Future Design of Renewable Energy Markets EUFORES Parliamentary Dinner Debate 4 December 2012 Brussels Simon Müller Energy Analyst Renewable Energy Division
Renewable power growth forecast to accelerate Globally, progress is broadly on track to achieve 2DS objectives Hydropower remains main RE source (+3% p.a.) non-hydro growing at +14% p.a. Non-OECD accounts for two-thirds of the overall growth China (40% of growth), Brazil, India lead; new markets expanding in all world regions TWh 8 000 7 000 6 000 5 000 4 000 3 000 2 000 1 000 Global renewable electricity production, forecast and 2DS Historical Data MRMR Projections ETP 2DS 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2020 OECD Europe OECD Americas OECD Asia Oceania China Brazil India Rest of Non-OECD
Mind the different contexts Apparent contradiction between markets: OECD countries: RE perceived as driving up costs China, India, Brazil: RE deployed as attractive options for getting energy security/diversification and increasingly good economics Very different contexts: In most of OECD, RE drives generation from existing capacity out of the market In emerging economies RE help to cover a deficit
Thought experiment: Target Model 2.0 Perfect European grid (copper-plate) Full integration of day-ahead & intraday-markets & balancing CO2 price in place Question: All problems solved? Including decarbonisation?
The (old) concern Will spot markets deliver Without renewables: Classical missing money problem During the transition: Uncertainty can inhibit investments Important transitional market-effects Close to decarbonisation: Exploring new territory
/MWh The classic missing money problem Scarcity prices several keur/mwh 75 50 25 Nuclear Lignite Hard Coal CCGT OCGT CHP 0 Min Demand Peak Demand
Classical missing money problem Capacity markets designed to deal with precisely this problem Growing shares of variable renewables tend to exacerbate the issue: Fewer hours of very high residual load Scarcity prices during less hours > requires even higher prices to recover fixed costs
Transition effects
The merit order effect Load 100 80 1000 60 40 20 2000 4000 8000 30% 0-20 -40 1000 2000 3000 4000 5000 6000 7000 8000 8760 80% Full load hours
The merit order effect Residual load 100 80 60 40 20 0-20 -40 1000 2000 3000 4000 5000 6000 7000 8000 30% 8760 80% Full load hours
The merit order effect Residual load 100 RE decrease market price 80 RE displaces conventional electricity 60 Less attractive 1000 to invest in generation 40 20 3700 30% 0 Price Duration Optimised 90 70 50 20 8760 Full load hours Non-optimised 20 0 (or lower)
GW GW GW Flexibility transition effect: storage 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 1 3 5 7 9 11 13 15 17 19 21 23 Total generation 0 2 4 6 8 10 12 14 16 18 20 22 Conventional Wind PV 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 0 2 4 6 8 10 12 14 16 18 20 22 Conventional Wind PV Medium-term: PV reduces value of pumped storage Long-term: Mutual increase of market value
The role of CO2 price in the transition For existing plants: rising CO2 price Can induce fuel switch for carbon generators Provides more revenue for existing low-c plants For new plants: high CO2 price Credibility spiral: High CO2 price not credible > Risk premium > Even higher price needed > Higher risk premium etc. Future prices even at high values - get discounted away
Uncertainty impacts on investments Fossil paradigm Energy sector extracts, transports and converts fossil energy commodities Implication for power sector: (sunk) investment costs make up only part of total costs Decarbonised paradigm Commodity flows are replaced by capital investments Capital costs domintate total costs Low carbon investments much more affected by uncertainty
All in all: A challenging transition! Displaced energy from conventional generation depresses market prices No incentive for flexibility investments under certain transition situations Future CO2 price gets discounted away, CO2 price credibility problem Uncertainty disproportionally renders lowcarbon investments less attractive
Long-term
Adaptation of the generation fleet Residual load 100 80 60 40 20 0-20 -40 1000 2000 3000 4000 5000 6000 7000 8000 30% 8760 80% Full load hours
Adaptation of the generation fleet Residual load 100 Spot market prices may recover in 80 the long term 60 40 20 0 Price Duration Optimal 90 70 50 20 8760 Full load hours Re-optimised 90 70 50 20 0 or above
The value of variable renewables At high penetrations difference between: instantaneous and annual value Instantaneous value Every good/service that varre can provide if the resource is available, will have a low value in moments when the resource is available Annual value (Variable) renewables are a cost effective, secure and clean way of supplying a certain amount of energy in one year
The role of the CO2 price 50 g/kwh in line with 2050 targets for CO2 reduction Leaves space for some 10% of unabated, efficient gas generation Hours of operation highly variable year on year > driven by wind, sun and economic situation When only low-carbon generators set the price, the CO2 price disappears from the market Not guaranteed that low CO2 generators benefit from high CO2 prices
A mixed picture in the long term Recovery of generation investments not ruled out but much more challenging Instantaneous value of variable renewables volatile - despite their stable annual value Close to full decarbonisation: not clear low carbon generation benefits from CO2 price with sufficient certainty
Thought experiment: Target Model 2.0 Answer: Plenty of issues left in particular during transition Possible misalignment of short-mid term investment incentives and future system needs CO2 price faces credibility/discounting issues Cost recovery not impossible in principle but much more challenging Uncertainty weights heaviest on low carbon investments
Future market design and renewables Criteria for a functioning market design Mitigate regulatory uncertainty to get investments Preserve other risks and competition to get efficiency and innovation Ensure that full cost/benefit is actually reflected Conclusion for RE Costs need to keep coming down Market design needs to recognise value of RE Secure, clean and (increasingly) low cost annual energy Flexibility value of hydro and bioenergy
Thanks. Simon.Mueller@IEA.org