How Emission Certificate Allocations Distort Fossil Investments: The German Example

Despite political activities to foster a low-carbon energy transition, Germany currently sees a considerable number of new coal power plants being added to its power mix. There are several possible drivers for this "dash for coal", but it is widely accepted that windfall profits gained through free allocation of ETS certificates play an important role. Yet the quantification of allocation-related investment distortions has been limited to back-of-the envelope calculations and stylized models so far. We close this gap with a numerical model integrating both Germany's particular allocation rules and its specific power generation structure. We find that technology specific new entrant provisions have substantially increased incentives to invest in hard coal plants compared to natural gas at the time of the ETS onset. Expected windfall profits compensated more than half the total capital costs of a hard coal plant. Moreover, a shorter period of free allocations would not have turned investors' favours towards the cleaner natural gas technology because of preexisting economic advantages for coal. In contrast, full auctioning of permits or a single best available technology benchmark would have made natural gas the predominant technology of choice.Emissions trading, Allocation rules, Power markets, Investments

A risk perspective on market integration and the reform of support of renewables in Germany

After more than a decade of supporting power from renewable energy (RE) through guaranteed feed-in tariffs, the German Government has initiated reforms to integrate RE into the market. To eventually achieve market integration requires that RE investors carry power market risks, in particular the power price risk. At the same time however, under the current financial structure higher risks are likely to have a negative impact on the bankability of new RE projects, which by extension may endanger further deployment and the achievement of renewable targets with it. Against this background we take a risk perspective to assess the past and upcoming EEG reforms, with the aim of developing a proposal to gradually shift risk towards RE investors without endangering project finance. To that end we first discuss the case for more market risk and classify the specific respective risks for RE, analyze how they have been allocated so far, and find that past policy reforms have initiated only a marginal transfer of revenue risks to renewables. On that basis we argue that more ambitious steps in this direction need to be taken, for which regulatory complexity and reform outcome uncertainty suggest a continuous and transparent transition rather than a grand all-at-once intervention. We outline and discuss two elements that could be at the center of it: First, a support framework that creates incentives for RE projects to increasingly take risks, for which we propose a cascading risk auction mechanism that prioritizes “more risky” projects. Second, design options for (a) “more risky” support contracts and (b) risk transfer in power purchase contracts, which if standardized could help to develop and establish suitable risk mitigation and management approaches on the side of financers. While this paper does not deliver a fully spelled-out action plan for these elements, it provides a basic sketch and identifies the main research gaps that should be filled for implementing it. Giving the long lead times of reforms and the need to think ahead that arises from it, we are sure that this proposal can make an important contribution to the next EEG reform in Germany expected for 2016/2017

Die Ziele der Energiewende: Eine Kartierung der Prioritäten

Fabian Joas, Michael Pahle und Christian Flachsland, Potsdam Institut für Klimafolgenforschung und Mercator Research Institute on Global Commons and Climate Change, Berlin, stellen die Ergebnisse einer Befragung von 54 Akteuren der Energiewende aus den Bereichen Politik, Wirtschaft, Wissenschaft und Medien zu den ihrer Meinung nach wichtigsten Zielen der Energiewende in Deutschland vor

On start-up costs of thermal power plants in markets with increasing shares of fluctuating renewables

The emerging literature on power markets with high shares of fluctuating renewables suggests that more frequent start-up procedures of thermal power plants may become an increasing concern, both for costs and possibly also for market design. Based on official scenario assumptions, we investigate how start-ups and related costs develop in Germany, where the share of fluctuating renewables quadruples between 2010 and 2030. We find that the overall number of start-ups decreases by a third, while related costs increase by half. The relative share of start-up costs in overall variable costs of thermal plants grows only slightly and remains below 1%. Several overlapping effects drive these results. The expansion of fluctuating renewables alone would strongly increase start-up costs. In contrast, increased flexibility of biomass power plants, additional power storage and larger block sizes have opposite effects. While the relevance of start-up costs grows only moderately under baseline assumptions, it may increase further under alternative developments of system flexibility. Future power market design reforms should thus aim to ensure proper remuneration of quasi-fixed start-up costs. Our findings are also relevant for many other countries with thermal power systems that plan to undergo comparable transitions toward fluctuating renewables

How Emission Certificate Allocations Distort Fossil Investments: The German Example

Despite political activities to foster a low-carbon energy transition, Germany currently sees a considerable number of new coal power plants being added to its power mix. There are several possible drivers for this "dash for coal", but it is widely accepted that windfall profits gained through free allocation of ETS certificates play an important role. Yet the quantification of allocation-related investment distortions has been limited to back-of-the envelope calculations and stylized models so far. We close this gap with a numerical model integrating both Germany's particular allocation rules and its specific power generation structure. We find that technology specific new entrant provisions have substantially increased incentives to invest in hard coal plants red to natural gas at the time of the ETS onset. More precisely, disproportionate windfall profits compared more than half the total capital costs of a hard coal plant. Moreover, shorter periods of free allocations would not have turned investors' favours towards the cleaner natural gas technology because of pre-existing economic advantages for coal. In contrast, full auctioning of permits or a single best available technology benchmark would have made natural gas the predominant technology of choice.This is a postprint of an article published in Energy Policy 39 (2011), 4, S. 1975-1987, available online at: http://dx.doi.org/10.1016/j.enpol.2011.01.02

Starting low, reaching high? : Sequencing in EU climate and energy policies

In order to achieve the UNFCCC Paris Agreement goals, climate policies worldwide require considerable ratcheting-up. Policy sequencing provides a framework for analysing policy process dynamics that facilitate ratcheting-up. We apply a sequencing perspective to two key EU climate and energy policies, the Emissions Trading Scheme (ETS) and the Renewable Energy Directive (RED), to comparatively test the empirical relevance of sequencing for single policies - in addition to sequencing across policies, which has been the focus of sequencing theory so far - and to uncover specific mechanisms. Our results confirm that sequencing, based on triggering positive and controlling negative feedback, is relevant both within and across policies. Policy choices that may facilitate ratcheting-up include tools to control costs, the possibility to centralise and harmonise in a multi-level governance context, options for compensation of reluctant actors, and the encouragement of learning processes

Do Benefits from Dynamic Tariffing Rise? Welfare Effects of Real-Time Retail Pricing Under Carbon Taxation and Variable Renewable Electricity Supply

We analyze the gross welfare gains from real-time retail pricing in electricity markets where carbon taxation induces investment in variable renewable technologies. Applying a stylized numerical electricity market model, we find a U-shaped association between carbon taxation and gross welfare gains. The benefits of introducing real-time pricing can accordingly be relatively low at relatively high carbon taxes and vice versa. The non-monotonous change in welfare gains can be explained by corresponding changes in the inefficiency arising from “under-consumption” during low-price periods rather than by changes in wholesale price volatility. Our results may cast doubt on the efficiency of ongoing roll-outs of advanced meters in many electricity markets, since net benefits might only materialize at relatively high carbon tax levels and renewable supply shares. © 2019, The Author(s)

Five myths about an EU ETS carbon price floor. CEPS Policy Insights No 2018/17, December 2018

This policy insight builds on the workshop EU ETS Reform: Taking Stock and Examining Carbon Price Floor Options, held at the Centre for European Policy Studies (CEPS) in Brussels on July 3, 2018. The workshop was cosponsored by CEPS and the AHEAD and Mistra Carbon Exit projects. While the paper draws on insights from workshop discussions, its views are solely those of the authors. It outlines different perspectives on the past performance of the EU Emissions Trading System (ETS) in terms of its allowance price (Section 1), analyses how the recent reform responded to related challenges (Section 2), and considers the case for introducing a carbon price floor in the EU ETS (Section 3). The main part of the paper (Section 4) identifies five myths in the debate about an EU ETS price floor and critically challenges them. Section 5 concludes by discussing potential entry points for introducing a carbon price floor in the context of the upcoming EU climate policy process

The market stability reserve in the EU emissions trading system: a critical review

Having experienced low prices for about a decade, the European Union Emissions Trading System has been supplemented with the market stability reserve (MSR) that adjusts the supply of allowances to market outcomes. We critically review the literature assessing the performance of the MSR against several policy objectives. In doing so, we cover both conceptual aspects and quantitative assessments. We conclude by pointing out important policy implications and open issues for further research

Design and Integration of an Actuated Nose Strake Control System

Aircraft flight characteristics at high angles of attack can be improved by controlling vortices shed from the nose. These characteristics have been investigated with the integration of the actuated nose strakes for enhanced rolling (ANSER) control system into the NASA F-18 High Alpha Research Vehicle. Several hardware and software systems were developed to enable performance of the research goals. A strake interface box was developed to perform actuator control and failure detection outside the flight control computer. A three-mode ANSER control law was developed and installed in the Research Flight Control System. The thrust-vectoring mode does not command the strakes. The strakes and thrust-vectoring mode uses a combination of thrust vectoring and strakes for lateral- directional control, and strake mode uses strakes only for lateral-directional control. The system was integrated and tested in the Dryden Flight Research Center (DFRC) simulation for testing before installation in the aircraft. Performance of the ANSER system was monitored in real time during the 89-flight ANSER flight test program in the DFRC Mission Control Center. One discrepancy resulted in a set of research data not being obtained. The experiment was otherwise considered a success with the majority of the research objectives being met