Supporting wind: European examples and problems

11

Supporting wind: European examples and problems

David NewberyUSAEE/IAEE North American Conference Plenary:Developments in Electricity Generation and Distribution

Anchorage, Alaska, 31st July 2013http://www.eprg.group.cam.ac.uk

Imperial CollegeLondon

22D Newbery 2013 2

Outline

• Why support wind?• How is wind supported and financed?• Efficient market design vs reality• Lessons from the UK• Towards a better support system


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Logic of 20-20-20 Directive• Supports RES deployment to drive down costs

– induces investment => learning-by-doing• Solution to equitable EU burden sharing

=> all countries contribute to public good of learning• Learning comes from:

– design (cost, reliability, controllability, etc) – production, installation, siting/planning, grid

integration

but not from operation (provided reliable)


D Newbery

Learning justifies Renewables Directive

Costs after doubling relative toinitial value

Source: IEA

1 5

Start of ETS

Learning curves for generation technologies

Source: N. Nakicenovic, A. Grübler, and A. McDonald, eds., Global Energy Perspectives (CUP, 1998).

2010 price$2,000/kWp

=$(1990)1,220

39GW 2010Right measure of LbD driver

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6

Renewables support replaces R&DUK Electricity R&D intensity

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

perc

ent e

lect

rici

ty r

even

ue

ROCs

other power

hydrogen and fuel cell

nuclear fission and fusion

Renewables

fossil fuels

Total ESI R&D (estimate)

77D Newbery 2013 7

Characteristics of wind• Low capacity factor, very site specific

= 25% on-shore, 36% off-shore in GB=> potentially considerable site rent

• High variability– requires considerable flexible dispatchable reserves– creates new demands for System Operator

• Low predictability day-ahead– hard to contract ahead, risk of imbalance

Support design needs to address these


88D Newbery Cranfield 2012 8

Considerable locational variation

Source Renewable Energy Foundation

Average monthly capacity factor GB on-shore wind, 1994-2005 wind data

0%

10%

20%

30%

40%

50%

60%

Jan Feb Mar April May June July Aug Sep Oct Nov Dec

perc

enta

ge

199419992004199820001997av 1994-2005200319962001200520021995

Source: Green and Vasilakos (2010)

Seasonal capacity factors

Source: Green and Vasilakos (2010)

Hourly average wind and total demand

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Hours ending

capa

city

fact

or %

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Dem

and,

MW

Jan wind CF LHSMay wind CF LHSAug wind CFJan demandMay demand

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Supporting wind• Market failures:

– CO2 under-priced– learning benefits not valued– risks higher than for conventional generation

• Pricing CO2 problematic - raises energy prices=> Britain has adopted Carbon Price Floor, others might prefer CO2

intensity target or RE target• Identify benefits from building and operation

=> availability subsidy + average (?) value of energy?• Reduce risks through contract design

Object is to deliver benefits at least system cost


Carbon prices have crashed

Source: EEX

EUA price October 2004-March 2013

0

5

10

15

20

25

30

35

Oct-04

Apr-05

Oct-05

Apr-06

Oct-06

Apr-07

Oct-07

Apr-08

Oct-08

Apr-09

Oct-09

Apr-10

Oct-10

Apr-11

Oct-11

Apr-12

Oct-12

Eur

o/t C

O2

OTC Index First Period

Second period Dec 2008

Second period next Dec

start of ETS

Second period

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UK’s Carbon Price Floor - in Budget of 3/11

Source: EEX and DECC Consultation

As at 1 Jun 2011

to £70/t by 2030

Corrective tax

EUA price second period and CPF £(2012)/tonne

£0

£5

£10

£15

£20

£25

£30

Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20

£(20

12)/t

onne

CO

2

second period priceCarbon Price Floor

Forward prices

Corrective tax

UK price movements: 2007 to 2009 in €

0

20

40

60

80

100

120

€/M

Whe

Electricity forward 2010 (€/MWh)Gas cost forward (2010) + EUACoal cost forward (2010) + EUAEUA price in €/tCO2

Gas and coal-fired generation costs move in line with electricity prices

Fossil plant naturally hedged

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Contracts for wind• Variety of Feed-in-tariff (FiT)s:

– FiT, Premium FiT (pFiT), Contract-for-difference – need to address risk, location, support

• Germany, Spain, Denmark adopted FiT– transfers all risk to TSO, poor locational signals– rapid roll-out, Germany extracts wind rent

• UK 3 models: auctions, ROC pFiT, CfD– locational transmission charges, single GB price

How do they compare?


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CCC’09 UK 2020 target is 27,000 MW

Installed wind capacity in MW

0

5,000

10,000

15,000

20,000

25,000

30,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

MW

Denmark Germany Spain UK

UK’s target looks feasible at DEroll-out rate

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UK experience• RE auctions drove down prices

– but no penalty for non-delivery => overoptimism=> decreasing proportion actually delivered

• Renewable obligation certificates (ROCs) – pay premium on wholesale price & sell to retailers

• no rent extraction, investment concentrated in Scotland

=> risky , benefits incumbent vertical gentailers=> low roll-out despite excellent wind

• Electricity Market Reform proposes CfDs– but requires windfarms to sell in illiquid wholesale market– removes wholesale price risk but not balancing risk


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Towards a better system• System Operator to contract for wind

– ideally through tender auction• offer different support profiles, tenors, indexed or not

– select least total cost (transmission, balancing, CO2)– or secure sites first and then auction=> extracts unnecessary rent => least consumer cost

• Agree with EU on where learning benefits lie– Reliable capacity? => pay for availability not MWh

• avoids negative prices, avoids distorting location


E: 2,000 hrs/yr

N: 2,500 hrs/yr

C: £50/MWh

£49/MWh=>£98k/MW/yr=>£198k + ROC

P1 £35/MWh(after new T) =>£87.5k/MW/yr =>£212.5k + ROC

T cost£15/MWh

ROC = £50/MWh

With ROCs wind farm inefficiently locates at N

Pay wind for availability + average spot price => efficient E

Location choices under LMP and spot pricing for wind

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Conclusions• Wind suffers market failures - CO2, risk and learning• These can be separately addressed with good contracts• learning - club good that needs collective agreement

– on what it delivers and how to induce that efficiently• Most RE support is poorly designed as hard to

agree on club goods and prone to lobbying– fails to recognise system costs: location, balancing– fails to extract rent to reduce support cost

All of these concerns are amplified off-shore


2323

Supporting wind: European examples and problems

David NewberyUSAEE/IAEE North American Conference Plenary:Developments in Electricity Generation and Distribution

Anchorage, Alaska, 31st July 2013http://www.eprg.group.cam.ac.uk


Supporting wind: European examples and problems

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