Energy Economics

Renewables EfficiencyCarbon emissions

EU’s 20-20-20 strategy for 2020

• Renewables are the solution as proposed by politicians– central planning approach– “picking winners”

A B C

EMISSION PERMIT MARKET

Competition for

permits

Solution 1:EU Emission Trading Scheme (EU-ETS)

Reduction of 21%

• Marcantonini, C., Ellerman, D. 2013. The Cost of Abating CO2 Emissions by Renewable Energy Incentives in Germany. EUI Working Paper RSCAS 2013/05.http://fsr.eui.eu/Publications/WORKINGPAPERS/Energy/2013/WP201305.aspx

Wind:±€50/ tCO2

Solar:±€350/ tCO2

Why install any solar, if a ton of CO2 can be abated by wind 7 times cheaper?

Wind:±€50/ tCO2

Solar:±€350/ tCO2

Why install any wind or solar, if a ton of CO2 can be abated by buying and not using a certificate

5 to 35 times cheaper!?

• Spillover externality?– Subsidize R&D or massive deployment?

-> Monday lecture

Wind:±€50/ tCO2

Solar:±€350/ tCO2

Why install any wind, if a ton of CO2 can be abated by buying and not using a certificate

- now - 12 to 96 times cheaper!?

• Interaction between ETS and renewables

• Böhringer, C., Rosendahl, K,E, 2009. Green serves the dirtiest. Discussion Papers No. 581, April 2009 Statistics Norway, Research Department

• Given the ETS in the EU, do subsidies and feed-in tariffs lead to:

1. Less “dirty” generation?2. Less CO2 emission in the EU?

• Surprisingly, the answers are:1. No, to more dirty generation2. No, it has no effect.

Permits SUPPLY CO2 produced

Electricity demand

Power produced

Hydro & Nuclear

gas

Coal

ETS reduces CO2 emissions

CO2 without

ETS

CO2 with ETS

Shortage of permits!

Permits SUPPLY CO2 produced

Electricity demand

Power produced

Hydro & Nuclear

gas

Coal

ETS reduces CO2 emissions

CO2 without

ETS

CO2 with ETS

Shortage of permits!

Electricity demand

Power produced

Hydro & Nuclear

gas

Coal

ETS affects generation choices

CO2 produced

Wind & solar with subsidies

Permits SUPPLY

Electricity demand

Hydro & Nuclear

gas

Coal

ETS affects generation choices

CO2 produced

Wind & solar with subsidies

Wind & solar

Excess of permits!

Permits SUPPLY

Electricity demand

Hydro & Nuclear

gas

Coal

ETS affects generation choices

CO2 produced

Wind & solar with subsidies

Wind & solar

Permits SUPPLY

Electricity demand

Permits demand

Hydro & Nuclear

Coal

ETS affects generation choices

CO2 produced

Wind & solar with subsidies

Wind & solar

• Some numbers

Solar & wind

Without ETS

10

20 CO2

Electricity demand

Y=

Power produced

(GWh)MC=0, AFC = 40, Em=0

C= 10* 40= 400

10

[ ]0p MAX MC

8

Gas

10

20 CO2

Electricity demand

Y=

Power produced

(GWh)

Gas: MC=15, FC=0, Em=1AC= MC+ Em*pp

=15+ pp

C= 10* 15 + 0= 150

10

Without ETS

[ ]15p MAX MC

8

x = CO2

Electricity demand

y=

Power produced

(GWh)

Coal

10

20

Coal: MC=y, FC=0, Em=2AC=MC = y+ 2*pp

= 10+ 2* pp

C= ½* 10^2= 50

10

Without ETS

[ ]10p MAX MC

8

Solar & wind

10

20 CO2

Electricity demand

Y=

Power produced

(GWh)AFC = 40

C=10* 40= 400

10

Gas

10

20 CO2

Electricity demand

Y=

Power produced

(GWh)AC= MC = 15

C= 10 * 15= 150

10 x = CO2

Electricity demand

y=

Power produced

(GWh)

Coal

10

20

MC= y==10

C= ½ * 10 *20= 100

C= 400

C= 150 C= 50

Which one to use?

Without ETS

x = CO2

Electricity demand

y=

Power produced

(GWh)

CoalCO2

without ETS

10

2010 12

With ETS

8

Systemcosts

Energyprice

PermitPrice (pp)

Worth ofpermits

No ETS 50 10 0 0

ETS

ETS + 2 solar

ETS + 5 solar

x = CO2

Electricity demand

y=

Power produced

(GWh)

CoalCO2

without ETS

10

2010 12

Supply of permits

With ETSOnly coal:

Shortage of permits!

8

x = CO2

Electricity demand

y=

Power produced

(GWh)

CoalCO2

without ETS

10

2010 12

Supply of permits

With ETSOnly coal:

Shortage of permits!Only gas:

Excess of permits!

8

x = CO2

Electricity demand

y=

Energy produced

(GWh)

CoalCO2

without ETS

10

2010 12

Supply of permits

8

With ETS Energy ( ): 10y c g Carbon ( ): 2 12x c g

2 & 8c g

x = CO2

Electricity demand

y=

Power produced

(GWh)

Coal

10

2010 12

Supply of permitsMC = |y| =2 +2* pp

MC= 15 +pp

With ETS Energy ( ): 10y c g Carbon ( ): 2 12x c g

2 & 8c g

2+2 15pp pp 13pp

[ ]2 2 13 28p MAX MC

8

Costs:-Gas: 8*15=120-Coal: ½*2^2=2Total: 122

Systemcosts

Energyprice

PermitPrice (pp)

Worth ofpermits

No ETS 50 10 0 0

ETS 122 28 13 156

ETS + 2 solar

ETS + 5 solar

x = CO2

Electricity demand

y=

Power produced

(GWh)

Coal: 6

10

2010 12

Supply of permitsMC = |y| =6 +2* pp

Subsidized solar & wind: 2

Energy ( ): 10y c g SSW Carbon ( ): 2 12x c g

2 4 & 4c SSW g

8

x = CO2

Electricity demand

y=

Power produced

(GWh)

Coal: 4

10

2010 12

Supply of permitsMC = |y| =4 +2* pp

With ETS

Subsidized solar & wind: 2

4 & 4c g

6

4Gas: 4

MC= 15 +pp

4+2 15pp pp 11pp

[ ]4 2 11 26p MAX MC

8

Costs:-Solar: 2*40=80-Gas: 4*15=60-Coal: ½*4^2=8Total: 148

Systemcosts

Energyprice

PermitPrice (pp)

Worth ofpermits

No ETS 50 10 0 0

ETS 122 28 13 156

ETS + 2 solar 148 26 11 132

ETS + 5 solar

x = CO2

Electricity demand

y=

Power produced

(GWh)

Coal: 4

10

2010 12

Supply of permitsMC = |y| =4 +2* pp

With ETS

Subsidized solar & wind: 2

6

4Gas: 4

MC= 15 +pp

8

4 & 4c g

x = CO2

Electricity demand

y=

Power produced

(GWh)

Coal

10

2010 12

Supply of permits

MC = |y| =4 +2* pp

MC= 15 +pp

With ETS

Subsidized solar & wind: 5

8

x = CO2

Electricity demand

y=

Power produced

(GWh)

Coal: 6

10

2010 12

Supply of permitsMC = |y| =5 +2* pp

With ETS

Subsidized solar & wind: 5

0pp

[ ]5 2 0 5p MAX MC

8

Costs:-Solar: 5*40=200-Coal: ½*6^2=18Total: 218

Systemcosts

Energyprice

PermitPrice (pp)

Worth ofpermits

No ETS 50 10 0 0

ETS 122 28 13 156

ETS + 2 solar 148 26 11 132

ETS + 5 solar 218 5 0 0

Adding renewables cannibalizes the ETS.

It decreases the permit price in addition to decreasing the wholesale energy price.

• Adding subsidized clean energy– Reduces the carbon price cp– Supports & indirectly “subsidizes” the dirty

technology (coal)– Crowds out the clean technology (gas)

• Böhringer, C., Rosendahl, K,E, 2009. Green serves the dirtiest. Discussion Papers No. 581, April 2009 Statistics Norway, Research Department– You can take their mathematical derivations

on good faith.

x = CO2

Electricity demand

y=

Power produced

(GWh)

Coal

10

2010 12

Supply of permits

8

With ETS 20% fall in demand:• Exogenous:

• Efficiency increase• Recession

• Endogenous:• Price effect

x = CO2

Electricity demand

y=

Power produced

(GWh)

Coal

10

2010 12

Supply of permits

8

With ETS

x = CO2

Electricity demand

y=

Power produced

(GWh)

Coal

10

2010 12

Supply of permits

8

With ETS

x = CO2

Electricity demand

y=

Power produced

(GWh)

Coal

10

2010 12

Supply of permits

8

With ETS

same effect:• 20% efficiency improvement• Fall in demand (Euro-crisis)

x = CO2

Electricity demand

y=

Power produced

(GWh)

Coal

10

2010 12

Supply of permits

8

MC = |y| =2 +2* pp

MC= 15 +pp

With ETS 20% fall in demand:• Exogenous:

• Efficiency increase• Recession

• Endogenous:• Price effect

x = CO2

Electricity demand

y=

Power produced

(GWh)

Coal

10

2010 12

Supply of permits

8

MC = |y| =2 +2* pp

MC= 15 +pp

With ETS

x = CO2

Electricity demand

y=

Power produced

(GWh)

Coal

10

2010 12

Supply of permits

8

MC = |y| =2 +2* pp

MC= 15 +pp

With ETS

x = CO2

Electricity demand

y=

Power produced

(GWh)

Coal

10

2010 12

Supply of permits

8

MC = |y| =4 +2* pp

MC= 15 +pp

With ETS Energy ( ): 8y c g Carbon ( ): 2 12x c g

4 & 4c g

4+2 15pp pp 11pp

[ ]4 2 11 26p MAX MC

• Reduction of energy demand… – Recession, demand reaction, efficiency increase

• has the same effect as subsidized clean energy– Reduces the carbon price cp– Supports & indirectly “subsidizes” the dirty

technology (coal)– Crowds out the clean technology (gas)

• EU (20-20-20):– 20% reduction of CO2 by ETS– 20% efficiency increase– 20% increase in renewables (solar & wind)

by subsidies+ 6-year long recession

• Reduces demand, and supports dirty technology

“Europe is burning more coal, while demand for gas – which emits much less CO2 than coal – is declining ”

• Under a cap& trade program:

–subsidy to renewables –=

–subsidies to dirty production

• Net no effect on CO2

• Under a cap& trade program:

–subsidy to renewables –=

–subsidies to dirty production

• Net no effect on CO2

Subsidized renewables:- Politicians are for- Popular among people- Renewables industry has strong lobby- Idealistic organisations support them

How to best adapt to them?

The grid

Need for long-distance transmission

STORAGE?

Batteries?

Hydro-plant and pumped storage

Hydro-plant and pumped storage

Need for long-distance transmissionHydro potential

Need for long-distance transmission

European Climate

Foundation

Increase of almost

400%

The future of the EU transmission network

2050 Increase from 34 GW to 127

GW

• Storage is never going to be enough

www.eirgrid.com.

Wind lulls

In every year easy to find a period of 1-2 weeks with only about 5-10% of national wind generation

Solar produces very little in winter, even without snow

• Wind and solar should better be seen as:– Wind and solar + gas backup (round 90%)– Wind and solar + coal backup (round 90%)