how can renewables support europe? - diw · based on cenace (2016): diferencias esperadas, factores...
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Florence School of Regulation, Annual Climate Conference 2016
How can renewables support Europe?
Karsten Neuhoff
German Institute for Economic Research (DIW Berlin)
Technical University Berlin
Moving beyond today‘s electricity demand : Flexibility and efficiency for reliable, affordable, and climate friendly energy services 1
Transport
Mining and manufacturing
Commerce and Services
Household
Power (non
RE)
Power (RE)
Other RE
Gas
Oil
Disctrict heating …
. Coal
Basierend auf: AG Energiebilanzen (2016)
2 Make use of renewables to stabilize energy costs
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 (2016)
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.
Illustration excludes system costs
Annual expenditure CO2 at 30 Euro/t Domestic fossil fuel Imported fossil fuel
Annuitized Investment (at 5%) for wind and solar generation at scale to replace fossil fuels
3 Financing costs increase with (i) country situation (ii) policy design not addressing market imperfection and policy risk
Based on DIA-CORE (2016): The impact of risks in renewable energy investments and the role of smart policies
Weighted average cost of capital for wind reported by European investors in 2014
4 Power market and renewable policy needs to focus on risk management
8% Sweden (Certificate Scheme)
4% Germany, revenue guarantee with feed-in
10% ex-post adjustments, country risks
The case for long-term technology differentiation 5 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
High
(homogenous technology, competition for entry)
Low
(inhomogeneous assets, large incumbent players, information asymmetries)
Other aspects RE trajectory required - For grid investment - Supply chain / planning
Government choices politically contentious
Strategic choices Policy-driven deployment Private sector determined
(financed on-balance sheet)
Neuhoff, Ruester and Schwenen (2016). Power Market Design beyond 2020: Time to Revisit Key Elements? The Energy Journal
6 Power market and renewable policy needs to focus on risk management
2. Policy can reduce financing cost for wind and solar by ensuring long-term stable revenue streams.
8% Sweden (Certificate Scheme)
4% Germany, revenue guarantee with feed-in
10% ex-post adjustments, country risks
1. Cooperation can reduce financing cost for countries.
3. RE benefit from hedge at times of low power prices: Ensure consumers also benefit at times of high power prices.
Art 6 new directive Stability of financial support
Art 5: 10-15% joint projects MFF 2020: EU fin instr.
Short-term market design open for all technologies 7
Data from Ignacio de la Fuente, Red Eléctrica de España
0 5 10 15 20 25 30 35 40
Hours before real time
% forecast error w
ind
2005 2006 2007 2008
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
+
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,
Opening power markets for RE - intraday auctions in the Winter Package
Intraday auctions can • Improve market liquidity • Facilitate contracting for flexibility • Allow effective participation of players of all scales and technologies
(including flexibility) • Ensure technical feasibility • Compatibility with current (continuous) trading arrangements • Ensure consistency between intraday and balancing • Allow for pricing and efficient use transmission capacity between
bidding zones • Reduce unannounced loop flows …. and thus avoid the need for direct marketing as way of strategic sale of electricity. Incentives for good forecast remain an important topic!
8
www.diw.de\fpm
No need to shift risks for investors – avoid them! 9
Cos
ts
Performance/operation Regulatory uncertainty Future market evolution
Cos
ts
Performance/operation Regulatory uncertainty Future market evolution
Risk from:
Revenue requirement (Financing costs)
Proj
ect r
isk
and
de
velo
pers
mar
gin
Feed-in
Polic
y de
sign
TG
C
TGC
mar
ket p
rice
Green Certificates
Ener
gy p
rice
risk
Bala
ncin
g co
sts
Tran
smis
sion
con
stra
ints
Premium Floating Fixed
Cost of even small risk exposure for financing 10
Risk-free There are no new costs or risks. Wind energy generators do not bear the costs resulting from forecast deviations, which corresponds to a EEG without mandatory direct marketing.
Risk-neutral Generators bear the forecast deviation costs accounting for 3 percent of revenues (corresponding to the calculated historical value), but there are no site-specific revenue reductions.
Risk-averse Debt and equity investors adopt a conservative perspective when determining the funding they provide: a pessimistic value of the costs of forecast deviations of 8 percent and site-specific reductions in revenue of 7 percent.
Asymmetrical Simulation of the perspective of an equity investor willing to bear additional risk without increasing revenue requirements based on the values of the risk-neutral scenario. The debt provider only offers a share of the funding that can be repaid in the pessimistic scenario.
Tariff in €/MWh New debt share Risk-free 87.78 83.7 % Risk-neutral 89.16 83.4 % Risk-averse 94.38 82.9 % Asymmetrical 90.50 78.0 %
Considering locational cost-element in tariff / PPA contract: Example German remuneration - adjusted for wind output 11
Duration for which high tariff applies dependend on wind output in first 5 years.
Based on May, N., 2015. Policies and Technologies: The Impact of Wind Power Support Schemes on Technology Choices. DIW Discussion Paper.
Considering local value in selecting PPA contracts Example Mexico 2016 auctions 12
• Bids are adjusted depending on the location‘s production value
• Gives strong incentives for generation where it provides the highest value, for instance plenty of winning bids in Yucatán where deployment is encouraged
• Both wind and solar winners, with ENEL gaining large amounts of solar contracts
• Locational maximum amounts • Pay as bid
NÚMERO ZONA ∆PMLZG 1 Hermosillo -3.30 2 Cananea -1.36 3 Obregón 1.00 4 Los Mochis 1.04 5 Culiacán 1.04 6 Mazatlán 1.89
Based on CENACE (2016): Diferencias Esperadas, Factores de Ajuste Horario y Precios Marginales Locales 2016-2033, v2016.05.13
Determining local component of remuneration based on cost or value?
Static – value based remuneration may result in scarcity rents • In competitive markets without resource constraints same outcome • If high wind speed locations are scarce, then developers (or land-
owners) capture scarcity value -> Mexico merged with pay as bid auctions and max local volumes Dynamic - challenge for projecting regional specific adjustment values
• Do LMPs converge to long-run marginal transmission expansion cost?
• Wind/solar can quickly change regional price patterns
-> „Optimal“ long-term quantities more robust than prices patterns
Technology specifc remuneration versus generic rules • Cost based adjustment needs to be technology specific
13
Why to care about system friendly technology choice? 14
Based on May, N., 2015. Policies and Technologies: The Impact of Wind Power Support Schemes on Technology Choices. DIW Discussion Paper.
Why to care about system friendly technology choice? 15
Based on May, N., 2015. Policies and Technologies: The Impact of Wind Power Support Schemes on Technology Choices. DIW Discussion Paper.
Ex-ante announced adjustment factors for production 16
Hourly adjustment factors in Mexico 2016 in Hermosillo
Based on CENACE (2016): Diferencias Esperadas, Factores de Ajuste Horario y Precios Marginales Locales 2016-2033, v2016.05.13
Ex-ante adjustment of remuneration for system value 17
Based on May, N., 2015. Policies and Technologies: The Impact of Wind Power Support Schemes on Technology Choices. DIW Discussion Paper.
How can Renewables Support Europe
• Moving beyond today‘s electricity demand – cross-sector and country integration of RE energy system
• Shift to RE based power system now economically viable creating European jobs, energy security, and sustainability
RE remuneration mechanism key for low cost finance • Eliminate regulatory risks, co-operate between MS, use EU
finance instruments, align on EU power markets for RE • Design RE remuneration for system friendly technology
and locational choices according to long-term needs
18
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