Securing the public interest in electricity generation markets. The myths of the invisible hand and the copper plate

Two aspects of investment in generation capacity in liberalized electricity markets are investigated: the question of whether investment will be sufficient to meet society's goals for the reliability of electricity supply (generation adequacy) and the question of how to coordinate investment in electricity generation capacity in a competitive market while bound by the physical requirements and limitations of the electricity networks. The study focuses on the situation in European electricity markets. A number of factors discourage generating companies from investing in a level of generation capacity that is optimal for society as a whole. Due to the limited possibilities for the storage of electricity and the low price-elasticity of demand, electricity prices are highly volatile. This, in addition to the lack of historical trend data (due to the short history of liberalized electricity markets), insufficient transparency and high capital costs, causes investment risk to be high. Investment risk is increased by several sources of regulatory uncertainty. Given these circumstances, it is rational for investors to be cautious. A number of policy options for improving investment incentives and for stabilizing the volume of generation capacity, called capacity mechanisms, are described and analyzed. A policy framework is introduced for evaluating them and deciding on the best policy options for different circumstances. With respect to the issue of coordinating investment in electricity generation capacity with the networks, the consequences of the choice for fixed transmission tariffs in most European countries were investigated. While fixed transmission tariffs are intended to make the market simple and transparent, paradoxically they create the need for several additional measures to compensate for their external effects. Among these, the implementation of a congestion management method ranks among the most necessary measures. The options for congestion management, given the choice for fixed transmission tariffs, are analyzed and compared.Technology, Policy and Managemen

European security of electricity supply policy in the context of increasing volumes of intermittent generation

In response to plans in France and the UK to implement a capacity mechanism and the recent implementation of a small strategic reserve in Germany, we address the question of the cross-border effects of national implementation of a capacity mechanism in Europe’s interconnected markets. We model some of the effects that may arise when different countries implement different types of capacity mechanisms. We draw conclusions with respect to generation adequacy policy in Europe. Capacity markets appear to be more effective than strategic reserve in attracting investment and securing supply in the long run, but may discourage investment in neighboring countries. A strategic reserve is easier to implement and does not have this negative externality, but its dynamic effectiveness is less certain and its effect may leak away across the border. The negative externality of a capacity mechanism may put pressure on neighboring countries to also implement a capacity mechanism. However, the proliferation of different types of capacity mechanisms – every category of capacity mechanism can be implemented in a myriad of different ways – creates a significant risk trade between countries will be increasingly distorted. Considering also the regulatory uncertainty that is brought about by this process and the risk of regulatory failure with implementing the more sophisticated capacity mechanisms such as capacity markets and reliability options, the positive effect on investment is not a given.Infrastructures, Systems and ServicesTechnology, Policy and Managemen

Carbon policies: Do they deliver in the long run?

Carbon taxation and emission trading are policy instruments for achieving significant CO2 emission reduction by inducing a shift in technology and fuel choice. Simulations with a quantitative agent-based model of a competitive electricity generation sector show that under both policies CO2 emissions increase for 10-15 years due to the long life cycle of power plants. Dramatic reductions materialize after 20-40 years when a tight cap or sufficient tax level is maintained. When taxes are set equivalent to trading prices, taxation induces earlier investment in CO2 abatement, a better balance between capital and operating costs and lower long-run electricity prices.Infrastructures, Systems and ServicesTechnology, Policy and Managemen

The market (in-)stability reserve for EU carbon emission trading: Why it might fail and how to improve it

The EU parliament has accepted a proposal of the EU commission on the backloading of EU emission allowances (EUA), where the auctioning of EUAs is postponed to future time periods. The EU commission has also proposed a market stability reserve (MSR), which is a quantity-based stabilisation policy that is aimed at controlling the volume of EUAs in circulation. Using an agent-based electricity market simulation with endogenous investment and a CO2 market (including banking), we analyse the backloading reform and the proposed MSR. We find backloading to only have a short-term impact of CO2 prices; regardless, there is a significant risk of high CO2 prices and volatility in the EU ETS. Our simulations indicate that the triggers of the proposed MSR appear to be set too low for the hedging need of power producers, effectively leading to a stricter cap in its initial 10–15 years of operation. While the current proposal may be improved by choosing different triggers, a reserve that is based on volume triggers is likely to increase price volatility, contrary to its purpose. Additional problems are the two-year delay in the response time and the abruptness of the response function, combined with the difficulty of estimating future hedging behaviour.Engineering, Systems and ServicesTechnology, Policy and Managemen

A review of agent-based models for forecasting the deployment of distributed generation in energy systems

Agent-based models are seeing increasing use in the study of distributed generation (DG) deployment. Researchers and decision makers involved in the implementation of DG have been lacking a concise overview of why they should consider using agent-based modeling (ABM) for forecasting purposes. Since this particular field of inquiry has only developed over the past few years there has yet to be a review of ABMs of DG deployment. In light of these developments the reasons to consider using ABM to develop a deeper understanding of the transition issues relevant to the increasing use of DG are presented. The current state of ABMs of DG deployment is reviewed followed by areas for improving these models and directions for further researchMulti Actor SystemsTechnology, Policy and Managemen

Agent-based models for policy makers

In order to support policy decisions, we have developed a modelling platform called AgentSpring, which facilitates the development of agent-based models in a modular and structured manner, using state-of-the-art IT development principles and tools. An attractive web-based interface allows for the interaction with policy makers. A model named d13n was developed on the topic of decarbonization of the power generation sector. For this model, relevant applications for policy makers – CO2 reduction, cross-border effects of policies, security of supply – have been identified. Each of those questions can be tackled by developing specific scenarios within the same modelling platform and with the same model core.Infrastructures, Systems and ServicesTechnology, Policy and Managemen

Adjusting the CO2 cap to subsidised RES generation: Can CO2 prices be decoupled from renewable policy?

The low prices in the European Emission Trading System (EU ETS) have triggered discussions of various possible reforms. One option is to decouple the CO 2 prices from renewable energy policy by adjusting the emission cap to renewable energy investment overshoots. We introduce two ways of reducing the CO 2 cap in response to overshoots of renewable policy investment over previously announced targets. We investigate these options with the agent-based model EMLab-generation. We find that both policy implementations are successful in restoring prices. They also ensure that making public investments that exceed policy targets contribute to carbon emission reduction, and that renewable policy does not benefit the most emission-intensive power plants. However, neither policy is suitable for achieving specifc levels of prices or price volatility.Engineering Systems and ServicesTechnology, Policy and Managemen

Understanding power plant investment decision processes

In order to understand how companies make investment decisions under conditions of deep uncertainty, we interviewed a number of actors in the Dutch electricity sector. Most of the economic literature that is devoted to this question is prescriptive in nature, describing rational methods to the investment decision process (such as real options and portfolio analyses). While these analysis tools play a role in the investment decision, the actual process is much more complicated. The reason is that the investor never has all the information that he would need to make a rational decision. Our research shows that the investment process is guided by a set of satisficing goals, rather than profit maximization; a multi-stage project management approach is used to cope with the lack of information; and the resources for information processing limit the scope of the analysis. We find several differences between companies in their decision making process and goals. These are a consequence of company characteristics such as the company size, ownership, vertical integration and geographic focus. The chosen electricity generation technology and inter-organizational dynamics also affect the investment process.Engineering, Systems and ServicesTechnology, Policy and Managemen

The impact of microgeneration upon the Dutch balancing market

The share of microgeneration (power generation at the level of households and small businesses) in the Dutch electricity system continues to grow. Over time, this development may pose a threat to the reliability and efficiency of the Dutch electricity balancing market. We investigated possible changes to the design of the Dutch balancing market that can maintain or even improve upon its current operational performance level. The first step of the research was an analysis of the existing Dutch balancing market. It consists of three main instruments: programme responsibility, the single buyer market for regulating and reserve power (RRP), and imbalance settlement. The balancing market currently functions satisfactorily. Subsequently, the effects of large-scale development of microgeneration in the Netherlands were evaluated with a qualitative scenario analysis. Four microgeneration scenarios and two methods for allocating the household electricity consumption and generation were considered. The four scenarios concerned large-scale penetration of PV, heat-led micro CHP, electricity-led micro CHP operated by the household consumer, and electricity-led micro CHP operated by the supply company. The last scenario was found to have the strongest positive net effect. Finally, six design options were identified for improving the Dutch balancing market design in case the share of microgeneration would increase substantially. Of these six options, adjusting the profile methodology and the regulation of smart meters are no-regret options that can be implemented immediately. The attractiveness of the other options depends upon the microgeneration portfolio that emerges, the manageability of large metering data flows, and the nature of the technical effects of large-scale microgeneration penetration.Technology, Policy and Managemen

Cross-border electricity market effects due to price caps in an emission trading system: An agent-based approach

The recent low CO2 prices in the European Union Emission Trading Scheme (EU ETS) have triggered a discussion whether the EU ETS needs to be adjusted. We study the effects of CO2 price floors and a price ceiling on the dynamic investment pathway of two interlinked electricity markets (loosely based on Great Britain, which already has introduced a price floor, and on Central Western Europe). Using an agent-based electricity market simulation with endogenous investment and a CO2 market (including banking), we analyse the cross-border effects of national policies as well as system-wide policy options. A common, moderate CO2 auction reserve price results in a more continuous decarbonisation pathway. This reduces CO2 price volatility and the occurrence of carbon shortage price periods, as well as the average cost to consumers. A price ceiling can shield consumers from extreme price shocks. These price restrictions do not cause a large risk of an overall emissions overshoot in the long run. A national price floor lowers the cost to consumers in the other zone; the larger the zone with the price floor, the stronger the effect. Price floors that are too high lead to inefficiencies in investment choices and to higher consumer costs.Engineering, Systems and ServicesTechnology, Policy and Managemen