Chapter 4: Renewable Generation and Security of Supply

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4

Renewable Generation and Securityof SupplyBoaz Moselle

A key question this book seeks to address iswhat justification exists for the promotion of

renewable generation over other forms of low-carbon generation—in other words, for policiesthat specifically promote renewable generationrather than a technology-neutral approach such asa carbon tax or cap-and-trade mechanism. Simpleeconomics suggests that the latter approach wouldbe more effective in achieving carbon reductionsat lowest cost, through competition between dif-ferent carbon abatement mechanisms and tech-nologies (e.g., renewable energy, nuclear, carboncapture and storage, reductions in non-generationsectors, energy efficiency).

In the European Union (EU), one of the mostcommon responses is that renewable generationmerits specific support because it enhances secu-rity of supply by reducing dependence onimported fuels. Concerns about import depend-ence refer particularly (though not exclusively) todependence on natural gas imports from Russiaand Algeria, which many observers view as poten-tially unreliable because of political instability and,in the case of Russia, a willingness to use energysupplies as a tool of geopolitics.1 This concern hasbeen greatly enhanced by interruptions in recentwinters to the flow of gas from Russia into theEU via Ukraine, as a result of disputes betweenRussia and Ukraine.

At the same time, a commonly voiced con-cern with renewable generation is that it willendanger security of supply by leading to exces-sive dependence on intermittent sources such aswind and solar power. To some commentators,this argues against the promotion of renewablegeneration. To others, it implies the need for sig-nificant changes in power market design to ensurethat sufficient backup capacity is available overvarious time frames.

This chapter therefore focuses on these twoquestions, examining to what extent security ofsupply concerns related to import dependencewarrant additional support for renewable genera-tion relative to other forms of low-carbon tech-nology, and to what extent security of supplyconcerns related to intermittency undermine thecase for supporting renewables at all or necessitatemajor changes in market design.

The focus is on the EU, where renewablesdeployment is most prominent on the policyagenda and is explicitly linked to security of sup-ply by policymakers. However, many of theconclusions—in particular, those relating tointermittency—can be applied to other jurisdic-tions as well.

The chapter begins by examining the issue ofimport dependence. It assesses the extent of theproblem and analyzes whether there are market or

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other failures that warrant intervention, and if so,whether the promotion of renewable generationis the most efficient form of intervention toaddress the problem. It then focuses on the prob-lems posed by intermittency, again assessing theproblem and analyzing the case for policy inter-vention and the most appropriate form that inter-vention might take.

EU Dependence onImported FuelsThe need to reduce dependence on importedfuels is used to justify a range of EU policies,including not only the promotion of renewables,but also the promotion of energy efficiency andthe provision by some national governments ofsubsidies to domestic coal production. In the pastdecade, these themes have been developed innumerous policy documents and pieces of legisla-tion, including the European Commission’s 2000Green Paper on security of supply, the 2002Regulation on State Aid in the coal sector, the2008 Energy Security and Solidarity Plan, and the2009 Renewables Directive (European Commis-sion 2000; Regulation 1407/2002; EuropeanCommission 2008a; Directive 2009/28/EC).

This section therefore presents evidence onthe extent of EU import dependence and the fac-tors that have most given rise to concern withrespect to power generation: the large and grow-ing dependence on Russian gas imports and theeffect of supply interruptions in recent winters. Italso assesses the extent to which import depend-

ence is a problem for the main fuels used forpower generation and whether the promotion ofrenewable generation is the most appropriatepolicy response to any such problem.

Current and Projected Levels of EUImport Dependence

As Table 4.1 illustrates, the EU imports a largeproportion of its primary energy sources, includ-ing the main fuels used for power generation. In2006, around 80% of electricity was generatedfrom coal (29%), gas (21%), and nuclear sources(30%) (European Commission 2008b).2

Imports are very significant for natural gas,which, as explained below, is the main source ofconcern among policy makers. The EU holds just1.6% of the world’s gas reserves and currentlyimports 58% of its natural gas demand, mainlyfrom four countries: Russia, Norway, Algeria, andNigeria.3 Gas supplies 24% of total energydemand and 21% of electricity generation (Euro-pean Commission 2008b). Gas import depend-ence is set to increase, as EU indigenous produc-tion is forecast to decline rapidly in the comingdecade, from 176 million tons of oil equivalent(Mtoe) in 2010 to 131 Mtoe in 2019 (IEA 2009).4

European Commission analysis forecasts netimports of natural gas increasing from 257 Mtoein 2005 (58% of total consumption) to 390 Mtoein 2020 (77% of total consumption) under abusiness-as-usual scenario, without taking intoaccount the impact of the new energy policyadopted in 2009 (see European Commission2008b, Annex 2).5

Table 4.1. EU import dependence, 2005

EU primary energydemand (Mtoe)

EU primaryproduction (Mtoe)

Net imports(Mtoe)

Import dependence(percentage)

Oil 666 133 533 80.0%

Natural gas 445 188 257 57.8%

Solid fuel 320 196 127 39.7%

Renewables 123 122 1 0.8%

Nuclear/uranium

257 8 249 97.0%

Sources: European Commission 2008b, 65; Euratom 2008Note: Mtoe = million tons of oil equivalent

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Winter Supply Interruptions

The heavy dependence of the EU on Russian gashas been brought home to the public andpolicymakers alike in recent years by interruptionsto the supply of Russian gas at the start of thecalendar year, arising from disputes between Rus-sia and Ukraine. A number of such disputes haveoccurred since the breakup of the Soviet Union asa result of continuing difficulties in agreeing onthe details of a new gas transit and supply regime,as well as deeper underlying differences.The mostserious of these interruptions occurred at thebeginning of 2006 and 2009. In January 2006, gassupplies to the EU were interrupted for one day;in January 2009, the interruption lasted 16 days(European Commission 2009a).

Ukraine’s Role as a Gas Consumerand Transit Country

Ukraine is both a significant consumer of gas anda key transit country. Its daily consumption inwinter is about 300 million cubic meters per day(mcm/day), and another 300 to 350 mcm/day ofgas passes through Ukraine to the EU (EuropeanCommission 2009a). Imports from Russia viaUkraine constitute around 80% of EU imports ofgas from Russia and about 20% of total gasdemand in the EU (European Commission2009a). The Ukrainian gas sector features below-cost pricing for domestic and government cus-tomers, and chronic underinvestment in its oiland gas sector, including the gas pipeline infra-structure (Chow and Elkind 2009).

Disputes between Ukraine and Russia overgas supplies, transit, and payment for gas havebeen a feature of this market since the early 1990s.Ukrainian inability to pay for the huge volumes ofgas contracted (despite the very low prices Russiagave Ukraine) led to high levels of debt andunpaid bills on a continuous basis for many years(Stern 2005). The disputes remained unresolveddespite a series of agreements covering the gasvolumes and prices, the price of gas transit acrossUkraine, and the level of debt owed to Gazpromby the Ukrainian gas company Naftokhaz, which

were characterized by low gas prices for Ukraineand low transit charges for delivery of Russian gasto Europe.6

In March 2005, Russia claimed that Ukrainewas not paying for gas and was diverting gasintended for transit to the EU (BBC 2006). OnJanuary 1, 2006, Russia retaliated by cutting offgas supplies passing through Ukrainian territory.7

Russia and Ukraine reached a preliminary agree-ment on January 4, and the supply was restored.The agreement provided for an increase in thenominal price of gas but did not provide anagreed pricing formula for future years or a tran-sition period to higher prices.The new agreementwas set to expire on December 31, 2008.

The 2009 crisis began on January 1, whenGazprom cut off suppliers (again, it stopped sup-plying gas for Ukrainian consumption while thesupply of gas that was theoretically to be transitedthrough for European consumption continued).Initially disruption of supply to the EU was onlyminor, but by January 7, all supplies from Russiato the EU were cut, and supplies were notresumed until January 20. This was the most seri-ous gas supply crisis ever to hit the EU, deprivingit of 20% of its total gas supply (European Com-mission 2009a). Within days of the supply disrup-tion, 12 countries were affected. They respondedby drawing on storage, importing additional LNGsupplies, and fuel-switching by the use of fuel oiland coal. Increased supplies were sourced fromRussia via Belarus and Turkey, as well as fromNorway and Libya. Gazprom is estimated to havelost sales of $2 billion (European Commission2009a).

Is Import Dependence Really a Problem?

Reliance on imported fuels is not, per se, a causefor concern. For policy intervention to be justi-fied on security-of-supply grounds, a number ofconditions must be satisfied, including that:

• The reliance on imports creates a genuinesecurity-of-supply risk. This is unlikely to bethe case for a fuel that can be imported easilyfrom a number of different countries that arepolitically stable, friendly, and geographicallydiverse.

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• There is good reason to think that the normalmarket response will not efficiently addressany security-of-supply risks and that policyintervention can be expected to do better.

The first of these conditions is assessed below foreach of the main fuels used for generation: coal,uranium, and natural gas. This is followed by adiscussion of the potential for market or otherfailures that might justify intervention.

Coal

Globally, coal is much more abundant than oil ornatural gas. There are proven coal reserves of 826billion tons of coal, with a proven reserve-to-production ratio of 122 years (BP 2009).8 Coalreserves are available in almost every country, withrecoverable reserves in around 70 countries. Sixcountries together account for about 80% of coalreserves, as shown in Figure 4.1.

Given that world coal reserves are spreadacross a politically and geographically diverse setof countries, large in number and including someof Europe’s closest political allies, the prospect ofsignificant supply interruption seems relativelyremote. It is therefore implausible to argue thatdependence on coal imports is a significant threatto EU security of supply.

Uranium

The earth has 5.5 million metric tons of identifieduranium resources, distributed widely around the

world, as Figure 4.2 illustrates. At the current rateof consumption, this would constitute about 100years’ worth of supply.

Uranium’s extraordinarily high energy densitymakes it practical to maintain large stockpiles(Euratom 2008), reducing the risks associatedwith a short-term interruption in supply.This fac-tor and the diverse range of supply sources suggestthat dependence on uranium imports is not a sig-nificant security-of-supply risk for Europe,despite the high level of import dependence, una-voidable given that Europe has less than 2% of theworld’s identified uranium resources (EuropeanCommission 2008b).

Gas

The picture for natural gas is very different thanthat for coal or uranium. Prima facie there is goodreason to consider that the EU’s import depend-ence does represent a potential threat to securityof supply. As noted earlier, the EU imports morethan half of its gas, of which a large proportioncomes from Algeria and Russia, and gas importsare predicted to increase in coming years (Euro-pean Commission 2007) as output continues todecline in the main EU producing nations.

Dependence on Algerian and Russian gas is ofconcern because of the absence or weakness ofdemocratic institutions and transparent govern-ance arrangements in these countries. Algeria hasexperienced recent civil war and ranks poorly oninternational league tables in terms of democracy

South Africa3.7%India 7.1%

Australia 9.2%

China 13.9%

Other 18.2%

United States 28.9%

Russian Federation19.0%

Figure 4.1. World coal reserves

Australia 23%

Kazakhstan15%

Russia 10%

South Africa8%

Canada 8%

United States6%

Niger 5%

Namibia 5%Brazil 5%

Figure 4.2. World uranium resources

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and civil rights (World Audit 2010). Russia alsohas a low rank, and the poor climate for businessinvestment raises questions as to whether newinvestment required to maintain and increase gassupply will be forthcoming. There is also a ques-tion as to how far the supply of gas is a commer-cial decision versus an instrument to exercise geo-political influence. This means that the extent towhich the supply of gas will respond to increaseddemand is unclear.

In addition, analysts have noted that Russianeeds to replace declining fields with new pro-duction from the Yamal Peninsula and offshorefields and to refurbish a large, aging high-pressurepipeline network (Stern 2005). As mentionedabove, there is also a need to invest in the Ukrain-ian pipeline network or construct new pipelinesto maintain transit capacity to Europe.

Underlying these concerns is the absence ofrealistic alternative sources of natural gas. Relativeto other fuels, the ability to bring gas from differ-ent sources is inherently limited by the morecostly, capital-intensive and inflexible means oftransportation required, in the form of long-distance pipelines or liquefied natural gas (LNG).Moreover, while gas remains abundant at globallevel, with world proven reserves as of 2007 stand-ing at some 177 trillion cubic meters (tcm),9

equivalent to some 60 years of consumption atcurrent rates (BP 2009), those reserves are con-centrated in a small number of countries, asshown in Figure 4.3. Of these, just three coun-tries, Russia, Iran, and Qatar, hold about 53% ofthe total.

There is an unknown potential for Europeandomestic gas supply to be boosted by unconven-tional or shale gas. In the United States, substan-tial discoveries of unconventional gas have beenmade.10 However, estimates of the potential forunconventional gas in Europe are lower. Onestudy estimates that Europe has 29 tcm, whereasthe United States has around 233 tcm of uncon-ventional gas (Holditch 2007).11 Moreover, theability to extract the resources will depend onenvironmental consents and the cost of extractingunconventional gas in Europe.

In conclusion, it seems that gas importdependence is a potentially significant security-

of-supply risk for the EU. It is possible that acombination of LNG imports and the arrival ofunconventional gas (either in Europe or in theUnited States but “liberating” LNG flows thatcould come to the EU) will mitigate the problem.It is also possible that the risk is overestimatedbecause of the mutual dependence between theEU and its suppliers: revenue from gas sales is ofgreat importance to both Russia and Algeria, andindeed, they have been known to express concernabout “security of demand” from the EU, mirror-ing the EU’s concerns about security of supply(see, e.g.,Yenikeyeff 2006). Neither of these pos-sibilities can be viewed as certain, however, andthe risk is therefore a real one, albeit difficult toassess or quantify.

The problem is particularly acute for easternEurope. Estonia, Latvia, Lithuania, Bulgaria,Slovakia, and Finland are completely dependenton Russia for gas imports, while Greece, Hun-gary, and Austria are more than 80% dependent(European Commission 2008b). Among the sevennew eastern European member states, depend-ence on Russian gas imports averages about 77%(European Commission 2009a). Eastern Euro-pean commentators point to the experience inLithuania—where oil supplies from Russia to theMazeikiu refinery were halted because, it isclaimed, Russia objected to its sale to a Polishrefiner, PKN Orlen—as a sign of the potentialrisks they face (Geropoulos 2007). The politicaltemperature is clearly at its highest with regard toeastern Europe, given Russian resentment at itsloss of influence there since the breakup of theSoviet Union.

Algeria 2.4%

Russia 23.4%

Iran 16.0%Qatar 13.8%

Turkmenistan4.3%

Saudi Arabia4.10%

United States3.6%

Nigeria 2.8%United Arab

Emirates 3.5%

Venezuela 2.6%

Figure 4.3. World gas reserves: top 10 countries



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The Case for Policy Intervention

Gas import dependence is therefore an under-standable source of concern for Europeanpolicymakers. However, it does not automaticallyfollow that policy intervention is warranted. Mar-kets already provide strong incentives for marketparticipants to appropriately ensure against unreli-able supplies. Contracts between suppliers andconsumers generally oblige suppliers to deliverenergy, and suppliers that choose to contract withless reliable sources (in other words, are too relianton gas from Russia and Algeria) will face what-ever penalties their contracts contain. These pen-alties are negotiated on a bilateral basis and there-fore represent accurately the costs to consumers ofloss of supply, or the trade-offs consumers arewilling to make between price and security ofsupply (for example, a consumer may be willingto sign a contract that has no penalties in the eventof supply failure, such as through the operation ofa force majeure clause, but in that case the supplieraccepts a lower price in return). A similar logicapplies for consumers that choose to rely onshort-term contracts or spot markets: they acceptthe higher level of risk in return for greater flex-ibility or an expected lower price.

The key question therefore is whether theseincentives are sufficient to provide an efficient12

level of security—or, more accurately, whetherthey provide a more efficient level of security thancan be expected from policy intervention, bearingin mind that real-world policy interventions andreal-world markets are both inherently imperfectcompared to any theoretical ideal.

In that context, a number of problems couldundermine the ability of these market-basedincentives to give an efficient outcome. Theseinclude some market failures that typically providethe theoretical justification for policy interven-tions, but also other issues that are arguably moreimportant from both normative and positive per-spectives (i.e., they should be taken more seri-ously, and they have a bigger impact on policyoutcomes).

First, it may be that consumers (individualsand firms) are not good at making judgments ofthis kind, and that governments could make better

judgments and use them to implement betterpolicies. A case may therefore exist for interven-tion on essentially paternalistic grounds.

The second problem is the issue of politicallymotivated supply interruptions. Arguably, the riskof supply interruption by a hostile state actor isgreater the more disruptive the effect of the inter-ruption.13 Thus, although ensuring against lowrainfall in a hydro-dominated power system doesnot make rain more likely to fall, ensuring againstgas supply interruptions in the EU actuallyreduces the threat of interruption, because if suchinterruptions are relatively painless, then a hostilestate gets little strategic benefit from interruptingor threatening to interrupt supplies. If so, thenindividual investments in supply security (e.g.,booking more gas storage or installing dual fuelcapability at gas-fired power stations) create apositive externality, and as with any such external-ity, there will be an incentive to free ride: con-sumers will spend less than is socially optimal,because they face all the costs but only a small partof the benefits (the so-called “tragedy of the com-mons”). Moving down the chain, it follows thatsuppliers will not face appropriate incentives toensure security, and the market will under-provide security.

Third, experience shows that in conditions ofenergy scarcity, regulatory or political interven-tion will almost certainly prevent the market fromfunctioning efficiently.The prospect of such inter-vention will therefore undermine investmentincentives. For example, a private investor mightconsider investing in a gas storage facility even ifthe market already appears well supplied with gasstorage, on the basis that it would offer a very highreturn in the low-probability event that a majorgas shortage leads to prolonged spikes in spot gasprices. Experience in Great Britain suggests thatthese spikes could involve prices many times ashigh as under normal conditions,14 implyingspectacular returns to anyone holding gas in stor-age.

In reality, however, the investor will be awarethat many regulators or governments havearrangements in place that suspend the pricemechanism in such emergencies. Such an investorwill also be aware that even if those mechanisms

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are not yet in place, they could be introduced atshort notice, and moreover, in the absence ofprice controls, they would be likely to suffer ret-ribution if they were judged to have profiteered or“price-gouged” during a crisis.15

Conversely, market participants will also beaware that emergency arrangements typicallyinvolve the imposition of “shared pain” rules,which undermine private incentives to ensureagainst scarcity of supply. For example, scarce gassupplies might be allocated to all suppliers on apro rata basis related to the size of their customerload. Such an outcome would do nothing toreward the supplier who had purchased gas from amore reliable source.

Examples of these two tendencies—nonreliance on the price mechanism and a“shared pain” approach—can be found in the gas“emergency cash-out” arrangements in GreatBritain, which suspend the market-based deter-mination of prices for the duration of the emer-gency (Ofgem 2006). The European Commis-sion’s proposed new legislation on gas security ofsupply provides for a variety of non-market-basedmeasures including compulsory demand reduc-tion and forced fuel switching (European Com-mission 2009c).

A fourth problem is a more conventional mar-ket failure: because security of supply is to someextent a public good, markets will tend toundersupply it.16 Specifically, the issue arises fornatural gas and electricity because they are trans-mitted via networks used by many consumers,and most individual consumers cannot beremotely interrupted when supplies are tight.17

Domestic and commercial consumers generallydo not have real-time metering and are notexposed to higher spot prices when supplies arescarce. There is therefore no incentive for indi-vidual consumers to ensure against supply risks,for example by paying more to purchase from asupplier that has more gas in storage.18

In particular, with electricity the absence ofremote disconnection means that in the event of ablackout, all consumers will lose supply in an area,even though in general it would be possible to seta price—if all consumers were exposed to real-time prices—that would allow demand to match

supply. An individual consumer therefore has noincentive to purchase energy from more reliablesources, as the higher levels of security are spreadacross all consumers. Purchasing from a more reli-able source creates a positive externality butalmost no private benefit (see Joskow 2007).Again, this gives rise to free riding andunderprovision of security by the market.

Assessment

How material these problems are for security ofsupply is a difficult empirical question, both inabsolute terms and because assessment should beagainst a counterfactual that is based on a realisticassessment of the likely intervention that thepolicy process would give rise to. Nonetheless,some simple observations are in order.

First, the paternalistic argument that consum-ers are unlikely to make wise decisions is at leastplausible. Extensive research in psychology andbehavioral economics shows that human beingshave particular difficulty making decisions involv-ing low-probability events that are well outsidetheir normal range of experience (Tversky andKahneman 1992). However, the claim that gov-ernment intervention will lead to better outcomesis more contentious (apart from any other consid-eration, governments are made up of humanbeings subject to the same biases as others).

Second, the argument concerning politicallymotivated interruptions is also at least plausible.The key question for EU policymakers to answeris how likely Russia is to interrupt gas supplies forpolitical reasons. On the one hand, instances havealready occurred where Russia has cut off oil sup-plies to an EU member state for essentially politi-cal reasons. On the other hand, as noted earlier,profits from Gazprom are of great importance toRussia and members of its political elite, creatinga relationship of mutual dependence betweenRussia and the EU.

Third, the combination of regulatory andmarket failures described above seems to implythat all but the very largest consumers are cut offfrom any of the upside from investing in enhancedsecurity of supply.



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Finally, whatever the objective merits, it is alsoclear that governments are increasingly set onintervention in this area, at EU and national lev-els. In the context of this book, it is thereforeappropriate to ask whether, assuming thatpolicymakers are intent on intervention, the pro-motion of renewable generation is the best formof intervention to address the EU’s concernsabout import dependence and its impact on secu-rity of supply.

Is Promotion of Renewablesthe Right Intervention?

It is natural to expect that the promotion ofrenewable generation will reduce gas consump-tion and hence gas import dependence, by substi-tuting away from gas-fired generation. Analysiscarried out for the European Commission is con-sistent with this logic. Table 4.2 shows the pre-dicted effects of the EU’s new 20-20-20 energypolicy adopted in 2008, whose main componentsare commitments to achieve several goals by theyear 2020: reduce demand, with an indicative tar-get of 20% reduction in energy consumption rela-tive to business as usual; increase the use of renew-

able energy, with a binding target of 20% of finalenergy consumption; and reduce greenhouse gasemissions, with a 20% reduction relative to 1990levels.

As the table shows, the combination of meas-ures is predicted to reduce gas imports by about aquarter, relative to business-as-usual. However,this analysis also raises a number of questions.

First, it is clear that much of the reduction ingas consumption reflects the impact of energyefficiency measures that reduce total energy con-sumption, rather than the displacement of gas-fired generation by renewables. Indeed, one cansee from the table (see the “Impact of new policy”rows), that the predicted reduction in gas con-sumption induced by the new energy policy (sec-ond column) is much larger than the inducedincrease in renewable energy (last column).

Second, although the analysis does not allowone to separate out these two effects, it is likelythat the impact of renewables on gas-firedgeneration is materially affected by the need forcontinued use of gas to provide flexible backupfor intermittent renewables. Recent analysis byCapros et al. (2008) suggests that the new energypolicy will reduce coal-fired generation signifi-

Table 4.2. Energy consumption and import dependence by 2020

Gasimports(Mtoe)

Gas con-sumption(Mtoe)

Gas imports/consumption(%)

Solidsimports(Mtoe)

Solids con-sumption(Mtoe)

Solids imports/consumption(%)

Renewableenergyproduction(Mtoe)

2005 257 445 57.8% 127 320 39.7% 122

2020 (oil $61/bbl)

Business as usual 390 505 77.2% 200 342 58.5% 193

New policy(20-20-20)

291 399 72.9% 108 216 50.0% 247

Impact of newpolicy

–99 –106 –4.3% –92 –126 –8.5% 54

2020 (oil $100/bbl)

Business as usual 330 443 74.5% 194 340 57.1% 213

New policy(20-20-20)

245 345 71.0% 124 253 49.0% 250

Impact of newpolicy

–85 –98 –3.5% –70 –87 –8.0% 37

Source: European Commission 2008b, 65

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cantly more than gas-fired, both because of theimpact of carbon prices and because renewablepower requires extensive support by flexiblereserve power, supplied mainly by gas units.Indeed, the analysis in Table 4.2 also shows theimpact of the new policy on coal (solids) to beequal to or larger than the impact on gas.

Third, it is unclear which gas sources are mostlikely to be affected by the reduction in gasimports. If the main effect of the policy is to dis-place imports of LNG from relatively friendlysources, then the effect on security of supply issmall. However, this is likely to be the case. LNGis often viewed as the marginal source of gas,because of the relatively high cost of bringingLNG to the EU, and also because Algerian andRussian producers are to some extent captive sup-pliers, given the high cost of attempting to diver-sify away from their European customer base.19

Finally, the analysis described above suffersfrom a more fundamental flaw, in that thebusiness-as-usual counterfactual is arguably some-thing of a straw man. A more interesting counter-factual would be a scenario with a policy thatinvolves the promotion of all forms of low-carbonenergy on a technology-neutral basis: a carbon taxor cap-and-trade scheme (in this context, the EUETS with a tighter cap) and no policies aimedspecifically at promoting the large-scale deploy-ment of renewables.20

The effect of such a policy would be to pro-mote some combination of energy efficiencymeasures, nuclear power, coal-fired generationwith carbon capture and storage (CCS), andrenewables. The noteworthy point here is that ofthose four classes of technology, renewablegeneration—at least in the forms of wind, solar, orwave power—may well be the least suited toenhancing security of supply, because as notedearlier many renewable generation technologiesare intermittent and will likely be associated withcontinued extensive use of gas-fired generation as“backup”.21 It is therefore likely that they will dis-place less gas-fired output than equivalentamounts of nuclear power or coal-fired genera-tion (or investments in energy efficiency).Although increased use of nuclear power or coal-fired generation would probably entail increased

imports of uranium or coal, I have argued abovethat no significant security-of-supply issue shouldarise from such imports.

In conclusion, therefore, a policy that pro-motes low-carbon generation in general wouldprobably be more effective in addressing gasimport dependency and enhancing security ofsupply than the current policies that specificallypromote renewable generation.

IntermittencySome of the most prominent forms of renewablegeneration—in particular wind but also solar andwave power—are variable in output, with thelevel of production determined by exogenous fac-tors such as wind speed, and also unpredictable toa lesser or greater degree. “Intermittency” is theterm generally used to refer to this combinationof variability and relative unpredictability.

Two concerns arise from the intermittentnature of renewable generation. A short-run con-cern is the impact on “system balancing”—ensuring that supply and demand of power arematched on a second-by-second basis. A long-runconcern is whether a liberalized power market canbe relied on to produce enough investment tomeet the much greater need for backupgeneration—flexible capacity that will be usedprimarily when demand is high and wind outputis low, and whose overall utilization will thereforebe comparatively low.

System Balancing

The basic physics of electric power systemsrequires that production and consumption22 arematched on a second-by-second basis. In anypower system, a system operator (SO) is responsi-ble for continuously ensuring this balancing. TheSO has short-term control of certain generatingassets, which it uses close to and in real time tocorrect any difference between the amounts ofelectricity supplied to the system and the amountbeing consumed.

Small deviations from perfect balance takeplace continuously and result in fluctuations in the



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frequency of AC power. Certain generating unitsare configured to react automatically and instanta-neously to these deviations. This so-called “pri-mary reserve” acts as a first line of defense againstimbalances. In case of larger deviations, after theimmediate response of the primary reserve, gen-erators providing the so-called “secondaryreserve” increase or reduce injections within sec-onds, following the instructions of a centraldevice in a process known as automatic genera-tion control. Secondary reserve is a scarceresource, because it is provided by units with spe-cific technical capabilities. As soon as possible,therefore, typically with a lag of minutes, injec-tions by units providing so called “tertiaryreserve” are increased or decreased, following theinstructions of the system operator, and secondaryreserve capacity is restored to the pre-deviationlevel.

In a liberalized market, the SO generally con-tracts with generators, and sometimes large con-sumers, to procure these services.23 The nature ofthe reserve contracts varies, but for the purpose ofthis chapter, it is sufficient to note that the SO willpay plants to be available to provide balancingservices, as well as for the provision of the serviceswhen called on.

Clearly the task of system balancing becomesmore difficult the greater the changes in the levelsof output, especially if those changes areunpredicted or occur with only very shortnotice.24 The prospect of high levels of penetra-tion of intermittent generation therefore gives riseto concern that the job of system balancing willbecome more costly and less certain of success:the SO will have to purchase more balancingservices, and if it fails to purchase enough, it couldfind itself overwhelmed by unexpectedly volatileshifts in output from intermittent generation,endangering security of supply.25

System Stability Implications

From a system stability perspective (i.e., in termsof the risk of supply disruptions), these concernsare probably exaggerated. The more technicalaspects of the system-balancing challenges posedby intermittent generation are addressed in Chap-

ter 2 and references therein. In brief, it is clearthat significant advances have been made in theability to forecast wind speeds and the outputfrom wind generation, such that while high levelsof penetration of wind generation may add to thecost of system operation, they need not under-mine system stability. Current evidence suggeststhis is the case at least for penetration up to 20%(i.e., with up to 20% of electric power being gen-erated by wind).

The issue is at present less clear for otherintermittent sources, and in climates with cloudyskies, solar photovoltaic (PV) power may presentgreater challenges, as cloud cover means the vari-ability in output can occur over seconds ratherthan hours (although geographic dispersion willmitigate this to some extent). Nonetheless, Boyleargues in Chapter 2 that they can probably bedealt with in similar fashion (for more details, seealso Boyle 2007).

The findings of a very comprehensive surveypaper by Gross et al. are consistent with this con-clusion: “none of the 200+ studies [we have]reviewed suggest that introducing significant lev-els of intermittent renewable energy generationon to the British electricity system must lead toreduced reliability of electricity supply” (2006,iv).

However, these conclusions do assume thatadvances in forecasting will be effectively incor-porated into system operation procedures. Chap-ter 11 notes the example ofTexas, where a much-discussed emergency occurred in 2008 followinga rapid reduction in wind output. The reductionhad been predicted by commercially availableforecasts, but the SO had not purchased thoseforecasts.

Cost Implications

The same survey by Gross et al. (2006) alsoanalyzes the cost implications of intermittency,looking at how much additional reserve capacityis likely to be required and how much thisis likely to cost. The authors conclude that “forpenetrations of intermittent renewables up to 20%of electricity supply, additional system balancingreserves due to short term (hourly) fluctuations in

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wind generation amount to about 5–10% ofinstalled wind capacity. Globally, most studies esti-mate that the associated costs are less than£5/MWh of intermittent output, in some casessubstantially less.” Of course, an additional cost of£5 ($7.50) per MWh is a material issue,26 but thatforms part of a larger set of questions about thecost-effectiveness of renewable generation and isnot really a security-of-supply issue.

All of this analysis assumes, however, that thenecessary reserve will be there for the SO to callon. This naturally leads back to the question ofinvestment incentives.

Investment in Backup Generation

Given the difficulty of storing electricity and thelimited potential for shifting demand across time,the use of intermittent generation means that alarge set of backup generation is required toensure that demand can be met at times when theintermittent sources have low availability becauseof a lack of wind, sunshine, and so on. This needfor spare capacity is not unique to systems withintermittent generation: no type of generation isavailable with 100% certainty, and conventionalunits also close down for planned and unplannedmaintenance. Nevertheless, large-scale penetra-tion of intermittent generation gives rise to amuch higher requirement.

The size of this requirement will clearlydepend on the level of penetration of intermittentgeneration, the technologies involved, the specificelectricity system, relevant physical features (e.g.,the geographic and temporal distribution ofwind), and many other factors. This has been theobject of many engineering studies. For the pur-pose of synthesis, it is convenient to summarizeany such study in terms of its estimated “capacitycredit,” which measures how much conventionalthermal generation is displaced by a unit of inter-mittent generation. So, for example, a capacitycredit of 20% means that adding 100 megawatts(MW) of intermittent generation would allowone to retire 20 MW of conventional generationwhile maintaining the same overall level of systemsecurity.

A comprehensive survey of these studies canbe found in Gross et al. (2006), whose summaryof the estimates of the capacity credit from 19 ofthe studies is shown in Figure 4.4.

Clearly a capacity credit in the range impliedby these studies would add significantly to thetotal capital costs of the system. With regard tosecurity of supply, however, the concern is that aliberalized market will not have sufficient invest-ment to provide the required level of generationcapacity.

40

35

30

25

20

15

10

5

0 5 10 15 20 25 30 35 40Intermittent generation penetration level (% of total system energy)

Cap

acity

cre

dit (

% o

f ins

talle

din

term

itten

t gen

erat

ion

capa

city

)

160

249

244250

24674

241243 238

83 204

248

242

247

515

79240

121 83

Source: Gross et al. 2006, 43

Note: the shaded area refers to UK studies

Figure 4.4. Capacity credit values



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Starting Point: Excess Capacity

In the short run, there may be little issue with theavailability of reserves and peaking generationmore generally, because as new intermittentcapacity is added to the network, the existingconventional capacity remains available. Althoughgenerators could choose to retire this capacity, theincentives to do so are relatively weak, because theinvestment is already sunk and profits from opera-tion need cover only annual fixed costs (such astransmission charges or taxes levied annually) tomake it worth keeping the plant open.

Experience to date in Germany and Spain isconsistent with these arguments. Sensfuß et al.(2008) note that for Germany, “the developmentof renewable electricity generation has had nomajor impact on investments into new generationcapacity up to the year 2006. One reason is thatthe period after the liberalization of the electricitymarket was characterized by excess capacity and asubsequent decommissioning of power plants,”while “most of the decommissioned capacity wasdecommissioned for economic reasons such aslow efficiency of the plant, need for repairs orinefficient use of expensive fuels such as oil andgas.” Chapter 15 in this book describes the evolu-tion of Spanish capacity, characterized by highlevels of excess capacity due in large part to therapid expansion of renewable generation, and asyet without any consequent retirement ormothballing of plants.

In some markets, however, this initial over-hang of excess capacity might erode relativelyquickly, for a number of reasons:

• If there is too much capacity, then pricesmight fall to a level that induces plantmothballing or early retirement. Chapter 15indicates that this situation may be develop-ing in Spain.

• Generators with zonal or regional marketpower might have an incentive to retire someof these plants so as to raise peak prices andthe price of reserve.

• Incentives for early retirement may be exac-erbated by the costs of refurbishments,including those necessary to meet the

requirements of new environmental legisla-tion. So, for example, in the EU, the cost ofadding “scrubbers” to coal-fired units by2015, to comply with the Large CombustionPlant Directive, would have to be recoveredthrough future profits, and this could be dif-ficult if utilization is expected to be very low.

Investment Incentives in Energy-Only Markets

In the long run, however, there is a real questionas to whether energy markets will deliver theneeded investment. This question falls into awider debate as to the ability of liberalized energymarkets to provide sufficient levels of investment.The issue has been extensively discussed in aca-demic and policy circles for some years (Cramtonand Stoft 2005; Stoft 2002). This chapter can dono more than briefly sketch out the main posi-tions taken.

The issue relates specifically to “energy-only”markets, where generators’ only sources of rev-enue are the sale of electricity and the provision ofreserves, as described earlier in this chapter.27

Theoretical models suggest that although genera-tors in a competitive energy-only power marketcan earn sufficient operating profits to cover theircost of capital (i.e., the variable profit from sellingpower can provide a sufficient return on invest-ment), the requirements for that to happen arerather stringent and may not be met in practice inmost real-world power markets.

The problem arises because if such a market iscompetitive, then the spot price of electricity willapproximate the marginal cost of the most costlygenerator being called on—the “system marginalcost”—at any point in time except hours whendemand (strictly speaking, demand for energy andoperating reserves) exceeds available capacity. Inthose hours, it is possible for price to exceed sys-tem marginal cost, for example if it is set by price-responsive demand. The difference between priceand system marginal cost is referred to as a “scar-city rent”.

For peaking plants (the plants with the highestmarginal cost on the system), these scarcity rentsare the only way to create a return on capital. It is

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possible to show that at least in theory, scarcityrents are also necessary for plants with lower mar-ginal cost, if they are to earn a sufficient return tocover their sunk costs. It is therefore necessarythat prices in those hours be sufficiently high toprovide an appropriate return on capital, i.e., onethat will provide the right incentive for new gen-eration in peaking plants.

Prices at times of scarcity should generally beset either by demand-side response or by actionsof the system operator in its procurement of oper-ating reserves (Hogan 2005). If those mechanismswork appropriately, then it can be shown that intheory, the level of scarcity rents will be efficient,in the sense of ensuring that generators earn theircost of capital and have appropriate incentives fornew investment.

However, this outcome depends on the pres-ence of flexible scarcity pricing mechanisms andthe absence of market or regulatory imperfectionsthat limit demand-side response or distort systemoperator decisions. In practice, such imperfectionsare endemic:

• The development of mechanisms to allowdemand-side participation has been generallyrather slow in most electricity markets, limit-ing the potential for demand-side response toset prices at times of scarcity.

• The protocols followed by many systemoperators at times of scarcity do not lead tothe appropriate level of scarcity pricing.28

• The potential for prices to depart from gen-erators’ marginal costs at times of scarcity isoften limited by administrative measures con-straining prices, to mitigate market power orfor other reasons. For example, many cen-trally organized markets (“pools”) haveexplicit price caps in place,29 and some limitthe offer prices as a part of the ex ante marketpower mitigation process. In many markets,regulators monitor prices and perform expost investigations of price spikes, with achilling effect on scarcity pricing.

It is therefore argued that in practice, imperfec-tions in energy-only markets will lead to

underinvestment, particularly in peaking capacity.This issue is commonly referred to as the “missingmoney” problem.

On the other hand, proponents of a moremarket-oriented approach argue or assert that inthe absence of price caps, the market can in prac-tice be expected to provide sufficient capacity,theoretical models notwithstanding. In GreatBritain, this view underlies the existing marketdesign, the so-called New Electricity TradingArrangements (NETA), which does not have anyprice caps in place. Practical experience in thedecade since NETA was put in place is somewhatambiguous. Despite many claims of imminentcrisis, the lights have stayed on. However, this hasbeen achieved with very little new investment ingeneration, indicating that the system may haveenjoyed an overhang of excess capacity from thepreceding decade.

In sum, there are theoretical reasons to believethat in the absence of some form of capacitymechanism, a competitive energy-only marketwithout efficient scarcity pricing mechanisms mayunderdeliver on investment in reserve capacity(i.e., in flexible units that will experience lowaverage utilization). Although the materiality ofthose concerns is open to debate, it is clear thatany problems would be exacerbated considerablyby the much greater need for such units thatcomes with high levels of penetration by renew-able generation. Moreover, in practice, concernsabout underinvestment are likely to be wellfounded because of the combination of explicitprice caps and the implicit threat or shadow offuture price regulation in most or all liberalizedmarkets. Even in Great Britain, which untilrecently was viewed as the paragon of energymarket liberalization, reregulation is now beingopenly discussed (see, e.g., Ofgem 2010).

The example of Great Britain also illustrates adeeper problem with investment incentives in thecontext of current energy policy, of which policytoward renewables forms only a part. The natureof the policy response to climate change, particu-larly in the EU, means that all forms of investmentin new generation capacity are heavily influencedby government intervention. Thus renewables,nuclear, and CCS each attract technology-specific



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forms of support, whereas environmental regula-tion in the form of the EU Emissions TradingScheme as well as non-climate-related measures30

affect the relative and absolute returns on differenttechnologies. Investments are thus arguably sub-ject to very high levels of political risk, and it is byno means clear that markets are able to assess andbear these risks.

In conclusion, therefore, the possibility thatcompetitive liberalized markets will struggle toprovide sufficient peaking capacity to accommo-date large amounts of intermittent generation is avery real one, for a variety of reasons. The biggestfactor undermining investment incentives is thehigh level of uncertainty and political risk, whichaffects all generation investments to a lesser orgreater degree, except for projects that can rely onexplicit and iron-clad government guarantees.

The design of wholesale power markets mayneed to change to reflect these concerns, by pro-viding stronger and more reliable incentives forinvestment, such as in the form of capacity pay-ments or similar mechanisms. Capacity paymentsare widely used in the United States and have hadsome application in Europe (in Spain, for exam-ple, as well as in England and Wales in the 1990s)(Perekhodtsev and Blumsack 2009). These arepayments to generators that are additional to therevenue they receive from the sale of energy. Dif-ferent countries have taken alternative approachestoward implementing such a mechanism. InEurope, the approach generally has been for thetransmission system operator (TSO) to make pay-ments to generation on the basis of its availabilityto generate, recovering those payments as a sur-charge on transmission tariffs. In the UnitedStates, regulators have tended to place obligationson demand-side participants to contract forwardfor capacity via organized “capacity markets”.Thelevel of the obligation then determines thedemand for capacity in those markets, and thatcombines with supply to determine a capacityprice. In either case, the details of design (includ-ing, for example, determining the appropriatelevel at which to place the price, or the quantityassociated with an obligation) are extensive andpotentially challenging (Harvey 2005). For thepurposes of this chapter, it is sufficient to note that

high penetration of intermittent generationmeans that a number of EU regulators are likely tobe addressing those challenges in the comingyears.

Finally I note one caveat: the picture may besomewhat different in countries where generationinvestment decisions are more naturally influ-enced by informal ties between industry and gov-ernment. For example, in Germany neededinvestments may take place as the outcome ofinformal (or at least non-contractual) agreementsbetween government and industry, rather thanbeing either a pure market outcome or oneinduced by regulatory mechanisms such as cap-acity payments.

ConclusionsDependence on imported gas gives rise to real,albeit hard-to-quantify, security-of-supply issuesfor the EU, because of geopolitical concernsaround both Russia and Algeria. Those problemsare particularly acute for many of the new EUmember states in eastern Europe, where depend-ence is highest and relations with Russia are moststrained. Dependence on imported coal and ura-nium does not give rise to such concerns, becauseof the number, diversity, and friendliness ofpotential sources.

Market outcomes may not provide an efficientlevel of protection against the security-of-supplyrisks associated with gas import dependence,because of a variety of market and regulatory fail-ures. However, the promotion of renewable gen-eration is not the best policy response. Increasedpromotion of all forms of low-carbon energy(including energy efficiency) would appear to beat least as effective in enhancing security of supply,at lower overall cost.

Security-of-supply concerns related to inter-mittency and its impact on system operation andgrid stability are exaggerated. In particular, recentimprovements in wind forecasting mean that evenrather high levels of penetration for wind genera-tion can safely be accommodated by an efficientlyrun and appropriately regulated system operator.The impact is one of cost rather than a threat to

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stability. High levels of penetration of intermittentgeneration do, however, raise real questions aboutmarket design and security of supply—in particu-lar, whether existing energy-only markets willprovide strong enough incentives for the invest-ment needed in peaking generation to cope withperiods where high demand coincides with lowintermittent output.

In principle, market mechanisms are sufficientto ensure the right levels of investment. In prac-tice, however, the absence in most EU powermarkets of appropriate mechanisms for scarcitypricing, combined with very high levels of regu-latory uncertainty and risk, suggests that theremay be a need for some form of enhanced incen-tive such as capacity payments that reward genera-tion for availability, except in markets where thelevel of investment is strongly influenced byimplicit regulation and consensus-based decision-making involving industry, government, andother stakeholders.

AcknowledgmentsThanks to Luis Agosti, David Black, GodfreyBoyle, Toby Brown, Guido Cervigni, DmitriPerekhodtsev, and Dick Schmalensee for manyhelpful suggestions and input. All errors and omis-sions are mine.

Notes

1. A parallel argument is made in the EU and theUnited States about the benefit of renewable fuelsin reducing the risks arising from dependence onimported oil for transportation. The focus of thisbook, however, is on renewable generation.

2. The bulk of the remainder was from renewables(14%).

3. Russia provides 42% of the EU’s gas imports,Norway 24%, Algeria 18%, and Nigeria 5%.

4. A more recent forecast is even more dramatic,showing a fall from 166 Mtoe in 2010 to113 Mtoe in 2019 (ENTSOG 2009); all figures

converted from billion cubic meters (bcm) toMtoe using 1 bcm = 0.90 Mtoe (www.bp.com/conversionfactors.jsp).

5. The 390 Mtoe figure assumes an oil price of $61per barrel (bbl). A second business-as-usual sce-nario has an oil price of $100/bbl and forecasts netimports of 330 Mtoe (75% of total consumption).

6. Some observers note that the actual price paid byUkraine is higher than the contracted pricebecause of an agreement due to arrangements toprovide free gas in exchange for delivery of gasinto Ukraine. However, even allowing for theadditional cost, the price remains well belowEuropean levels. See Chow and Elkind 2009.

7. In principle, Gazprom did not cut off supplies tothe EU; it reduced the level of flows by theamount of gas that previously would have beenintended for Ukraine, while continuing to flowgas for transit across Ukraine to the EU. However,it was easily predictable that Ukraine would con-tinue to consume gas, with the effect of reducingtransit flows significantly.

8. Corresponding figures are 42 years for oil and 60years for gas (BP 2009).

9. The corresponding figure for 1987 was 70 tcm.10. The U.S. Energy Information Agency (EIA 2008)

has reported increases in the level of proven gasreserves as a result of the development of uncon-ventional gas resources. The Potential Gas Com-mittee (2009) reported an increase in reserves,(including proven, possible and speculativereserves) in 2008 to the highest level in its 44-yearhistory.

11. Figures converted from trillion cubic feet (tcf) totcm using 1 tcm = 35.3 tcf (www.bp.com/conversionfactors.jsp).

12. Here “efficiency” refers to the trade-off betweencost and risk. Arrangements are efficient if theadditional cost of investing to increase securityoutweighs the additional benefit (and the savingfrom spending less does not justify the increasedlevel of risk).

13. So either supply interruptions become moreprobable/frequent, or society pays a higher priceto avoid them, in the form, for example, of highernational security costs or unwanted changes inforeign policy to appease the potential interrupter.This argument has been used in the past to justifythe requirements for strategic oil storage.

14. For example, in 2005, a combination of factorstemporarily reducing supplies to the United King-



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dom led to price spikes of up to 500% betweenFebruary 23 and March 11 (Trade and IndustryCommittee 2005).

15. Some U.S. states even have legislation specificallyprohibiting price-gouging. For example, FloridaStatute 501.160 states that during a state of emer-gency, it is unlawful to sell “essential commodi-ties” for an amount that grossly exceeds the aver-age price for such commodities during the pre-ceding 30 days.

16. A public good is a good that is non-rivalrous andnon-excludable. This means that consumption ofthe good by one individual does not reduce avail-ability of the good for consumption by others, andthat no one can be effectively excluded from usingthe good.

17. In other words, it is not possible for the systemoperator to cut off supply to individual consumers,other than very large consumers (who often have“interruptible supply” contracts that allow forsuch actions).

18. Given metering technologies currently in place, itis not possible to create such an incentive. Forexample, gas meters typically record only cumula-tive consumption, and unless they were read on adaily basis—which would clearly be impossiblycostly—there would be no way to know howmuch has been consumed by an individual cus-tomer on a day when supplies were particularlyscarce.

19. This is a general analysis; individual import con-tracts can vary significantly.

20. Another interesting counterfactual, and one thatin principle should be the starting point for thedesign of any intervention, would be to use taxa-tion to correct for any security-of-supply exter-nalities. In theory, this might lead to different lev-els of taxation applied to gas from differentsources, with Russian gas probably incurring thehighest tax. In practice, this could create difficul-ties with World Trade Organization (WTO) rules,and it would also raise difficult questions about thequantitative assessment of the size of the external-ity. A more realistic approach would be to tax allgas. However, this would also be politically diffi-cult because of the aversion of key member states(notably the United Kingdom) to EU-level taxes,and because the United Kingdom and the Neth-erlands are both major gas producers.

21. This is not to assert that intermittency per se is asecurity-of-supply risk (see next section), butmerely to observe that all else being equal, inter-

mittent generation will displace less gas-fired gen-eration than will non-intermittent. Clearly thiswould not apply to hydro generation or tobiomass. The potential for new hydro is relativelylimited, however, and intermittent sources (in par-ticular wind) are forecast to be the dominant formof new installed renewable generation capacity inthe coming decade at least.

22. Including consumption in the form of losses aris-ing from transmission and distribution.

23. With the exception of primary reserve, whoseprovision is typically an obligation placed byadministrative means on generators connected tothe system.

24. An important distinction must be made herebetween wind and solar photovoltaic (PV) power.Wind variability occurs over a matter of hours andis relatively amenable to forecasting. Except in cli-mates with cloudless skies, solar PV can vary overseconds and is therefore more difficult to forecast.

25. This account has greatly simplified the complexi-ties of running an electric power system. As well asthe need to match total supply with total demand,the system has a number of other technicalrequirements, including so-called “voltage regula-tion”, and the need to respect transmission con-straints. The latter task in particular is likely tobecome more costly and challenging with theaddition of large amounts of new intermittentgeneration, as discussed in a number of the casestudy chapters in this book.

26. As of February 2010, this is about €5.70 ($7.75)per MWh.

27. This is in contrast to markets where generatorsalso receive payments for being available to gener-ate, via “capacity payment” mechanisms or cap-acity requirements and auctions, as discussed laterin this chapter.

28. Mechanisms allowing the scarcity of operatingreserves to set the price in the energy market arenot in place in most EU markets. Such mecha-nisms require an advanced level of integrationbetween the markets for energy and the marketsfor reserves, as well as between the spot and bal-ancing markets. Market designs allowing suchintegration can be seen mostly in the UnitedStates. See, e.g., Kranz et al. 2003.

29. For example, the markets in Alberta and Ontariohave price caps of C$1,000 ($979) and C$2,000($1,958) per MWh (Adib et al, 2008), and Texas(ERCOT) has a price caps of $2,250 (ERCOT2008). In Europe, Nordpool caps the day-ahead

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price at €2,000 ($2,720) per MWh (Nordpool2008). As discussed in Chapter 15 of this book,Spain has a very low cap of €180 ($245) perMWh, but it is not an energy-only market, asgenerators also receive capacity payments.

30. Notably the Large Combustion Plant Directive(Directive 2001/80/EC) and the Industrial Emis-sions Directive (still under negotiation in theEuropean Parliament at the time of this writing).

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68 Boaz Moselle


Chapter 4: Renewable Generation and Security of Supply

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Transcript of Chapter 4: Renewable Generation and Security of Supply