0 1103 0 Coal & Lignite Waste & Biomass 855 6 864 6 900 6 368 44 378 47 384 49 Gas 869 705 909 646 896 607 Oil 0 13 0 7 0 5 Hydro 733 28 739 28 743 28 Wind 652 95 652 95 652 95 Solar 555 313 555 313 555 313 Spilled renewables -5-32 -2-21 0-15 Total 5,130 1,173 5,196 1,121 5,233 1,088 28

Time-weighted average prices /MWh 100 90 80 70 60 Scenario 1 Scenario 2 Scenario 3 50 40

British-Nordic transmission Time-weighted average price ( /MWh) 100 90 80 70 60 British S1 British S2 British S3 Nordic S1 Nordic S2 Nordic S3 50 40 0 5 10 15 GW Transmission between British Isles and Nordic Countries

Paying for transmission Scenario 1 Scenario 2 Scenario 3 Amount of transmission Variable cost of generation Cost of transmission assets 36 GW 75 GW 145 GW 253.3 bn. 240.8 bn. 234.3 bn. 17 bn. 50 bn. 100 bn. Easy to justify investment; merchant interconnectors vulnerable to downward jumps in price differentials 33

Price-duration curves: Britain /MWh 500 400 300 200 100 Transmission between British Isles and Nordic Countries 0 GW 4 GW 8 GW 16 GW 0-100 0 1000 2000 3000 4000 5000 6000 7000 8000 Hours per year

More risk of missing money for generators Moves to capacity markets advisable? Fewer arbitrage opportunities for storage Storage can also provide reserve and/or relax transmission and/or distribution constraints Less incentive for demand response Transmission reduces extreme prices 39

Thank you 40