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Renewable energy:

regulatory and market issues

László Szabó

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2 6th ERRA Training: Principles of Electricity Markets

May 7-11,2018 Budapest, Hungary

Outline

Renewable electricity outlook

– Policy context

– Technology development

Regional outlook

Investment challenge

Integration challenge

Regulatory challenge



Major pillars of RES-E policy

Supply security

increasing energy independence

Industrial policy green jobs and technology

export

Climate change avoiding CO2 emissions



Externalities in electricity generation

Source: ECOFYS 2014

• Conventional

technologies,

generally over 80

€/MWh

• Wind external cost

below 10 €/MWh

• PV external cost

generally below 25

€/MWh

• * Technology

development would

further reduce

external costs of PV



In the 2DS, electricity becomes a

near zero carbon fuel by 2050

0100200300400500600700800900

1 000

2009 2030 2050 2030 2050

4DS 2DS

g C

O2

-eq

/ k

Wh

World European Union United States China India ASEAN

Carbon intensity drops by 90% by 2050 in the 2DS (IEA)



Technology learning

6

Source: Fraunhofer 2017



Technology Levelsied Costs

Source IEA: Medium-Term Renewable Energy Market Report 2014



New built electricity generation

in Europe: RES-E

Source: WindEurope (February 2017)

Overall 80% share of RES in new investments.



Global RES power net additions


IEA scenarios under BAU and accelerated cases

- Shift to China and other Non-OECD



Regional Outlook on RES support schemes



European Union

2020 targets:

• Binding national targets, with legal actions and sanctions if 2020 targets are not

met

• National implementation – NREAPs

2030 targets:

• 27%, but binding at EU level, no national targets. (This level might be elevated

to 30% according to present negotiations between EC, Parliament and Council)

The 2322/2014 EU Communication sets up new state aid rules for RES support:

• From 2017 RES support could only be granted through competitive tendering

(FIP or GC)

• Exemptions: demonstration plants, smaller sized plants (under 1 MW)

• RES electricity must be sold on the product market

• Balancing costs must be paid by RES producers

• In case of negative prices – RES-E production should not be supported to

produce



EU Winter Package 1

Main findings of the RES and Market Design IAs:

– improved electricity market, revised ETS could deliver investments in

the most mature renewable technologies by 2030

– less mature renewable electricity technologies will need some

support

– At the beginning of the period, over-capacity, the imbalance on the

ETS market and low wholesale electricity market prices and high

RES-E technology costs make market only driven investment difficult

– support schemes will still be needed at least for a transitional period

RES IA investigates options to ensure that if and where

support is needed, it is cost-effective

RES-E: Some technologies would be viable exclusively from

market revenues but the 2030 target would not be reached



EU Winter Package 2

Planned next steps:

• Let the market reveal the true price of RES-E (auctioning of

support)

• Mandatory partial opening of support schemes (10 % till

2025, 15% afterwards)

• Lower the cost of capital (aligning support schemes,

support mature technologies)

• Further simplify administration (e.g. under 50 kW-

automatic approval after 6 month)

• RES heat- ‚gap filler’ – 1 % growth/year, District Heating:

RES and Waste heat –access to network

• RES-Transport: cap on food based biofuel, 2nd generation

biofuel targets (6.8% by 2030)



Middle East and North Africa


O: recently opened, □ ■: under review: ►: closed or suspended for new entrant



Europe




Asia and Pacific




Investment challenge



Potential impact of INDCs on global cumulative investment in

the power sector, 2015 – 2040

18

IEA WEO2015



Definition of LCOE

LCOE equation:

- It = investment cost

- Mt = operation and maintenance (O&M) costs in year t.

- Ft = fuel costs in year t.

- Et = electricity generated in year t.

- r = discount rate (expected return)

- n = planned (or regulated) support period or lifetime

– Used to compare technologies under similar

assumptions

19



Financing costs can dominate all other costs for

renewables

20

Solar PV

Source: IEA



WACC figures – DiaCore (wind onshore)

WACC estimations can

change significantly in

developing markets, even

in SEE

Change between 2014-16

Source: Diacore,

Ecofys 2016



RES integration challenges



Typical problems of intermittent RES-E

Intermittency additional reserve needs, loop-flows

Distance to load high transmission related cost

Source: Swinder (2008)



System impacts

• Due to low or close to zero variable costs in

competitive electricity markets wholesale electricity

price will reduce

• Have twofold effect on consumers:

• A positive impact as wholesale price will drop, also appearing in

end-user price

• A negative one, as subsidy is financed by RES surcharge, which

will increase end-user prices

• Conventional producers will see smaller utilisation rates

and reduced margins

• As in many countries gas based power plants are still

required to serve as balancing entities, they still have to

be kept in the market

Merit order effects of RES

P

Q

Q1

P1

S2

D support for renewables

(Wind) nuclear coal gas oil

P2

S1

Merit order !

Biomass Biomass

Original

Curve

Curve

with FIT

on wind

Nucl.

Coal

Gas

Oil



Merit order effect 2

• Wholesale price reduction reduces the revenues of

traditional producers – ‚missing money problem’

• On the long term traditional producers delay

investments

• This effects reduces the burden on end users – but

there is a price increasing effect by the RES

surcharge to cover subsidies (usually higher)

• Volatility of wholesale price increases (due to

intermittent technologies) which can partly

reduces the price reduction effect



Integration costs

Source: UECKERDT 2013



Additional impacts of higher RES

deployment

Intermittent technologies (PV, wind) Variable production Uncertainty in

production Production is location specific

- As electricity is not a homogeneous product – intermittent production has its ‚price’

- Other, traditional producers operate at lower utilisation level

- Uncertainty in production forecast - Other producers have to step in to balance the unexpected deviations

-Placing production in distant location has higher costs - Due to network constraints, it does matter where the new capacities are located

– ’profile costs’

- ‚balancing cost’

-‚grid costs’

Source: Ueckerdt 2013 But: Do they earn sufficient money to

stay on the market on the long term?



Integration costs 2

Source: UECKERDT 2013



‚Cannibalisation’ effect

• Definition: Renewables tend to earn less than

average market price with increasing market share

• Mechanisms: with higher deployment levels, VRES

generators reduce wholesale price in their

respective production hours. e.g. PV in the summer

daily hours. This reduces their ‚benchmark’ prices,

and their economic benefits.

• Coordination of day-ahead, intra-day and

balancing markets can help to reduce these system

wide impacts



Impact of higher PV deployment

on Wholesale Prices

Source: REKK, 2018



Regulatory tasks –

Network integration issues



Regulatory tasks

• Contribute to the design of RES-E support schemes

(production price support or quota obligation schemes)

• Regulate grid access and integration for RES-E

– connection queue management

– grid connection and cost allocation rules

– balancing and settlement rules, e.g. intra-day

– remuneration for additional reserve needs

• License and monitor the RES-E market

• Provide RES-E certification

• Promote cross-border cooperation in RES-E utilization



Grid integration issues

• Methods determining the maximum intermittent

RES-E capacity to be connected to the grid

• Methods handling the queue of renewable

generation projects waiting for system connection

• Tariff methods determining the connection charge

of RES producers

• Potential regulatory incentives for DSOs

connecting new renewable generators

• System balancing needs and rules



Asymmetric incentives for RES-E

generation versus network

• RES-E generation: fast; attractive; simple incentives

• Network upgrade: slow; complicated; counter-incentives

• Integrated resource and network planning

• Sufficient incentives for transmission and distribution upgrade is key



Regulatory tasks –

Designing tariff schemes



Support schemes 1

• Investment support schemes

– Investment grants, supported investment credits, tax

credits (US)

• Tradable green certificate schemes (quantity based)

– RES-E obligation on retailers

– Two products (sources of revenue) by RES-E generators:

electricity and Green Certificate; both tradable

– GC price is determined by supply and demand

• Feed-in tariff or feed-in premium schemes (price based)

• Priority dispatch obligation

– Who is the party to purchase RES-E?



Support schemes 2

• Functioning principle:

• Support renewables through their production

• Create an almost ‘financial’ instrument:

• High upfront investment cost is covered by a fix cash-flow

attached to the RES-E production up to 10-20 years

• Supplementary tools: priority connection, priority dispatch

• Three fundamental instruments:

• Feed-in Tariffs (FIT): Support RES-E price is fixed, production

quantity is flexible

• Feed-in Premium (FIP): higher market orientation, support explicitly

over market price

• Green Certificate (GC): Supported RES-E quantity is fixed, price

becomes volatile

• FIT is more effective to promote RES-E. Also it was more

popular/applied in the EU and in other countries.

• BUT: EU 2015 step: phasing out FIT based support schemes

The second-best regulation – subsidies to RES generation

P

Q

Q1

P1

S

D support for renewables

Supply of non-renewables

Supply of renewables

P2

!

Average cost

based supply

curve!

Support Schemes – Feed-in Tariff (FIT)

40

kWh

Market price Pp

MC renewable

Q

p

PFIT

QFIT

Costs, prices

FIT support / kWh

Two main characteristics of FIT

schemes:

• Obligatory takeover of

electricity

• Fixed purchase price,

independently from market

price

• In the EU the ‚favorite’ supply tool

• It is one of the most effective tool, but not the most cost

efficient

• It is most suitable to apply in the early phase of the RES

deployment, but can lead to over-subsidisation and

overshootings

Support Schemes: Feed-in Premium (FIP)

time

Pp

Market price

PFIP

FIP over support

Costs,

prices

FIP efficient

MC RES

Market price + FIP

Premium / kWh

• Electricity is sold on the product

market

• Once sold, gets premium as well

• Premium systems are more

efficient than FITs

• Higher risks for green producers

• Closer to market operations

• Various forms: fixed or variable

premiums

• Also cap and floor values

• FIPs get higher and higher shares in the EU RES support systems

• More market oriented instrument

• Could also be applied in competitive tendering schemes

Support schemes: Green certificates (GCs)

42

Producer of

Renewable electricty

ele

ctr

icity

„rene

wable”

attribute

s

Buyer „A” Buyer „B”

€ €

• Consumers are obliged to buy certain amount of green certificates (GCs)

• Authority checks at the end of the years if sufficient GCs are purchased

• GCs are tradeable

• Physical trade of electricity and green attributes are separated and sold separately

• Green producers sell electricity on the traditional product markets, while GCs on the green certificate markets

• Non-compliance is punished –it is important to set fines at reasonably high levels

Although one of the most market based instrument, there is a mixed

picture in those EU countries applying GC schemes

RES support tools and risks

Source: Dr. Corinna Klessmann, 2014, Ecofys



FIT – Does it follow

technology learning curves ?



EU State Aid Rules and Renewable Support

The 2322/2014 EU Communication sets up new state

aid rules for RES support:

• From 2017 RES support could only be granted through

competitive tendering (FIP or GC)

• Exemptions: demonstration plants, smaller sized plants

(under 1 MW, or 6 MW wind)

• RES electricity must be sold on the product market

• Balancing costs must be paid by RES producers

• In case of negative prices – RES-E production should not be

supported to produce

• Opening up support schemes with other Member States



RES auction design elements – main questions to

be answered

What is auctioned? - Technology-specific / neutral

- Output-based / investment grants

- Sliding / fixed premiums

- Support duration, adjustment

How much is auctioned? - Single-item / multiple items

- Volume (capacities / budget)

How should the winners be selected? - Price-only

- Multiple criteria

How should the price be determined? - Pay-as-bid

- Uniform / pay-as-cleared

Should there be special bidding rules? - Price caps / floors

- Quotas for diversity

Should there be safeguards? - Pre-qualification rules

- Penalties (non-compliance/delays)

SOURCE:EU AURES project, 2017



Trade-offs in auction designs

47

• Low entry barrier

• Low participatory risk

• Uniform conditions

amongst bidders

Competition

• Pre-qualification

conditions

• Penalties

• Simple, transparent

rules

• Pre-defined rules,

definitions

• Give preferential

treatment to small

players

Many

participants

Trans-

parency

High

realisation

rate

Source: Finger, 2016



German and Greek PV tenders

48

• Price trends between 2015 and 2017 Eurocent/kWh

• Only PV technology

• Why do we observe this difference between DE and GR

• for 2017?

DE GR

2017



RES auctions results

PV and wind technology auctions:

49

Source: Fortum 2016

PV: Germany: latest 2017 PV auction: 56 €/MWh, Greece 2017 – 83-98 €/MWh,

Off-shore wind: Denmark 2016: 54-72 €/MWh; DE, DK 2017: zero premium (Dong)

W

THANK YOU

FOR YOUR ATTENTION!

László Szabó

E-mail: [email protected]

Web: www.rekk.hu

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