Revisiting the Merit-Order Effect of Renewable Energy Sources

An on-going debate in the energy economics and power market community has raised the question if energy-only power markets are increasingly failing due to growing feed-in shares from subsidized renewable energy sources (RES). The short answer to this is: No, they are not failing. Energy-based power markets are, however, facing several market distortions, namely from the gap between the electricity volume traded at day-ahead markets versus the overall electricity consumption as well as the (wrong) regulatory assumption that variable RES generation, i.e., wind and photovoltaic (PV), truly have zero marginal operation costs. In this paper we show that both effects over-amplify the well-known merit-order effect of RES power feed-in beyond a level that is explainable by underlying physical realities, i.e., thermal power plants being willing to accept negative electricity prices to be able to stay online due to considerations of wear & tear and start-stop constraints. We analyze the impacts of wind and PV power feed-in on the day-ahead market for a region that is already today experiencing significant feed-in tariff (FIT)-subsidized RES power feed-in, the EPEX German-Austrian market zone ($\approx\,$20% FIT share). Our analysis shows that, if the necessary regulatory adaptations are taken, i.e., increasing the day-ahead market's share of overall load demand and using the true marginal costs of RES units in the merit-order, energy-based power markets can remain functional despite high RES power feed-in.Comment: Working Paper (9 pages, 11 figures, 5 tables) - Some revisions since last version (10 February 2014). (Under 2nd review for IEEE Transactions on Power Systems

Liberalisation of network industries : Is the electricity sector an exception to the rule?

For quite a long time, network industries used to be regarded as (natural) monopolies. This was due to these industries having some special characteristics. Network externalities and economies of scale in particular justified the (natural) monopoly thesis. Recently, however, a trend towards deregulation of such industries has been observed. This trend started with the successful introduction of competition in the telecommunications sector. The main reason behind this success is that the economies of scale have disappeared as a result of emerging new technologies. The successful deregulation in telecommunications is in line with micro-economic theory, which predicts an increase in efficiency and lower prices when markets are opened up to competition. The success in the telecommunications sector is often used as an argument for opening up other network industries to competition as well. In this paper we analyse whether this reasoning can be transposed to the electricity sector. It is argued that the two sectors, electricity and telecommunications, are similar in that they are both network industries which used to be characterised by economies of scale, and that technological progress might have put an end to this scale effect. There are however certain differences. Firstly, technological progress on the supply side was accompanied by a strong growth in demand in the telecommunications sector. This demand side effect is absent in electricity. Moreover, due to physical characteristics, the electricity sector seems to be more complicated: in order to introduce competition in the sector, it has to be split up into subsectors (production, transmission, distribution and supply). Competition is introduced in production and supply, transmission and distribution remain monopolies. This splitting up creates a new kind of costs, the so-called transaction costs. The paper is centered around two issues: (a) are the basic assumptions behind the theoretical model of the perfectly free market met in the deregulated subsectors? and (b) do the transaction costs (partly) offset possible price decreases in competitive segments ? There is no hard evidence that the hypotheses behind the theoretical model are met in the electricity sector, and there are strong indications that these transaction costs might be substantial. Moreover, in addition to the deregulation process, the electricity sector is also subject to other changes such as the internalisation of externalities (see the Kyoto protocol) and the debate on nuclear energy. These elements could exert an upward pressure on prices. Since electricity is ubiquitous, the deregulation process should be closely monitored.Welfare economics; market structure and pricing; organizational behaviour, transaction costs, property rights, Electric Utilities, Telecommunications.

The single European electricity market: A long road to convergence

In the context of a first Working Paper the authors argued that electricity has a number of characteristics that set it apart from other commodities. It was demonstrated that some of these characteristics might complicate the deregulation process. This paper analyses the ongoing deregulation process in the European electricity sector and attempts to establish whether these difficulties can more readily be solved at European level. It would appear that some problems, e.g. economies of scale in electricity generation, have less of an impact at European level than within smaller national markets. However, a number of difficulties have to be overcome before a unified European electricity market can become a reality. These include the limited interconnection capacities between Member States. The European Commission has taken steps to improve the situation, for example by offering financial support for investments and promoting the development of regional markets as an interim measure ultimately leading to a fully integrated market. Apart from the difficulties related to electricity generation and transmission there are also exogenous factors that influence the ongoing deregulation process, e.g. the implementation of the Kyoto protocol and the dramatic increases in primary fuel prices. This paper argues that a consistent, stable and uniform European regulatory framework must be put in place if the impact of these difficulties is to be minimised.Electricity deregulation

Efficient provision of electricity for the United States and Switzerland

This study applies financial portfolio theory to determine efficient frontiers in the provision of electricity for the United States and Switzerland. Expected returns are defined by the rate of productivity increase of power generation (adjusted for external costs), volatility, by its standard deviation. Since unobserved productivity shocks are found to be correlated, Seemingly Unrelated Regression Estimation (SURE) is used to filter out the systematic component of the covariance matrix of the productivity changes. Results suggest that as of 2003, the feasible maximum expected return (MER) electricity portfolio for the United States contains more Coal, Nuclear, and Wind than actual but markedly less Gas and Oil. The minimum variance (MV) portfolio contains markedly more Oil, again more Coal, Nuclear, and Wind but almost no Gas. Regardless of the choice between MER and MV, U.S. utilities are found to lie substantially inside the efficient frontier. This is even more true of their Swiss counterparts, likely due to continuing regulation of electricity markets.Efficiency frontier, energy, electricity, portfolio theory, Seemingly Unrelated Regression Estimation (SURE)

Efficient Electricity Portfolios for Switzerland and the United States

This study applies financial portfolio theory to determine efficient electricity-generating technology mixes for Switzerland and the United States. Expected returns are given by the (negative of the) rate of increase of power generation cost. Volatility of returns relates to the standard deviation of the cost increase associated with the portfolio, which contains Nuclear, Run of river, Storage hydro and Solar in the case of Switzerland, and Coal, Nuclear, Gas, Oil, and Wind in the case of the United States. Since shocks in generation costs are found to be correlated, the seemingly unrelated regression estimation (SURE) method is applied for filtering out the systematic component of the covariance matrix of the cost changes. Results suggest that at observed generation costs in 2003, the maximum expected return (MER) portfolio for Switzerland would call for a shift towards Nuclear and Solar, and therefore away from Run of river and Storage hydro. By way of contrast, the minimum variance (MV) portfolio mainly contains Nuclear power and Storage hydro. The 2003 MER portfolio for the United States contains Coal generated electricity and Wind, while the MV alternative combines Coal, Nuclear, Oil and Wind. Interestingly, Gas does not play any role in the determination of efficient electricity portfolios in the United States.energy, electricity, portfolio theory, efficiency frontier, seemingly unrelated regression estimations (SURE)

Energy storage in the UK electrical network : estimation of the scale and review of technology options

This paper aims to clarify the difference between stores of energy in the form of non-rechargeable stores of energy such as fossil-fuels, and the storage of electricity by devices that are rechargeable. The existing scale of these two distinct types of storage is considered in the UK context, followed by a review of rechargeable technology options. The storage is found to be overwhelmingly contained within the fossil-fuel stores of conventional generators, but their scale is thought to be determined by the risks associated with long supply chains and price variability. The paper also aims to add to the debate regarding the need to have more flexible supply and demand available within the UK electrical network in order to balance the expected increase of wind derived generation. We conclude that the decarbonisation challenge facing the UK electricity sector should be seen not only as a supply and demand challenge but also as a storage challenge. (c) 2010 Elsevier Ltd. All rights reserved

An economic evaluation of the potential for distributed energy in Australia

Australia’s Commonwealth Scientific and Industrial Research Organisation (CSIRO) recently completed a major study investigating the value of distributed energy (DE; collectively demand management, energy efficiency and distributed generation) technologies for reducing greenhouse gas emissions from Australia’s energy sector (CSIRO, 2009). This comprehensive report covered potential economic, environmental, technical, social, policy and regulatory impacts that could result from the wide scale adoption of these technologies. In this paper we highlight the economic findings from the study. Partial Equilibrium modeling of the stationary and transport sectors found that Australia could achieve a present value welfare gain of around $130 billion when operating under a 450 ppm carbon reduction trajectory through to 2050. Modeling also suggests that reduced volatility in the spot market could decrease average prices by up to 12% in 2030 and 65% in 2050 by using local resources to better cater for an evolving supply-demand imbalance. Further modeling suggests that even a small amount of distributed generation located within a distribution network has the potential to significantly alter electricity prices by changing the merit order of dispatch in an electricity spot market. Changes to the dispatch relative to a base case can have both positive and negative effects on network losses.Distributed energy; Economic modeling; Carbon price; Electricity markets

Mainstreaming New Renewable Energy Technologies

This paper outlines the benefits, obstacles and options for governments to support international markets for technology development. International markets for new energy technologies offer greater scope, thereby increasing the incentives and opportunities for technology improvements. As the market is supported by more independent governments, the confidence of technology developers and producers that future markets for their products will exist is increasing, thus enabling capital access and inducing R&D investment and exploration of improved production processes. The bigger markets also allow for international competition, thus allowing for the application of the best available technology. The government challenge to induce sufficient RD&D remains and with international markets the benefits and costs of national governments free-riding on international effort needs to be addressed. Finally, we discuss how international co-operation can be used to evolve the energy system in such a way that it can integrate new technologies at minimum cost

Germany’s Nuclear Power Plant Closures and the Integration of Electricity Markets in Europe

This paper examines the potential implications of national policies that lead to a sudden increase of wind power in the electricity mix for interconnected European electricity markets. More specifically, it examines market integration before and after the closures of eight nuclear power plants that occurred within a period of a few months in Germany during 2011. The short- and- long run interrelationships of daily electricity spot prices, from November 2009 to October 2012, in: APX-ENDEX, BELPEX, EPEX-DE, EPEX-FR, NORDPOOL, OMEL and SWISSIX; and wind power in the German system are analysed. Two MGARCH (Multivariate Generalized Autoregressive Conditional Heteroscedasticity) models with dynamic correlations are used to assess spot market behaviour in the short run, and a fractional cointegration analysis is conducted to investigate changes in the long-run behaviour of electricity spot prices. Results show: positive time-varying correlations between spot prices in markets with substantial shared interconnector capacity; a negative association between wind power penetration in Germany and electricity spot prices in the German and neighbouring markets; and, for most markets, a decreasing speed in mean reversion