The Delicate Art of Regulating a Decarbonising Power Market · •Asymmetric fims: 8 firms, asym....
Transcript of The Delicate Art of Regulating a Decarbonising Power Market · •Asymmetric fims: 8 firms, asym....
The Delicate Art of Regulating a Decarbonising Power Market
Caterina Miriello (IEFE, Università Bocconi)Joint with Derek W. Bunn (London Business School)
IEFE, Università Bocconi March 02, 2012
Themes and Motivation
• Increasing power from renewable sources
• EU Renewables Directive (20-20-20):
• EU-15: 5 billion € to support RES
(1/6 of total energy subsidies) – Source: EEA
• Alongside with Market liberalisation
• European Union “wants it all…”?
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Research questions
• To what extent is co-evolution of low carbon initiatives with market liberalisation feasible?
• Which situations need to be monitored?
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Paper Outline
• Analysis of a wholesale electricity market experiencing an increasing share of wind power
• Methodology: ABM that simulates repeated dailyauctions
• Several scenarios
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Research Background
• RES Lower average wholesale prices
• Twomey and Neuhoff (2009), Sensfuß et al. (2008), Sàenz de Miera et al. (2008)
• Price-based incentives more successful
• Butler and Nauhoff (2004), Lüthi and Wüstenhagen (2008)
• Bulan et al. 2009 on investment and market power
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Proportion of RES in the EU countries
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National targets
0
10
20
30
40
50
60
2005 2009 (prov.) 2020 target
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Data source: http://ec.europa.eu/energy/renewables/targets_en.htm
Main contributions
• Generating firms’ ability to make profit (and to recover costs) is influenced by market structure
• A market composed by asymmetric firms is more likely to yield capital costs recovery
• New entrants renewable generators benefit from the existence of a strategic fringe
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Data
• Stylised model
• Data source on:
– Fossil fuels: Eurostat
– Marginal costs: IEA, OECD
– Capital costs: EWEA
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Model description (1)
• Set of agents: n generators
• Capacity
• Demand
• Generating plants with own capacity, seasonal availability profiles, marginal cost c
• Economy runs during periods
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ni ,...,1
nKkn
20,...,1,0T
Model description (2)
• Trading arrangements: compulsory, uniform-price auction
1. Bids:
2. SMP
3. Output:
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)( ibb
jij
ji
n
i
n
j
ji
jii
i
bbifk
bbifkn
kn
bbifk
bq
,0max
,0max1
,min1
,min
);(1 1
Firms’ Objective
1. Reaching a minimum utilisation target
2. Maximise profits:
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iii qcSMP
Learning algorithm
• If Current Utilisation Rate ≥ Desired Utilisation Rate
• If Current Utilisation Rate < Desired Utilisation Rate
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211
211
tttt
tttt
ifbb
ifbb
1 tt bb
Strategy
• Verify the investment performance through IRR:
• The higher the better; if IRR is high enough thenthe investment is profitable
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0NPV
N
nn
n
r
C
0
0)1(
Cases
• Benchmark: 10 symmetric firms
• Oligopoly: 4 symmetric firms
• Asymmetric fims: 8 firms, asym. in size
• New entrant case: 8 firms asym. in size and technology portfolio
• For each case: strategic variation, in which all firmsbut one engage in capacity restrictions
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Assumptions
• Existing plants fully depreciated
• Firms invest in wind sequentially, from 10% to60%
• Wind capacity replaces the existing fossil fuel capacity
• Carbon price: 15 € per ton of carbon emitted
• Green certificates (GC)
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Results
1. Non-monotonic evolution of profit contributions
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-
10.000.000,00
20.000.000,00
30.000.000,00
40.000.000,00
50.000.000,00
60.000.000,00
0% WIND 10%
WIND 15%
WIND 20%
WIND 30%
WIND 40%
WIND 50%
WIND 55%
WIND 60%
WIND 70%
WIND 80%
WIND 90%
WIND 100%
WIND 120%
WIND 150%
WIND 180%
Results - Benchmark
• IRR of the single projects always the same
• IRR of the totals low and decreasing in the share of wind
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-2%
-1%
-1%
0%
1%
1%
2%
2%
10% 15% 20% 30% 40% 50% 55% 60%
IRR Totals
IRR for Wind Projects
-0,022
-0,021
-0,02
-0,019
-0,018
-0,017
-0,016
10% 15% 20% 30% 40% 50% 55% 60%
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Results – Benchmark, Strategic
• Investment performance is going to decrease as the share of wind penetration increases
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-2%
-1%
0%
1%
2%
3%
4%
5%
10% 15% 20% 30% 40% 50% 55% 60%
IRR (Totals)
IRR - Strategic Firm IRR - Non Strategic Firm
-10%
-5%
0%
5%
10% 15% 20% 30% 40% 50% 55% 60%
IRR (Single projects)
IRR - Strategic Firm IRR - Non Strategic Firm
Results – Oligopoly, Strategic
-3%
-3%
-2%
-2%
-1%
-1%
0%
10% 15% 20% 30% 40% 50% 55% 60%
IRR Oligopoly (Single Projects, Strategic case)
IRR Strategic Firm IRR Non Strategic Firm
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Results – Oligopoly, Strategic
-2%
-1%
0%
1%
2%
3%
4%
5%
10% 15% 20% 30% 40% 50% 55% 60%
IRR Oligopoly (Totals, Strategic case)
IRR Strategic Firm IRR Non Strategic Firm
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Wholesale Prices
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Results – Asymmetry in size (1)
• Introducing some asymmetry
• Firms able to gain profits, even with symmetry in technology portfolio
• Smaller firms perform significantly better
• IRR still decreasing in the share of wind
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Results – Asymmetry in size (2)
0%
2%
4%
6%
8%
10%
12%
14%
16%
10% 15% 20% 30% 40% 50% 55% 60%
IRR (Single Projects)
IRR (BIG) IRR (MEDIUM) IRR (SMALL)
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Results – Asymmetry in size (3)
0%
5%
10%
15%
20%
25%
30%
35%
10% 15% 20% 30% 40% 50% 55% 60%
IRR (Totals)
IRR (BIG) IRR (MEDIUM) IRR (SMALL)
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Results – Asymmetry in size (4)
0%
5%
10%
15%
20%
25%
30%
35%
10% 15% 20% 30% 40% 50% 55% 60%
IRR (Totals. Strat vs Non strat)
IRR Strategic (BIG) IRR Strategic (MEDIUM) IRR Strategic (SMALL) IRR (BIG) IRR (MEDIUM) IRR (SMALL)
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Results – New entrant case
• A new entrant wind firm enjoys the presence of a strategic fringe in the market
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-4%
-2%
0%
2%
4%
1 2 3 4 5
IRR of a New Entrant Wind Firm (Single Projects)
IRR strategic IRR
-2%
0%
2%
4%
1 2 3 4 5
IRR of a New Entrant Wind Firm (Totals)
IRR strategic IRR
Conclusions
Results suggest:
• Firms’ ability to make profit (and to recover costs) influenced by market structure
• With perfect competition and symmetry costs are not recovered, even in concentrated markets
• Renewable generators benefit from the existence of a strategic fringe
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Policy implications
• Market concentration need to be monitored
• Decommodisation
• Asymmetric evolution of the marketreinforced
• New entrants
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Thank you for your attention
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