KI
K.K. Iychettira
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1
National Renewable Policies in an International Electricity Market
A Socio-Technical Study
The current regulatory framework under which the support schemes for Renewable energy sources specifically for electricity (RES-E) operate, is provided for by the Directive 2009/28/EC. It sets a 20% target for energy consumption, while relying on legally binding, national targets until 2020. The goal to promote RES-E, in the European context, coexists with goals of ensuring a single internal market for electricity, and security of supply in the European Union, and these simultaneous goals are not always congruent with each other.
Today, significant amounts of intermittent RES-E in the energy mix have led to unintended effects. An important consequence is the so called ‘merit-order effect’, where the spot market electricity price reduces to the extent by which the renewable electricity generation displaces demand along the merit order. There is concern that part of the merit order effect spreads across national borders. Vitally, implications of the merit order effect on the effectiveness of RES-E support schemes are unclear. Another important effect of the price reduction is that, the lower the average electricity market price, the greater the costs of subsidies, making the phasing out of subsidies for renewable, intermittent sources more difficult.
With respect to electricity fromrenewable sources, this achievement of the three objectives took the shape of "making renewable support schemes more market-based", "ensuring renewables are driven bymarket signals". However, it is not often clearwhat is meant by such statements in policy documents by the EC. What features of the support scheme are being referred to? What would it mean for renewables solely to be driven
by market signals? How would features of support schemes impact for instance, the merit order effect, and vice-versa? These issues are encapsulated in the first problem addressed in the thesis: to unravel the interactions between renewable support scheme design and a single isolated electricity spotmarket, with a long termperspective.
Since countries are now increasingly interconnected, the secondmajor issue tackled in this thesis concerns cross border effects due to different renewable support schemes between neighbouring countries in a common electricity market. This issue addresses concerns about the merit-order effect spreading across national borders, and the ensuing distributional implications.
The final issue addressed in this dissertation relates to the long term economic viability of electricity fromrenewable sources given the current institutional and physical setting they operate in. Costs of renewable technologies have dropped dramatically and yet effects such as their reducing market value lead to questions about whether it is possible for them to attain economic viability in a decarbonised power sector. Accordingly, the main research question in this dissertation is:
How do national renewable electricity support schemes interact with the electricity market over the long term (20-30 years) as the European Union transitions to a decarbonized energy system? ...
Today, significant amounts of intermittent RES-E in the energy mix have led to unintended effects. An important consequence is the so called ‘merit-order effect’, where the spot market electricity price reduces to the extent by which the renewable electricity generation displaces demand along the merit order. There is concern that part of the merit order effect spreads across national borders. Vitally, implications of the merit order effect on the effectiveness of RES-E support schemes are unclear. Another important effect of the price reduction is that, the lower the average electricity market price, the greater the costs of subsidies, making the phasing out of subsidies for renewable, intermittent sources more difficult.
With respect to electricity fromrenewable sources, this achievement of the three objectives took the shape of "making renewable support schemes more market-based", "ensuring renewables are driven bymarket signals". However, it is not often clearwhat is meant by such statements in policy documents by the EC. What features of the support scheme are being referred to? What would it mean for renewables solely to be driven
by market signals? How would features of support schemes impact for instance, the merit order effect, and vice-versa? These issues are encapsulated in the first problem addressed in the thesis: to unravel the interactions between renewable support scheme design and a single isolated electricity spotmarket, with a long termperspective.
Since countries are now increasingly interconnected, the secondmajor issue tackled in this thesis concerns cross border effects due to different renewable support schemes between neighbouring countries in a common electricity market. This issue addresses concerns about the merit-order effect spreading across national borders, and the ensuing distributional implications.
The final issue addressed in this dissertation relates to the long term economic viability of electricity fromrenewable sources given the current institutional and physical setting they operate in. Costs of renewable technologies have dropped dramatically and yet effects such as their reducing market value lead to questions about whether it is possible for them to attain economic viability in a decarbonised power sector. Accordingly, the main research question in this dissertation is:
How do national renewable electricity support schemes interact with the electricity market over the long term (20-30 years) as the European Union transitions to a decarbonized energy system? ...
The current regulatory framework under which the support schemes for Renewable energy sources specifically for electricity (RES-E) operate, is provided for by the Directive 2009/28/EC. It sets a 20% target for energy consumption, while relying on legally binding, national targets until 2020. The goal to promote RES-E, in the European context, coexists with goals of ensuring a single internal market for electricity, and security of supply in the European Union, and these simultaneous goals are not always congruent with each other.
Today, significant amounts of intermittent RES-E in the energy mix have led to unintended effects. An important consequence is the so called ‘merit-order effect’, where the spot market electricity price reduces to the extent by which the renewable electricity generation displaces demand along the merit order. There is concern that part of the merit order effect spreads across national borders. Vitally, implications of the merit order effect on the effectiveness of RES-E support schemes are unclear. Another important effect of the price reduction is that, the lower the average electricity market price, the greater the costs of subsidies, making the phasing out of subsidies for renewable, intermittent sources more difficult.
With respect to electricity fromrenewable sources, this achievement of the three objectives took the shape of "making renewable support schemes more market-based", "ensuring renewables are driven bymarket signals". However, it is not often clearwhat is meant by such statements in policy documents by the EC. What features of the support scheme are being referred to? What would it mean for renewables solely to be driven
by market signals? How would features of support schemes impact for instance, the merit order effect, and vice-versa? These issues are encapsulated in the first problem addressed in the thesis: to unravel the interactions between renewable support scheme design and a single isolated electricity spotmarket, with a long termperspective.
Since countries are now increasingly interconnected, the secondmajor issue tackled in this thesis concerns cross border effects due to different renewable support schemes between neighbouring countries in a common electricity market. This issue addresses concerns about the merit-order effect spreading across national borders, and the ensuing distributional implications.
The final issue addressed in this dissertation relates to the long term economic viability of electricity fromrenewable sources given the current institutional and physical setting they operate in. Costs of renewable technologies have dropped dramatically and yet effects such as their reducing market value lead to questions about whether it is possible for them to attain economic viability in a decarbonised power sector. Accordingly, the main research question in this dissertation is:
How do national renewable electricity support schemes interact with the electricity market over the long term (20-30 years) as the European Union transitions to a decarbonized energy system?
Today, significant amounts of intermittent RES-E in the energy mix have led to unintended effects. An important consequence is the so called ‘merit-order effect’, where the spot market electricity price reduces to the extent by which the renewable electricity generation displaces demand along the merit order. There is concern that part of the merit order effect spreads across national borders. Vitally, implications of the merit order effect on the effectiveness of RES-E support schemes are unclear. Another important effect of the price reduction is that, the lower the average electricity market price, the greater the costs of subsidies, making the phasing out of subsidies for renewable, intermittent sources more difficult.
With respect to electricity fromrenewable sources, this achievement of the three objectives took the shape of "making renewable support schemes more market-based", "ensuring renewables are driven bymarket signals". However, it is not often clearwhat is meant by such statements in policy documents by the EC. What features of the support scheme are being referred to? What would it mean for renewables solely to be driven
by market signals? How would features of support schemes impact for instance, the merit order effect, and vice-versa? These issues are encapsulated in the first problem addressed in the thesis: to unravel the interactions between renewable support scheme design and a single isolated electricity spotmarket, with a long termperspective.
Since countries are now increasingly interconnected, the secondmajor issue tackled in this thesis concerns cross border effects due to different renewable support schemes between neighbouring countries in a common electricity market. This issue addresses concerns about the merit-order effect spreading across national borders, and the ensuing distributional implications.
The final issue addressed in this dissertation relates to the long term economic viability of electricity fromrenewable sources given the current institutional and physical setting they operate in. Costs of renewable technologies have dropped dramatically and yet effects such as their reducing market value lead to questions about whether it is possible for them to attain economic viability in a decarbonised power sector. Accordingly, the main research question in this dissertation is:
How do national renewable electricity support schemes interact with the electricity market over the long term (20-30 years) as the European Union transitions to a decarbonized energy system?
The governance of renewable electricity in Europe beyond 2020 is still uncertain. The only certain aspects are that national level targets will be abolished beyond 2020, and that most renewable electricity support schemes will take the form of competitive bidding. The objective of this paper is to assess the impact of policy choices, the so-called Design Elements, related to renewable electricity support schemes on social welfare. Presently, simulation and optimisation models are commonly applied for assessing the value of policy choice. Typically however, such models do not account for bounded rationality, and true uncertainty in investment decisions, and assume perfect information. However such assumptions can hardly be expected to hold in the real-world, especially in sectors where investment decisions which happen under knowledge of past trends and imperfect foresight, are a major determinant of welfare outcomes. The approach employed in this work is fundamentally different in that firstly, there is a shift from a ‘policy’ view to a ‘design element’ based approach of renewable electricity support assessment, and secondly investment decisions are simulated using agent-based modelling. We find that the combination of design elements that provides the highest increase in social welfare is the quantity warranty, with electricity market price accounted for ex-ante, and with technology specificity. Given the current debate on the governance of renewable energy generation in the European Union beyond 2020, the present paper offers guidance to policy makers and analysts who would like a better understanding of the relationship between policy design and social welfare.
...
The governance of renewable electricity in Europe beyond 2020 is still uncertain. The only certain aspects are that national level targets will be abolished beyond 2020, and that most renewable electricity support schemes will take the form of competitive bidding. The objective of this paper is to assess the impact of policy choices, the so-called Design Elements, related to renewable electricity support schemes on social welfare. Presently, simulation and optimisation models are commonly applied for assessing the value of policy choice. Typically however, such models do not account for bounded rationality, and true uncertainty in investment decisions, and assume perfect information. However such assumptions can hardly be expected to hold in the real-world, especially in sectors where investment decisions which happen under knowledge of past trends and imperfect foresight, are a major determinant of welfare outcomes. The approach employed in this work is fundamentally different in that firstly, there is a shift from a ‘policy’ view to a ‘design element’ based approach of renewable electricity support assessment, and secondly investment decisions are simulated using agent-based modelling. We find that the combination of design elements that provides the highest increase in social welfare is the quantity warranty, with electricity market price accounted for ex-ante, and with technology specificity. Given the current debate on the governance of renewable energy generation in the European Union beyond 2020, the present paper offers guidance to policy makers and analysts who would like a better understanding of the relationship between policy design and social welfare.
Simulating climate and energy policy with agent-based modelling
The Energy Modelling Laboratory (EMLab)
Journal article
(2017)
-
Emile J.L. Chappin, Laurens J. de Vries, Joern C. Richstein, Pradyumna Bhagwat, Kaveri Iychettira, Salman Khan
We present an approach to simulate climate and energy policy for the EU, using a flexible and modular agent-based modelling approach and a toolbox, called the Energy Modelling Laboratory (EMLab). The paper shortly reviews core challenges and approaches for modelling climate and energy policy in light of the energy transition. Afterwards, we present an agent-based model of investment in power generation that has addressed a variety of European energy policy questions. We describe the development of a flexible model core as well as modules on carbon and renewables policies, capacity mechanisms, investment behaviour and representation of intermittent renewables. We present an overview of modelling results, ongoing projects, a case study on current reforms of the EU ETS, and we show their relevance in the EU context.
...
We present an approach to simulate climate and energy policy for the EU, using a flexible and modular agent-based modelling approach and a toolbox, called the Energy Modelling Laboratory (EMLab). The paper shortly reviews core challenges and approaches for modelling climate and energy policy in light of the energy transition. Afterwards, we present an agent-based model of investment in power generation that has addressed a variety of European energy policy questions. We describe the development of a flexible model core as well as modules on carbon and renewables policies, capacity mechanisms, investment behaviour and representation of intermittent renewables. We present an overview of modelling results, ongoing projects, a case study on current reforms of the EU ETS, and we show their relevance in the EU context.
Journal article
(2017)
-
Pradyumna C. Bhagwat, Kaveri K. Iychettira, Jörn C. Richstein, Emile J.L. Chappin, Laurens J. De Vries
The effectiveness of a capacity market is analyzed by simulating three conditions that may cause suboptimal investment in the electricity generation: imperfect information and uncertainty; declining demand shocks resulting in load loss; and a growing share of renewable energy sources in the generation portfolio. Implementation of a capacity market can improve supply adequacy and reduce consumer costs. It mainly leads to more investment in low-cost peak generation units. If the administratively determined reserve margin is high enough, the security of supply is not significantly affected by uncertainties or demand shocks. A capacity market is found to be more effective than a strategic reserve for ensuring reliability.
...
The effectiveness of a capacity market is analyzed by simulating three conditions that may cause suboptimal investment in the electricity generation: imperfect information and uncertainty; declining demand shocks resulting in load loss; and a growing share of renewable energy sources in the generation portfolio. Implementation of a capacity market can improve supply adequacy and reduce consumer costs. It mainly leads to more investment in low-cost peak generation units. If the administratively determined reserve margin is high enough, the security of supply is not significantly affected by uncertainties or demand shocks. A capacity market is found to be more effective than a strategic reserve for ensuring reliability.
Journal article
(2017)
-
Pradyumna C. Bhagwat, Jörn C. Richstein, Emile J.L. Chappin, Kaveri K. Iychettira, Laurens J. De Vries
The cross-border effects of a capacity market and a strategic reserve in interconnected electricity markets are modeled using an agent-based modeling methodology. Both capacity mechanisms improve the security of supply and reduce consumer costs. Our results indicate that interconnections do not affect the effectiveness of a capacity market, while a strategic reserve is affected negatively. The neighboring zone may free ride on the security of supply provided by the zone implementing a capacity mechanism. However, a capacity market causes crowding out of generators in the energy-only zone. A strategic reserve implemented by this region could aid in mitigating this risk.
...
The cross-border effects of a capacity market and a strategic reserve in interconnected electricity markets are modeled using an agent-based modeling methodology. Both capacity mechanisms improve the security of supply and reduce consumer costs. Our results indicate that interconnections do not affect the effectiveness of a capacity market, while a strategic reserve is affected negatively. The neighboring zone may free ride on the security of supply provided by the zone implementing a capacity mechanism. However, a capacity market causes crowding out of generators in the energy-only zone. A strategic reserve implemented by this region could aid in mitigating this risk.