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Energy Economics
• How can negative prices come about in
Germany?
– Mandatory dispatch of wind and solar
– “Must-run” generation
• Central Heating and Power plants (CHP)
– Baseload plants don’t like cycling
• For what price would a baseload plant (eg a big
nuclear) bid in its electricity?
– (DA & ID)
• Day-Ahead market (DA market)
– Bid your quantity and price for each hour of
the next day
– Market closes at 14:00.
– Eg. On 1st
June at 13:59, I send in a schedule
for 2nd
June with 24 quantity-price bids (one for
each hour)
• Intra-Day market (ID market)
– Bid for 2 hours ahead
– Eg.: On 2nd
June, before 3:59 I send in one
quantity-price bid for the hour 6:00-7:00.
D
S=MC
€/MWH Uniform price auction
60
0
-150
D
S=MC
€/MWH Uniform price auction
60
0
-150
D
S=MC
€/MWH Uniform price auction
60
0
-150
D
S=MC
€/MWH Uniform price auction
60
0
-150
What if these generators have high startup
costs? Or they simply cannot ramp down
enough so quickly?
D
S=MC
€/MWH Uniform price auction
60
0
-150
What if these generators have high startup
costs? Or they simply cannot ramp down
enough so quickly?
D
S=MC
€/MWH Uniform price auction
60
0
-150
What if these generators have high startup
costs? Or they simply cannot ramp down
enough so quickly?
Renewables in Germany
have mandatory dispatch
D
S=MC
€/MWH Uniform price auction
60
0
-150
Renewables in Germany
have mandatory dispatch
What would be an
improvement here?
D
S=MC
€/MWH Uniform price auction
60
0
-150
No mandatory dispatch,
renewables bid in at true MC
or MC=0
What would be an
improvement here?
German electricity wholesale market
• Effect on load-duration curve
Load-duration curve steeper
But net demand more variable
Renewables Efficiency
Carbon
emissions
EU’s 20-20-20 strategy for
2020
• Renewables are the solution as
proposed by politicians
– central planning approach
– “picking winners”
• Maybe we should not expect politicians to be
the ones who can point out the solution.
• In foreign trade politicians have a terrible track
record
2008 Nobel price winner Paul Krugman
How to create a
framework that leads to
cleaner electricity?
WITHOUT POLITICIANS
PICKING “WINNERS”?
2mT 4mT 5mT
A B C
Emissions:
2mT 4mT 5mT
A B C
Emissions:
4$/T 5$/T 20$/T
Abatement
cost:
2mT
A B C
4$/T 5$/T 20$/T
Abatement
cost:
Abatement
-investment
7$/T
5mT4mT1mT
1$/T
Emissions:
A B C
Abatement
cost:
Abatement
-investment
?
Emissions:
• Need the law of one price
• 20-20-20 strategy
a) 20 reduction of CO2
b) 20% increase in efficiency
c) 20% renewables
a) 20 reduction of CO2
• How?
• Against lowest costs if possible:
efficiency
– Market-based
– Law of one price…
• Implementation
– ETS
– tax
A B C
Abatement
cost:
Abatement
-investment
Emissions:
A B C
EMISSION PERMIT MARKET
Competition
for
permits
Solution 1:
EU Emission Trading Scheme (EU-ETS)
Taxing
Cap-and-trade / Emission Trading System
• 2005- end 2007: Phase 1 (test phase)
• 2007- end 2012: Phase 2 (6.5% below 2005 level)
• 2012- end 2020: Phase 3 (linear 1.74% reduction/year)
Kyoto Protocol
Reduction of 21%
• 20-20-20 strategy
a) 20 reduction of CO2 (ETS)
b) 20% increase in efficiency
c) 20% renewables
1. Points a) (ETS) gives a measure of the cost of
point c) (Renewables)
2. Points a) (ETS) and point c) (Renewables)
Source: Böhringer, C., Rosendahl, K,E, 2009. Green serves the dirtiest. Discussion Papers No. 581, April 2009 Statistics Norway, Research
Department
http://www.pnl.gov/main/publications/external/technical_reports/PNNL-19225.pdf
Wind generation in Germany
Feed-in tariffs
• 0.50 €/kWh 0.20€/kWh
Coal or gas plant
costs
0.04€/kWh
2004 2012
Case of Germany
• 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?

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Ee w08.1 m_ 3. renewables and the electricity industry (climate change)

Editor's Notes

  1. Consider a simple example. Assume that two emissions sources are currently emitting 15 units each for a total 30 units. Assume further that the control authority determines that the environment can assimilate is 15 units in total, so that a reduction of 15 units is necessary. How should this 15-unit reduction be allocated between the two sources in order to minimize the total cost of the reduction? We can demonstrate the answer with the aid of Figure 14.3, which is drawn by measuring the marginal cost of control for the first source from the left-hand axis (MC1) and the marginal cost of control for the second source from the right-hand axis (MC2 ). Note that a total 15-unit reduction is achieved for every point on this graph; each point represents some different combination of reduction by the two sources. Drawn in this manner, the diagram represents all possible allocations of the 15-unit reduction between the two sources. The left-hand axis, for example, represents an allocation of the entire reduction to the second source, while the right-hand axis represents a situation in which the first source bears the entire responsibility. All points in between represent different degrees of shared respon sibility. What allocation minimizes the cost of control? In the cost-effective allocation, the first source cleans up ten units, while the second source cleans up five units. The total variable cost of control for this particular assignment of the responsibility for the reduction is represented by area Aplus area B.Area Ais the cost of control for the first source; area Bis the cost of control for the second. Any other allocation would result in a higher total control cost. (Convince yourself that this is true.)
  2. In a region that must reduce emissions, three polluters currently emit 30 units of emissions. The three firms have the following marginal abatement cost functions that describe how marginal costs vary with the amount of emissions each firm reduces.
  3. RSCAS 2013/05 Robert Schuman Centre for Advanced Studies Climate Policy Research Unit The Cost of Abating CO2 Emissions by Renewable Energy Incentives in Germany Claudio Marcantonini and A. Denny Ellerman
  4. RSCAS 2013/05 Robert Schuman Centre for Advanced Studies Climate Policy Research Unit The Cost of Abating CO2 Emissions by Renewable Energy Incentives in Germany Claudio Marcantonini and A. Denny Ellerman