Pros and cons of exposing renewables to electricity market risks—A comparison of the market integration approaches in Germany,Spain, and the UK

The article examines how renewable electricity (RES-E) producers are integrated into the electricity market under the support legislations and regulatory frameworks of Germany, Spain, and the UK. Focus is on wind power, which faces the highest market integration challenge of all RES-E. The analysis shows that the three countries follow contrasting approaches of exposing RES-E producers to the market risks of forward electricity markets, balancing markets and system planning requirements. Risk exposure is highest in the UK and lowest in Germany. From a policy maker's perspective, there is a trade-off between a “high risk” and a “low risk” approach. When RES-E face high market risks, a higher level of financial support is required to stimulate RES-E development than in a low risk environment, but the exposure to market risks may also give an incentive to make efficient use of the respective market, thus limiting the indirect costs to society. The special characteristics of wind energy, however, put natural limits to the response of wind power plants to market prices and locational price signals and will increasingly influence electricity markets and grid infrastructure. These interdependencies should be recognised in the design of RES-E policies and market regulations.     

Current challenges of Germany’s energy transition project and competing strategies of challengers and incumbents: The case of direct marketing of electricity from renewable energy sources

Electricity generated by renewable energies (RES-E) already accounts for 25% of Germany’s electricity supply. This has led to recent discussions for a better market integration of RES-E. The paper examines how competing actors and their ideas on market integration developed new services for direct marketing according to their respective origins and tried to shape the regulatory framework. The paper analyses this process and explains the current shape of the field of direct marketing. Medium-sized structured actors, who favoured RES-E integration via the conventional wholesale power markets, and who formed early close coalitions with RES-E power producers at the same time, have been most successful in terms of market shares. Moreover, they have been very successful for different reasons in building-up coalitions with governance units and influencing the field rules and routines. Based on those findings, the paper will conclude with some policy advices for the future adjustment of the current regulative frameworks. As long as there is no evidence of how RES-E can be integrated most effectively and efficiently, policies should maintain a competition between different direct marketing strategies to find out which strategies serve the best in terms of achieving a successful energy transition.     

Analysing the impact of renewable electricity support schemes on power prices: The case of wind electricity in Spain

It is sometimes argued that renewables are “expensive”. However, although it is generally true that the private costs of renewable electricity generation are certainly above those of conventional electricity, that statement fails to consider the social benefits provided by electricity from renewable energy sources (RES-E), including environmental and socioeconomic ones. This paper empirically analyses an additional albeit usually neglected benefit: the reduction in the wholesale price of electricity as a result of more RES-E generation being fed into the grid. The case of wind generation in Spain shows that this reduction is greater than the increase in the costs for the consumers arising from the RES-E support scheme (the feed-in tariffs), which are charged to the final consumer. Therefore, a net reduction in the retail electricity price results, which is positive from a consumer point of view. This provides an additional argument for RES-E support and contradicts one of the usual arguments against RES-E deployment: the excessive burden on the consumer.     

A hybrid model for the optimum integration of renewable technologies in power generation systems

The main purpose of this work is to assess the unavoidable increase in the cost of electricity of a generation system by the integration of the necessary renewable energy sources for power generation (RES-E) technologies in order for the European Union Member States to achieve their national RES energy target. The optimization model developed uses a genetic algorithm (GA) technique for the calculation of both the additional cost of electricity due to the penetration of RES-E technologies as well as the required RES-E levy in the electricity bills in order to fund this RES-E penetration. Also, the procedure enables the estimation of the optimum feed-in-tariff to be offered to future RES-E systems. Also, the overall cost increase in the electricity sector for the promotion of RES-E technologies, for the period 2010–2020, is analyzed taking into account factors, such as, the fuel avoidance cost, the carbon dioxide emissions avoidance cost, the conventional power system increased operation cost, etc. The overall results indicate that in the case of RES-E investments with internal rate of return (IRR) of 10% the cost of integration is higher, compared to RES-E investments with no profit, (i.e., IRR at 0%) by 0.3–0.5 €c/kWh (in real prices), depending on the RES-E penetration level.     

Implications of technological learning on the prospects for renewable energy technologies in Europe

The objective of this article is to examine the consequences of technological developments on the market diffusion of different renewable electricity technologies in the EU-25 until 2020, using a market simulation model (ADMIRE REBUS). It is assumed that from 2012 a harmonized trading system will be implemented, and a target of 24% renewable electricity (RES-E) in 2020 is set and met. By comparing optimistic and pessimistic endogenous technological learning scenarios, it is found that diffusion of onshore wind energy is relatively robust, regardless of technological development, but diffusion rates of offshore wind energy and biomass gasification greatly depend on their technological development. Competition between these two options and (existing) biomass combustion options largely determines the overall costs of electricity from renewables and the choice of technologies for the individual member countries. In the optimistic scenario, in 2020 the market price for RES-E is 1 €ct/kWh lower than in the pessimistic scenario (about 7 vs. 8 €ct/kWh). As a result, total RES-E production costs are 19% lower, and total governmental expenditures for RES-market stimulation are 30% lower in the optimistic scenario.     

Cost effects of international trade in meeting EU renewable electricity targets

The European market for renewable electricity received a major stimulus from the adoption of the Directive on the Promotion of Renewable Electricity. The Directive specifies the indicative targets for electricity supply from renewable energy sources (RES-E) to be reached in European Union (EU) Member States in the year 2010. It also requires Member States to certify the origin of their renewable electricity production. This article presents a first EU-wide quantitative evaluation of the effects of meeting the targets, using an EU-wide system for tradable green certificates (TGC). We calculate the equilibrium price of green certificates and identify which countries are likely to export or import certificates. Cost advantages of participating in such an EU-wide trading scheme are determined for each of the Member States. Moreover, we identify which choice of technologies results in meeting targets at least costs. Results are obtained from a model that quantifies the effects of achieving the RES-E targets in the EU with and without trade. The article provides a brief insight in this model as well as the methodology that was used to specify cost potential curves for renewable electricity in each of the 15 EU Member States. Model calculations show that within the EU-wide TGC system, the total production costs of the last option needed to satisfy the overall EU RES-E target equals 9.2 eurocent/kWh. Assuming that the production price of electricity on the European power market would equal 3 eurocent/kWh in the year 2010, the indicative green certificate price equals 6.2 eurocent/kWh. We conclude that implementation of an EU-wide TGC system is a cost-efficient way of stimulating renewable electricity supply.     

Conditions and costs for renewables electricity grid connection: Examples in Europe

This paper compares conditions and costs for RES-E grid connection in selected European countries. These are Germany, the Netherlands, the United Kingdom, Sweden, Austria, Lithuania and Slovenia. Country specific case studies are presented for wind onshore and offshore, biomass and photovoltaic power systems, as based on literature reviews and stakeholder interviews. It is shown that, especially for wind offshore, the allocation of grid connection costs can form a significant barrier for the installation of new RES-E generation if the developer has to bear all such costs. If energy policy makers want to reduce the barriers for new large-scale RES-E deployment, then it is concluded that the grid connection costs should be covered by the respective grid operator. These costs may then be recouped by increasing consumer tariffs for the use of the grid.     

Modelling of auctioning mechanism for solar photovoltaic capacity

In this work, a modified optimisation model for the integration of renewable energy sources for power-generation (RES-E) technologies in power-generation systems on a unit commitment basis is developed. The purpose of the modified optimisation procedure is to account for RES-E capacity auctions for different solar photovoltaic (PV) capacity electricity prices. The optimisation model developed uses a genetic algorithm (GA) technique for the calculation of the required RES-E levy (or green tax) in the electricity bills. Also, the procedure enables the estimation of the level of the adequate (or eligible) feed-in-tariff to be offered to future RES-E systems, which do not participate in the capacity auctioning procedure. In order to demonstrate the applicability of the optimisation procedure developed the case of PV capacity auctioning for commercial systems is examined. The results indicated that the required green tax, in order to promote the use of RES-E technologies, which is charged to the electricity customers through their electricity bills, is reduced with the reduction in the final auctioning price. This has a significant effect related to the reduction of electricity bills.     

Regulatory road maps for the integration of intermittent electricity generation: Methodology development and the case of The Netherlands

The envisaged increase in the share of electricity generation from intermittent renewable energy sources (RES-E) like wind and photovoltaics will pose challenges to the existing electricity system. A successful integration of these sources requires a cost-efficient use of system flexibility. The literature on the options to improve system flexibility, and thus the costs of successfully integrating intermittent electricity generating units, is still growing but what is lacking is an overarching systematic view on when to adopt which option in particular energy systems. This paper aims to bridge this gap in literature. We use existing insights on market and network integration of intermittent electricity sources within a regulatory road map framework. The framework allows policy makers and other electricity system stakeholders to arrive at a consistent strategy in dealing with integration issues over a longer period of time. In this contribution we present and explain the framework and apply it for the case of The Netherlands.     

Assessing the strength and effectiveness of renewable electricity feed-in tariffs in European Union countries

In the last two decades, feed-in tariffs (FIT) have emerged as one of the most popular policies for supporting renewable electricity (RES-E) generation. A few studies have assessed the effectiveness of RES-E policies, but most ignore policy design features and market characteristics (e.g. electricity price and production cost) that influence policy strength. We employ 1992–2008 panel data to conduct the first econometric analysis of the effectiveness of FIT policies in promoting solar photovoltaic (PV) and onshore wind power development in 26 European Union countries. We develop a new indicator for FIT strength that captures variability in tariff size, contract duration, digression rate, and electricity price and production cost to estimate the resulting return on investment. We regress this indicator on added RES-E capacity using a fixed effects specification and find that FIT policies have driven solar PV development in the EU. However, this effect is overstated without controlling for country characteristics and is concealed without accounting for policy design. We do not find robust evidence that FIT policies have driven wind power development. Overall, we show that the interaction of policy design, electricity price, and electricity production cost is a more important determinant of RES-E development than policy enactment alone.     

Cost/benefit analysis of transmission grid expansion to enable further integration of renewable electricity generation in Austria

This paper elaborates on the costs and benefits of expanding the Austrian transmission system and the implementation of innovative grid-impacting technologies (e.g. flexible AC transmission systems (FACTS), dynamic line rating (DLR)) to support further integration of renewable energy sources for electricity generation (RES-E). Therefore, a fundamental market model has been developed - respecting DC load flows - and applied for analysing different future scenarios, notably for the time horizon 2020, 2030 and 2050. Up to 2020 and 2030, special focus is put on the finalisation of the so-called “380 kV-level transmission ring” in Austria to enable enhanced RES-E integration. The results confirm that transmission power line expansion in the states of Salzburg and Carinthia is important to connect imports from Germany with pumped hydro storage capacities, on the one hand, and the wind farms in the east with the pumped hydro storages in the western part of Austria, on the other hand. For 2050, the results indicate that the implementation of FACTS and DLR can reduce RES-E curtailment significantly.     

A reexamination of renewable electricity policy in Sweden

Green certificates are the main instrument for promoting renewable electricity (RES-E) in Sweden. But certificates cover only a limited share of total RES-E production. Under partial coverage, crowding out may arise whereby costly new RES-E replaces inexpensive old RES-E. Granting certificates to all of RES-E production improves efficiency, but leaves windfall rent to otherwise profitable facilities. We also analyze transaction costs in the permit process for new RES-E in Sweden. Municipalities veto socially desirable projects because of asymmetrically distributed investment costs and benefits. We propose market-based permit fees rather than limited veto rights as a solution to this NIMBY problem.     

How to deal with negative power price spikes?—Flexible voluntary curtailment agreements for large-scale integration of wind

For the large-scale integration of electricity from renewable energy sources (RES-E), the German system seems to reach its limits. In 2009, the electricity wholesale market experienced serious negative prices at times of high wind and low demand. The feed-in system in Germany consists of a fixed feed-in price, a take-off obligation and a RES priority rule, and in practice only very restrictive use of RES-E curtailment. Exactly the latter is the problem. We argue that the overall performance of the system would improve seriously by lifting the restrictions on the use of voluntary curtailment agreements, while retaining the priority rule as such. Since generators of RES-E can only improve under this system reform, investment conditions improve, leading to higher installed RES-E capacity. This in turn implies that reduced wind output due to curtailment can actually be offset by higher wind output in all periods in which there is no problem.     

Renewable energy sources in European energy supply and interactions with emission trading

This paper presents a model-based approach, which allows to determine the optimised structure and operation of the EU-15 electricity supply under different political and economic framework conditions, with a focus on the integration of renewable energy sources for electricity generation (RES-E) in the EU-15 countries. The approach is designed to take into account the characteristics of power production from both renewable and conventional sources, including the technological and economic characteristics of existing plants as well as those of future capacity expansion options. Beyond that, fuel supply structures are modelled, as well as the international markets for power and CO₂-certificates with their restrictions. Thus, a profound evaluation of the exploitation of mid-term renewable potentials and an assessment of the market penetration of the various renewable power generation technologies under the (normative) premise of a cost-optimised evolution of the power system becomes possible. Results show that a promotion of renewable energies reduces the scarcity of CO₂-emission allowances and thus lowers marginal costs of CO₂ reduction up to 30% in 2030. Despite the higher overall costs, a diversification of the energy resource base by RES-E use is observed, as primarily natural gas and nuclear fuels are replaced.     

The effectiveness of Renewable Portfolio Standard banding and carve-outs in supporting high-cost types of renewable electricity

Renewable Portfolio Standards (RPSs) are renewable electricity (RES-E) subsidy mechanisms in which governments mandate how much RES-E should be generated and markets determine the cost of the subsidy needed to generate the RES-E. Two modifications of the RPS that can help support high-cost types of RES-E are banding, where governments mandate higher multiples of RPS tradable certificates for high-cost types of RES-E, and carve-outs, where governments prescribe parts of a RPS target that can be met only by a particular type, or types, of RES-E.     

The impact of Production Tax Credits on the profitable production of electricity from wind in the U.S.

A spatial financial model using wind data derived from assimilated meteorological condition was developed to investigate the profitability and competitiveness of onshore wind power in the contiguous U.S. It considers not only the resulting estimated capacity factors for hypothetical wind farms but also the geographically differentiated costs of local grid connection. The levelized cost of wind-generated electricity for the contiguous U.S. is evaluated assuming subsidy levels from the Production Tax Credit (PTC) varying from 0 to 4 ¢/kWh under three cost scenarios: a reference case, a high cost case, and a low cost case. The analysis indicates that in the reference scenario, current PTC subsidies of 2.1 ¢/kWh are at a critical level in determining the competitiveness of wind-generated electricity compared to conventional power generation in local power market. Results from this study suggest that the potential for profitable wind power with the current PTC subsidy amounts to more than seven times existing demand for electricity in the entire U.S. Understanding the challenges involved in scaling up wind energy requires further study of the external costs associated with improvement of the backbone transmission network and integration into the power grid of the variable electricity generated from wind.     

The implications of the Kyoto project mechanisms for the deployment of renewable electricity in Europe

EU energy/environmental policy has at least two major and interrelated goals: to increase the percentage of electricity from renewable energy sources (RES-E) and to control the emission of GHG cost efficiently. These two goals could be in conflict. This paper explores one aspect of this conflicting relationship, namely the effect that the use of the Kyoto Protocol project mechanisms (CDM/JI project) may have on the deployment of RES-E within EU borders.The main conclusion is that, under certain assumptions (i.e., no mandatory EU RES-E quota), CDM/JI projects might reduce the incentive to deploy RES-E within EU borders because they would allow European power companies to comply with GHG targets in a cheaper way than if they reduced emissions by investing in renewable electricity in Europe. This is problematic, since many benefits from renewable electricity are local and these would be gone. This situation would be different if a mandatory RES-E quota (combined with an EU-wide TGC scheme) was implemented. In this case, the RES-E target would be fulfilled and CDM/JI projects would only affect RES-E deployment exceeding the target.     

A European-wide harmonised tradable green certificate scheme for renewable electricity: is it really so beneficial?

Winds of change are blowing in the public promotion of renewable electricity (RES-E) in Europe. On the one hand, a move to allegedly more market-conform instruments for the promotion of RES-E has already taken place in some Member States. On the other hand, a Directive on the promotion of RES-E has recently been approved setting indicative targets for RES-E consumption and opening the possibility that a harmonised framework for support schemes will be implemented in Europe. This harmonised framework (in combination with trade in RES-E between Member States) can be compared to a situation in which Member States continue to apply their current support schemes. This paper analyses the pros and cons of harmonisation. The main conclusion is that if priority is given to the local/regional/national benefits of RES-E, then harmonisation in combination with a tradable green certificate scheme is not so advantageous for countries. Only if the policy priority is the achievement of the RES-E Directive targets at the minimum costs should harmonisation be favoured by national energy authorities.     

Economic modelling of price support mechanisms for renewable energy: Case study on Ireland

The Irish Government is considering its future targets, policy and programmes for renewable energy for the period beyond 2005. This follows a review in 2003 of policy options that identified a number of different measures to stimulate increased deployment of renewable energy generation capacity. This paper expands this review with an economic analysis of renewable energy price support mechanisms in the Irish electricity generation sector. The focus is on three primary price support mechanisms quota obligations, feed in tariffs and competitive tender schemes. The Green-X computer model is utilised to characterise the RES-E potential and costs in Ireland up until, and including, 2020. The results from this dynamic software tool are used to compare the different support mechanisms in terms of total costs to society and the average premium costs relative to the market price for electricity. The results indicate that in achieving a 20% RES-E proportion of gross electricity consumption by 2020, a tender scheme provides the least costs to society over the period 2006–2020 but only in case there is limited or no strategic bidding. Considering, however, strategic bidding, a feed-in tariff can be the more efficient solution. Between the other two support mechanisms, the total costs to society are highest for feed-in-tariffs (FIT) until 2013, at which point the costs for the quota system begin to rise rapidly and overtake FIT in 2014–2020. The paper also provides a sensitivity analysis of the support mechanism calculations by varying default parameters such as the interim (2010) target, the assumed investment risk levels and the amount of biomass co-firing. This analysis shows that a 2010 target of 15% rather than 13.2% generates lower costs for society over the whole period 2006–2020, but higher costs for the RES-E strategy over the period 2006–2010.     

An economic valuation of renewable electricity promoted by feed-in system in Spain

This paper provides an economic valuation of RES-E promoted by the Spanish feed-in system. First, supported RES-E is evaluated in terms of CO₂ emissions avoided when they are introduced in the Spanish electricity market instead of other potential polluting energy sources. And secondly, these positive environmental externalities of supported RES-E are compared with the funds they received from the Spanish feed-in system, in order to estimate the economic balance of this support system. The estimate for 2011 shows that approximately 10% of premiums paid to promote RES-E could be explained, from an economic point of view, by the monetary value of CO₂ emissions avoided by not using alternative energy sources, as coal and combined cycle. Furthermore, the economic evaluation of National Energy Commission (CNE [Spanish acronym]) proposal that links the energy sources responsible for CO₂ emissions to finance the support system of RES-E, confirms that the monetary value of CO₂ emissions avoided when using promoted RES-E is nearly 70% of the revenues from the sale of allowances allocated to polluting technologies in the last National Plan of Emission Allowances in 2011. Promotion of RES-E over the use of fossil energy sources, must take into account not only the costs of their implementation, but also the overall balance of their use.