Phasing out subsidies

Abstract

The increasing shares of RES-e generation have resulted in unexpected but well-documented effects, such as the Merit Order Effect (MOE) on the power market. According to the MOE, the electricity prices decrease along with high penetrations of low variable cost technologies such as RES-e. Due to high investment costs the deployment of RES-e technologies is strongly depended on policy support. Upon lower electricity prices, generating profits becomes more and more challenging. Therefore, investors are more reluctant on financing such capital intensive projects. In consequence, further policy support is required to incentivize RES-e investments. However, subsidies are not expected to support the RES-e investments for an unlimited time but only for a certain time span during which the RES-e should evolve to self-sustained technologies. The design of the subsidy itself can contribute to tackling the negative impact of the MOE. The EU member states not only need to reduce the public support that is imposed by EU commission mandates, but at the same time have to ensure that they will meet the targets set for RES-e consumption in 2050 (European Commission, 2011). According to the abovementioned goals, two issues arise: a) how can the public support be reduced without challenging the RES-e generation? b) how can dependency on public support for the development on VREs be eliminated? To tackle these issues, the present thesis comes with the objective to provide recommendations regarding policy support without challenging the deployment of VREs. To deliver the objective an agent based model designed by the Energy and Industry Section of TPM faculty of Delft University of Technology called EMLab Generation was employed. The model is built to study the transition of the European Energy markets towards a carbon-free regime. To deliver the thesis objective six scenarios were tested- five including policy support and one Base Case scenario in which no subsidies are provided. The following KPIs were measured to provide answers to the research question and sub-questions: investor profits per energy unit, spot market revenue per energy unit, mean subsidy per energy unit, ratio of RES-e to total generation, production per technology, average electricity price for each year of the simulated period and aggregated profits and subsidy costs during the entire modeled period. The findings suggest that the optimum subsidy scheme to reduce public support is provided by the FIP Ex Post scenario according to which the mean paid subsidy decreases with time. Regarding the insight for energy investors, more profits are generated when investments only in RES-e technologies are realized. The reason for the latter is that investments in CCGT plants result in losses. This is explained by the exclusion of CCGT technology from the market due to the high penetration of the zero marginal cost RES-e technologies. RES-e technologies are first in the merit order and therefore have priority on supplying the electricity market. Consequently, as more RES-e technologies are implemented the lesser, is the load needed to be supplied by other sources. Finally, regarding the value of storage in the energy market the only remarkable effect is the smoothening of electricity prices which still is not observed when storage capacity increases from 20gwh to 40gwh.