“Cross-country electricity trade, renewable energy and European transmission infrastructure policy” by Jan Arbell and Sebastian Rausch

Grishma Manandhar

This Photo by Unknown Author is licensed under CC BY

Outline

• Background

• Introduction

• Conceptual Framework

• Empirical Determinants of Cross-Country

Electricity Trade in Europe

• Description of Model and Data

• Simulation Results

• Conclusions

Background

• Cross country electricity trade and transmission infrastructure

• Climate policy

• renewable energy sources

• Intermittency

• Non-dispatchable

• Surprisingly, little is known about the interactions between TI, RE

and environmental outcomes.

Introduction

Research Objectives

• Develops a multi-country, multi-sector general equilibrium framework

• Integration high-frequency electricity dispatch and trade decisions,

• To study the effects of transmission infrastructure expansion and renewable energy

penetration in Europe for the regional distribution of gains from trade and Co2

emissions from electricity production.

Literature contribution

• Most prior studies have assessed the gains from TI policy by relying on partial

welfare measures focusing in either

• Cost differentials (Rogers and Rausch, 1989), (Newberry et al., 2013)

• Impacts in terms of cross-country price differentials (Bessembinder and Lemmon,

2006); (Newberry et al.,2013), (Bahar and Sauvage, 2012)

• Consumer and producer surplus (von der Fehr and Sandsbraten, 1997)

• First to study the role of infrastructure for cross country electricity trade in a general

equilibrium framework.

Conceptual Framework

Electricity production, demand and cross-country trade

• Difference in the step wise supply curves reflect that both countries differ with respect to the technology mix of installed capacity

• low cost technology is comparativelycheaper in country A

• With No transmission, the countries will be forced to use their high cost technology

• With transmission, country B becomes the exporter

Fig: Cross Border electricity trade, MC, installed Capacities, and asynchronous demand

Empirical Determinants of cross-country trade in Europe

Production capacities, marginal technologies, and demand

• Hourly equilibrium prices are

determined by the least cost technology

available in each country to meet

demand in this hour “price-setting” or

“marginal technology”

• Cross-country differences in marginal

generation costs

• Cross-country differentials in marginal

costs along with significant excess

capacities indicate large potential for

trade.

Production capacities, marginal technologies, and demand

• Empirically observed frequency

distribution of hourly electricity demand

alongside with the marginal technology

• France is shown to have a cumulative

capacity of almost 80GW. (55GW would

be met with nuclear as marginal

technology, coal if demand is 60MW

(installed coal-fired capacity is 5GW)

Residual demand

Demand

Cross country transfer capacities

• Unlike other commodities, electricity

trade is restricted and is grid bound by

the existing TI.

• NTCs shows the maximum amount of

electricity that can be transported

between geographically contiguous

countries for the current EU grid.

• North-south pattern of electricity trade

Scope for cross-country trade

• Price differentials- how large are the

economic incentives for international

electricity trade between EU countries.

• In more than half hours in 2012, CC price

differentials was 2Euro/MWh, and 35%

and 10% price differentials exceeded 10

and 30 Euros/MWh

• For majority of hours in Germany, it

could import electricity from Norway,

while it can also export relatively export

electricity to Switzerland.

Description of Model and Data

Complementarity based formulation of equilibrium conditions

• Incorporates the drivers and assess the emissions impacts of enhanced

TI

• Mixed complementarity problem: a square system of non-linear

(weak) inequalities that represent the economic equilibrium through

zero profit and market clearing conditions.

• Unifying framework for combining technological details from bottom-up

approach and economic richness of top-down approach

Electricity generation and storage

- Firms are assumed to operate

under perfect competition

- Generation units are

represented at the technology

level

- Total production (𝑋𝑝𝑟𝑡)

- p denotes technology ( ∊P)

- t ∊ {1,..T} T=8760

- r ∊ {1….R}

Electricity generation and storage

• Production at any point in time cannot exceed given (and fixed) installed capacity

Where 𝑃𝑋𝑝𝑟𝑡 is the shadow price of capacity of firm p in region r at point t

• Increase in input, i.e. the load gradient or ramping amount is given by

• Increase in generation cannot exceed the maximum increase per hour, 𝐼𝑝

Electricity generation and storage

• Amount of generation increase is positive if sum of unit ramping cost and the shadow price on the

max ramping constraint, is equal to (larger) than the shadow value of generation ramping

• Zero profit condition: by using the marginal generation costs, shadow prices for capacity and

ramping, and the price for electricity in region r at time t

International Electricity Trade

• Trade from r to 𝑟 is restricted by the fixed and given net transfer capacity (𝑛𝑡𝑐෦𝑟𝑟) and the concept of

line losses in electricity network models (e)

• Net transfer capacities ensures that the transmission line capacity between regions is sufficient to

cover the trade flows (𝑇𝑟 𝑟𝑡)

• Trade flows from region r to 𝑟 is positive

• Hourly electricity market demand and curtailment: supply given by sum of generation, storage and

net imports equal residual demand

Production, consumption and trade in commodities other than electricity

• consistent profit and utility maximizing decisions by firms and households for non-electricity commodities that are consistent with market balance conditions.

• Consumer preference and production technologies are characterized are represented by nested constant-elasticity-of-substitution (CES) functions

• Government collects revenues from income and commodity taxation and international trade taxes

Linking electricity supply and economy-wide activities

• Reconciling the different time scales in which we treat electricity generation and economy wide activities

• Using benchmark data on hourly electricity demand (β𝑟𝑡) and denoting yearly (quantity weighted)

average electricity demand price as 𝑃𝐴𝐸𝐿𝐸

• On the cost side, electricity firms' decisions depend on marginal costs for generation and ramping which

are functions of process for capital, labor, fuel and materials inputs

Data and empirical specification

• Specification of economy wide activities

• comprehensive energy economy dataset

• GTAP9 dataset ( aggregated to 20 regions)

• Electricity technologies, demand and cross-border transmission

• Model the year 2012 with hourly resolution

• Hourly demand data from ENTSO-E

• Generation facilities are aggregated on a fuel basis according to technologies

Computational Strategy

• System of nonlinear inequalities, GAMS (General Algebraic Modeling system) using

PATH solver

• Compute the vector of price and quantities that solves the system of

simultaneous equations

• Decomposition method: block decomposition algorithm developed by B ሷ𝑜hringer

and Rutherford (2009)

• Combination of top down and bottom up approach for comprehensive energy

policy analysis

Simulation Results

Counter-factual Scenarios

Scope of cross-country electricity trade?

01Welfare gains?

02Dependency on assumed levels of RE production across countries?

03

Counter-Factual Scenarios

• Cross-country net transfer

transmission capacities

(𝑛𝑡𝑐𝑟 𝑟)

1. Current- existing in 2012

2. TYNDP- increase of 41%

3. Full Integration – no binding

restriction for cross country

transmission between

countries Fig: Increases in cross-border transmission capacities (red, GW) and annual renewable electricity production for wind and solar (black, TWh).Figures for NTC increases are shown next to arrows, figures for RE production increases are shown in center of each country.

Counter-Factual Scenarios

• RE production (𝑟𝑒𝑛𝑟𝑡)

1. RE Base- assumes the 2012level of RE production

2. RE 2020- official target and forward calibration

3. RE 2030- official target and forward calibration

• Annual electricity production increases by a factor of 2.5(3.9), share of RE increases from 8.3% to 20.4%(31%).

Equilibrium price and quantity impacts for electricity

• Aggregate European

Impacts:

• Increased NTCs induce

higher volume of

electricity traded

• Substitution from

natural gas to coal

• Congestion is reduced

Equilibrium price and quantity impacts for electricity

• Regional Electricity price

impacts:

• Identified price zone

continues to exist

• Prices fall in all countries

• Cross country price

differentials increase

Current RE2020 RE2030

Current TI

Equilibrium price and quantity impacts for electricity

• Regional Electricity price

impacts:

• Induces price change

up to 5.5Euros/MWh

• Higher the level of RE,

smaller are the price

impacts Current RE2020 RE2030

TYNDP

Equilibrium price and quantity impacts for electricity

• Regional Electricity price

impacts:

• Substantial price decrease

in southern Europe

• Large price increase in

Scandinavian countries

• Central Europe exhibit

intermediate price increase

Current RE2020 RE2030

Full Integration

CO2 emissions impacts

• Rationale of TIP – to reduce

emissions by using more

“clean” energy

• It depends on the level of RE

• Current and RE2020,

increase in emissions ( more

incentives to produce and

export cheap electricity)

• RE2030, reduces emissions

(RE can replace coal)

Aggregate welfare impacts

• Gains from trade due to

TYNDP increases by 62%

(104%) for RE2020(2030)

respectively

• Profits in the electricity sector

increases substantially

Country level welfare impacts

• Most countries gain, some countries ( Germany, Denmark, and Switzerland) experience welfare losses from TYNP

• New transmission line from Norway to Germany, Norway obtains at the expense of Denmark

• Germany (net exporter) experiences welfare loss despite revenues from international trade

• Higher electricity prices now negatively impacts welfare due to large negative economy wideadjustments.

TYNDP

Current RE2020 RE2030

Country level welfare impacts

• Roughly like TYNDP scenario

• Welfare loss for “wheeling”

countries are larger

• Gains for importing (Italy and

Spain) and net exporting (

Scandinavian countries and

Eastern Europe) increase

RE2030RE2020Current

Full Integration

Conclusions

• First step toward analyzing the interactions between TI, RE penetration, and

environmental outcomes.

• “environmentally friendly” but spatially uncoordinated RE policies bear the risk of

unintended outcomes

• Enhanced TI has the potential to bring about sizeable gains from trade (1.6-2.6

billion 2011$ per year)

Future Research

• Investment incentives by an enhanced

• Technological change

• Stochastic intermittency issues

• Local costs

• Centralized system