Long-term effects on investments in electricity markets of renewable energy tender policies under harmonization

Abstract

The current decentralized support schemes for stimulating renewable energy from electricity (RES-E) in the Member States (MS) of the European Union (EU) cause cost inefficiencies, distort the market and competition and exhibit unclear welfare effects. RES-E policy harmonization, a top-down approach that equalize, support schemes among MS, can improve cost efficiency, decrease market fragmentation and increase overall welfare. The master thesis explores the long term dynamic effects of policy harmonization on consumer and producer welfare, cost and the electricity market performance. This is tested under the scenarios of infinite interconnector capacity, a tender with technology-specificity, different ambitions of RES-E targets and countries with the exact same RES-E targets. With the aid of the model EMLab Generation, simulations of the electricity markets in two countries have been carried out from an Agent-Based Modelling (ABM) approach. ABM can deals with market uncertainty and is therefore a novel approach in the field of testing RES-E policy harmonization. Within this modelling environment a tender is conceptualized, which follows the EU Aid state guidelines that recommends to use a competitive bidding process to distribute subsidies for RES-E. The primary objective is to answer the main research question: What are effects of RES-E tender support policies on the electricity markets of an interconnected two-country situation in the long run under harmonization? Effects of harmonized RES-E tenders Is was found that RES-E tenders stimulates investments in renewable energy technologies that leads to lower electricity prices, creates higher welfare for consumers, but decreases welfare for producers. The lower prices are accompanied with higher volatility. Furthermore, a rapid development of RES-E creates high yearly generation costs, and high tender clearing prices result in high subsidy costs. Next to the objective of de-carbonisation, it is important for the regulator to deal with technologies that do not participate in the tender, to make sure no high clearing prices occur due to yearly increasing targets. Effects of high interconnector capacity The increase of interconnector capacity under high penetration of RES-E lowers the overall cost of outages. A country with relative high RES-E energy targets increases the subsidy costs for renewables in the neighbouring country under perfect market integration, and subsequently leads to increased cost burden for society in the importing country. The importing country can offset this by implementing low RES-E targets. However, the consequence is that high differences in RES-E targets between countries, leaves the less ambitious country to serve basically as a ’back-up-country’ for its neighbour. Effects of Technology-Specific Tender The research showed that a technology-specific tender leads to lower RES-E target fulfilment when one or more RES-E technologies do not participate in the tender. A technology-neutral tender is thus more effective in stimulating RES-E since the regulator is indifferent of which technologies are participating, as long as these are the lowest cost technologies. Effects of RES-E Targets A country can be too ambitious in setting its RES-E target, meaning that if a RES-E target is not met, it results in higher clearing prices and subsequently imposes a burden on society due to high tender subsidies. It also shows that the regulator can control the generation costs to a certain extent by setting the RES-E targets since RES-E is accompanied with high generation costs. Regarding the regulator, it is concluded that setting the right RES-E target is of paramount importance but prone to uncertainty due to expectations in renewable generation in the market. Overshooting expected generation leads to high higher tender quotas than necessary, which leads to over fulfilment of the pre-determined tender targets. Subsequently, it causes higher tender clearing prices which increases the yearly subsidy costs more than needed, which is passed on to society. Moreover, overshooting also affects producer welfare and cash balances negatively, costs in generation and outages rises and electricity prices increase accompanied with more volatility. While undershooting the expected generation, results in lower RES-E target fulfilments and thus more carbon intensive technologies in the market than demanded. This can be overcome to let the regulator predicts for a shorter interval such that he does not look further into the future than the lead time of a technology. It is concluded that setting the targets wrong will affect the success of the tender or that it imposes a larger cost burden on society than necessary. The secondary objective aimed to find what policy conditions and configurations are most beneficial from an EU and Member State perspective based on the results. It was found that soft policy harmonization and improving market integration i.e. increasing interconnector capacity are the best scenarios for the EU policy maker, while full harmonization is the best scenario configuration on the level of both Member States. This implies that a conflict can arise between the interest of the EU and the Member States. Moreover, one also needs to take into account that the importance attributed to a certain welfare or cost indicator, can be different among the two national policy makers. Full harmonization would be less feasible if countries do not agree on design variables of tenders, or the priority of certain indicators. Both could lead to different policy configurations, which is in most cases will be moving away from full harmonization. This concludes that full harmonization of RES-E policies is unlikely to succeed.