the public promotion of renewable energies sources in the electricity industry
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Robert Schuman Centre for Advanced Studies. Loyola de Palacio Chair on Energy Policy. The public promotion of renewable energies sources in the electricity industry. Yannick Perez Loyola de Palacio Chair RSCAS-EUI & Université of Paris- Sud. yannick.perez @u-psud.fr. - PowerPoint PPT PresentationTRANSCRIPT
The public promotion of renewable energies sources in the electricity industry
Yannick Perez
Loyola de Palacio Chair RSCAS-EUI &
Université of Paris-Sud
Robert Schuman Centre for
Advanced Studies
Loyola de Palacio Chair on Energy Policy
Loads
Productions décentralisées 95% 2
RenewableOn-siteStorage
BackupPower
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From Old days to Renewables issues
Generation
DistributionTransmission
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Massive RES (5%)1
EVs
Residential
Commercial
Industrial
Voltage issues and management opportunities
Frequency management opportunities
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Demand-side strategic policies have emerged as the “preferred
instrument” in most countries• The emergence of modern environmentalism has been
accompanied by a desire to reap commercial benefits from individuals’ growing concern for the environment.
• US surveys of willingness to pay for green energy have found that between 40% to 70% of respondents are willing to pay a premium for green energy (Fahrar and Houston 1996; Zarnikau 2003).
• So as economist we expect a high “Willingness to paid” for Green Energy
• => market incentives (market forces) will deliver green energy by demand needs.
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Declared European WTP a premium ranging from 5% to over 25% Complied from Devries
(2004)
5857
52 52
49
4544
4240
37
3433
3129
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17
0
10
20
30
40
50
60
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L NL S DK FIN A I GR UK EU15 IRL D B F E P
% W
TP
a p
rem
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What told us the revealed preferences on the market?
• 2 to 4% population are taking the tariff solution by themselves...
• if you look at revealed preference in actual market solution…
• Bird et al., 2003; Morthorst & Jørgensen, 2005
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How to explain the gap between declared WTP and facts?
• Usual suspects:– Free riding– Opportunisme– Lack of transparency– Switching costs / searching cost– A clear link between consumption and
increase of health (Experimental economics classical results : WTP goes from 5% to 15% if the link is clear)
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DEMAND SIDE STRATEGIES ARE NOT A GOOD TOOL FOR RES-E
First conclusion
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Government support is necessary for Renewable Energy Sources in
Electricity (RES-E)• although desirable from a social welfare
perspective, their private costs are not competitive in power generation systems dominated by large electricity generation plants.
• Three reasons account for the bias against RES-E in the electricity market: – (i) environmental costs are not adequately internalized
for conventional electricity generation technologies; – (ii) the absence of scale effects on costs, due to the
small size of the plants, – and (iii) the random nature of their intermittent
production (wind power, mini-hydraulic) creates negative externalities.
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EU Wind potential
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Wind and solar production variability
Government support is necessary for Renewable
Energy Sources in Electricity (RES-E)
But how?
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Offer-side strategies
• So there are three instruments for “offer side” largely used: – feed-in tariffs (FIT), – bidding instruments (BI) for the assignment of long-
term purchase contracts – and exchangeable quotas (EQ)
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Definitions
• FIT obliges electricity distributors to purchase electricity from any new RES-E plant in their service area and pay a minimum guaranteed tariff per kWh that is fixed over a long period of time.
• Bidding Instruments selects by auctions RES-E projects and obliges local electricity distributors to buy electricity from the successful plants by a long term contract on the basis of bid price in the reference design.
• EQ introduces future obligatory targets for electricity suppliers to buy either green electricity directly from the RES-E producers, or green certificates issues to RES-E producers, targets being defined in terms of a percentage of their electricity deliveries.
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National subsidizing schemes
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Source: Ragwitz et al. 2012. Recent developments of feed-in systems in the EU – A research paper for the International Feed-In Cooperation
Target: 20% of energy consumption from renewables by 2020
RES integration into market differs from one country to another
Feed-in tariff access priority start-up and shutdown constraints on conventional generatorsFeed-in premium and green certificates no access priority more flexibility to manage situation of excessive energy
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Energy mix
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Economic analysis of the RES-E Support mechanism
Some new debates
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THE IMPACT OF CO2 AND RES ON THE PRICE OF ELECTRICITY
Natural EU « MERIT ORDER »
Installed capacity
Price/MWh( €)
0
Hydro / Nuke
Coal
Gas
Peak
EU « MERIT ORDER » with C02
Installed capacity
Price/MWh( €)
0
Hydro / Nuke
Coal
Gas
Peak
EU « MERIT ORDER » with C02And RES PRIORITY
Installed capacity
Price/MWh( €)
0
Hydro / Nuke
Coal
Gas
Peak
Interconnection
Hydroelectric
Nuclear Fuel/Gas
CCGT Wind Power Other Coal
30-september-2010 6-Februray-2013
MW MW
Wind 66.5%15:50h
Wind 1%17:45h
Wind
Wind
Gas
Gas
Interconnection Hydroelectric Nuclear Fuel/Gas
CCGT Wind Power OtherCoal
Wind generation in Spain
Source REE, ENAGAS 24
Negatives prices EU « MERIT ORDER »
Installed capacity
Price/MWh( €)
0
Increasing Marginal cost
Increasing Opportunity cost of inflexibilidad
Existence of Negative prices in electricity markets: the German case
Gas plants are loosing money
(Source: Roques IHS, 2013)
Economic analysis of the RES-E Support mechanism
Some old debates
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1- Survey from the « Public Economics Perspective” litterature
• Welfare economics suggest that an environmental tax reflecting the value of the marginal damage will provide incentives to achieve optimal levels of technology substitution and development of clean power Generation equipment.
• But little agreement on tax.
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Price or quantity policy instrument?
• First is the debate on the choice between price-instrument and quantity-instrument in a world of uncertainty, in terms of RES-E : – FIT could be considered a price instrument,– while bidding and Exchangeable quotas are
quantity instruments.• With perfect information + perfect
rationality => choice is equivalent.
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But with imperfect information and rationality…
• We have to introduce a value for errors…underestimation or surestimation risk…– Quantity instrument are the better because
you introduce a limit (quantity) – whereas with price mechanism… the social
cost can be infinite.• => Quantity instrument > price instrument• => EQ & BI > FIT
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RESULTS FROM PPE
Feed-in Tariffs
Bidding Instrument
Exchangeable Quotas
Timing
Parameters Ex ante Ex post Ex ante Ex post Ex ante Ex post
Incentives intensity and cost control
+/0 + ++
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Second argument from PPE
• The long term market compatibility with electricity market incentives
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RESULTS FROM PPE
Feed-in Tariffs
Bidding Instrument
Exchangeable Quotas
Timing
Parameters Ex ante Ex post Ex
anteEx
postEx ante Ex post
Incentives intensity and cost control
+/0 + ++
Conformity with electricity market regime
0 0/+ ++
Problem with this PPE result
Denmark Spain and Germany,
the 3 RES-E leaders are using FIT
vs
UK is using the best economic support but weak results…
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Rational for Transaction Cost Economics (TCE) :
• Our claim, the TCE perspective allows us a better understanding of support mechanism:– TCE insists on investment safeguard as a
major determinant of social efficiency (Henisz and Zelner (2001))
– TCE shows that instruments’ conformity to its institutional environment (North 1990) is a determinant of its viability in a long run.
– TCE offers ex ante & ex post solutions to complete the “incomplete contract” problems
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3- Methodology• We compare and assess RES-E on several
dimensions from both the Public Economics and TCE perspectives:
• Dimensions are :
– market incentive intensity & control of the cost for consumers,
– and conformity with the new market regime of electricity industry
– safeguards of RES-E investments, – Ex ante adaptability of the instrument in order to
preserve its stability in the long run, – Technological progress
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RESULTS Feed-in Tariffs
Bidding Instrument
Exchangeable Quotas
Timing
Parameters
Ex ante Ex post Ex ante Ex post Ex ante Ex post
Incentives intensity and cost control +/0 + ++
Conformity with electricity market regime 0 0/+ ++
Investment safeguards
++ - - ++ + +/-
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RESULTS Feed-in Tariffs
Bidding Instrument
Exchangeable Quotas
Timing
Parameters
Ex ante Ex post Ex ante Ex post Ex ante Ex post
Incentives intensity and cost control +/0 + ++
Conformity with electricity market regime 0 0/+ ++
Investment safeguards
++ - - ++ + +/-
Ex ante adaptability of the instrument + 0 0
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RESULTS Feed-in Tariffs
Bidding Instrument
Exchangeable Quotas
Timing
Parameters
Ex ante Ex post Ex ante
Ex post
Ex ante Ex post
Incentives intensity and cost control +/0 + ++
Conformity with electricity market regime 0 0/+ ++
Investment safeguards
++ - - ++ + +/-
Ex ante adaptability of the instrument + 0 0Technological progress ++
0(Best available per technology
band)
-(The most
mature technique)
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Conclusions• We show that neither instruments offers an
optimal solution in each of these dimensions…
• So there is no first best mechanism to support RES-E technologies.
• But each instrument “gives you what you paid for” even if you don’t know it at the beginning!
• 2 options are possible here :– Government can select an instrument in
accordance with the relative importance of its own objectives.
– We can use our framework as a sort of “ex post tool” to reveal implicit or tacit preference of governments in these subject.
The public promotion of renewable energies sources in the electricity industry
Yannick Perez
Loyola de Palacio Chair RSCAS-EUI &
Université of Paris-Sud
Robert Schuman Centre for
Advanced Studies
Loyola de Palacio Chair on Energy Policy