1. Energy Economics

2. 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”

3. A B C
EMISSION PERMIT MARKET
Competition
for
permits
Solution 1:
EU Emission Trading Scheme (EU-ETS)

4. Reduction of 21%

5. • 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

6. Wind:
±€50/ tCO2
Solar:
±€350/ tCO2
Why install any solar, if a ton of CO2 can be
abated by wind 7 times cheaper?

7. 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!?

8. • Spillover externality?
– Subsidize R&D or massive deployment?

9. -> Monday lecture

10. Wind:
±€50/ tCO2
Solar:
±€350/ tCO2
Why install any wind, if a ton of CO2 can be
abated by buying and not using a certificate
- now - 12 to 96 times cheaper!?

11. • Interaction between ETS and renewables
• Böhringer, C., Rosendahl, K,E, 2009.
Green serves the dirtiest. Discussion
Papers No. 581, April 2009 Statistics
Norway, Research Department

12. • Given the ETS in the EU, do subsidies and
feed-in tariffs lead to:
1. Less “dirty” generation?
2. Less CO2 emission in the EU?
• Surprisingly, the answers are:
1. No, to more dirty generation
2. No, it has no effect.

13. Permits SUPPLY CO2
produced
Electricity
demand
Power
produced
Hydro &
Nuclear
gas
Coal
ETS reduces CO2 emissions
CO2
without
ETS
CO2
with
ETS
Shortage
of permits!

14. Permits SUPPLY CO2
produced
Electricity
demand
Power
produced
Hydro &
Nuclear
gas
Coal
ETS reduces CO2 emissions
CO2
without
ETS
CO2
with
ETS
Shortage
of permits!

15. Electricity
demand
Power
produced
Hydro &
Nuclear
gas
Coal
ETS affects generation choices
CO2
produced
Wind & solar
with subsidies
Permits SUPPLY

16. Electricity
demand
Hydro &
Nuclear
gas
Coal
ETS affects generation choices
CO2
produced
Wind & solar
with subsidies
Wind &
solar
Excess of
permits!
Permits SUPPLY

17. Electricity
demand
Hydro &
Nuclear
gas
Coal
ETS affects generation choices
CO2
produced
Wind & solar
with subsidies
Wind &
solar
Permits SUPPLY

18. Electricity
demand
Permits demand
Hydro &
Nuclear
Coal
ETS affects generation choices
CO2
produced
Wind & solar
with subsidies
Wind &
solar

19. • Some numbers

20. Solar &
wind
Without ETS
10
20 CO2
Electricity
demand
Y
=
Power
produced
(GWh)
MC=0, AFC = 40, Em=0
C= 10* 40= 400
10
[ ]
0
p MAX MC=
=
8

21. Gas
10
20 CO2
Electricity
demand
Y
=
Power
produced
(GWh)
Gas: MC=15, FC=0, Em=1
AC= MC+ Em*pp
=15+ pp
C= 10* 15 + 0= 150
10
Without ETS
[ ]
15
p MAX MC=
=
8

22. x = CO2
Electricity
demand
y
=
Power
produced
(GWh)
Coal
10
20
Coal: MC=y, FC=0, Em=2
AC=MC = y+ 2*pp
= 10+ 2* pp
C= ½* 10^2= 50
10
Without ETS
[ ]
10
p MAX MC=
=
8

23. Solar &
wind
10
20
CO2
Electricity
demand
Y
=
Power
produced
(GWh)
AFC = 40
C=10* 40= 400
10
Gas
10
20
CO
Electricity
demand
Y
=
Power
produced
(GWh)
AC= MC = 15
C= 10 * 15= 150
10
x = CO
Electricity
demand
y
=
Power
produced
(GWh)
Coal
10
20
MC= y=
=10
C= ½ * 10 *20= 100
C= 400
C= 150 C= 50
Which one to use?
Without ETS

24. x = CO2
Electricity
demand
y
=
Power
produced
(GWh)
Coal
CO2
without
ETS
10
2010 12
With ETS
8

25. System
costs
Energy
price
Permit
Price (pp)
Worth
of
permits
No ETS 50 10 0 0
ETS
ETS + 2 solar
ETS + 5 solar

26. x = CO2
Electricity
demand
y
=
Power
produced
(GWh)
Coal
CO2
without
ETS
10
2010 12
Supply of
permits
With ETS
Only coal:
Shortage of
permits!
8

27. x = CO2
Electricity
demand
y
=
Power
produced
(GWh)
Coal
CO2
without
ETS
10
2010 12
Supply of
permits
With ETS
Only coal:
Shortage of
permits!
Only gas:
Excess of
permits!
8

28. x = CO2
Electricity
demand
y
=
Energy
produced
(GWh)
Coal
CO2
without
ETS
10
2010 12
Supply of
permits
8
With ETS Energy ( ): 10y c g+ =
Carbon ( ): 2 12x c g+ =
2 & 8c g= =

29. x = CO2
Electricity
demand
y
=
Power
produced
(GWh)
Coal
10
2010 12
Supply of
permitsMC = |y| =2 +2* pp
MC= 15 +pp
With ETS Energy ( ): 10y c g+ =
Carbon ( ): 2 12x c g+ =
2 & 8c g= =
2+2 15pp pp× = +
13pp =
[ ]
2 2 13 28
p MAX MC=
= + × =
8
Costs:
-Gas: 8*15=120
-Coal: ½*2^2=2
Total: 122

30. System
costs
Energy
price
Permit
Price (pp)
Worth
of
permits
No ETS 50 10 0 0
ETS 122 28 13 156
ETS + 2 solar
ETS + 5 solar

31. x = CO2
Electricity
demand
y
=
Power
produced
(GWh)
Coal: 6
10
2010 12
Supply of
permitsMC = |y| =6 +2* pp
Subsidized
solar &
wind: 2
Energy ( ): 10y c g SSW+ = −
Carbon ( ): 2 12x c g+ =
2 4 & 4c SSW g= + = =
8

32. x = CO2
Electricity
demand
y
=
Power
produced
(GWh)
Coal: 4
10
2010 12
Supply of
permitsMC = |y| =4 +2* pp
With ETS
Subsidized
solar &
wind: 2
4 & 4c g= =
6
4
Gas: 4
MC= 15 +pp
4+2 15pp pp× = +
11pp =
[ ]
4 2 11 26
p MAX MC=
= + × =
8
Costs:
-Solar: 2*40=80
-Gas: 4*15=60
-Coal: ½*4^2=8
Total: 148

33. System
costs
Energy
price
Permit
Price (pp)
Worth
of
permits
No ETS 50 10 0 0
ETS 122 28 13 156
ETS + 2 solar 148 26 11 132
ETS + 5 solar

34. x = CO2
Electricity
demand
y
=
Power
produced
(GWh)
Coal: 4
10
2010 12
Supply of
permitsMC = |y| =4 +2* pp
With ETS
Subsidized
solar &
wind: 2
6
4
Gas: 4
MC= 15 +pp
8
4 & 4c g= =

35. x = CO2
Electricity
demand
y
=
Power
produced
(GWh)
Coal
10
2010 12
Supply of
permits
MC = |y| =4 +2* pp
MC= 15 +pp
With ETS
Subsidized
solar &
wind: 5
8

36. x = CO2
Electricity
demand
y
=
Power
produced
(GWh)
Coal: 6
10
2010 12
Supply of
permitsMC = |y| =5 +2* pp
With ETS
Subsidized
solar &
wind: 5
0pp =
[ ]
5 2 0 5
p MAX MC=
= + × =
8
Costs:
-Solar: 5*40=200
-Coal: ½*6^2=18
Total: 218

37. System
costs
Energy
price
Permit
Price (pp)
Worth
of
permits
No ETS 50 10 0 0
ETS 122 28 13 156
ETS + 2 solar 148 26 11 132
ETS + 5 solar 218 5 0 0
Adding renewables cannibalizes the ETS.
It decreases the permit price in addition to decreasing the wholesale
energy price.

38. • Adding subsidized clean energy
– Reduces the carbon price cp
– Supports & indirectly “subsidizes” the dirty
technology (coal)
– Crowds out the clean technology (gas)

39. • Böhringer, C., Rosendahl, K,E, 2009.
Green serves the dirtiest. Discussion
Papers No. 581, April 2009 Statistics
Norway, Research Department
– You can take their mathematical derivations
on good faith.

43. x = CO2
Electricity
demand
y
=
Power
produced
(GWh)
Coal
10
2010 12
Supply of
permits
8
With ETS 20% fall in demand:
• Exogenous:
• Efficiency increase
• Recession
• Endogenous:
• Price effect

44. x = CO2
Electricity
demand
y
=
Power
produced
(GWh)
Coal
10
2010 12
Supply of
permits
8
With ETS

45. x = CO2
Electricity
demand
y
=
Power
produced
(GWh)
Coal
10
2010 12
Supply of
permits
8
With ETS

46. x = CO2
Electricity
demand
y
=
Power
produced
(GWh)
Coal
10
2010 12
Supply of
permits
8
With ETS

47. same effect:
• 20% efficiency improvement
• Fall in demand (Euro-crisis)

48. x = CO2
Electricity
demand
y
=
Power
produced
(GWh)
Coal
10
2010 12
Supply of
permits
8
MC = |y| =2 +2* pp
MC= 15 +pp
With ETS 20% fall in demand:
• Exogenous:
• Efficiency increase
• Recession
• Endogenous:
• Price effect

49. x = CO2
Electricity
demand
y
=
Power
produced
(GWh)
Coal
10
2010 12
Supply of
permits
8
MC = |y| =2 +2* pp
MC= 15 +pp
With ETS

50. x = CO2
Electricity
demand
y
=
Power
produced
(GWh)
Coal
10
2010 12
Supply of
permits
8
MC = |y| =2 +2* pp
MC= 15 +pp
With ETS

51. x = CO2
Electricity
demand
y
=
Power
produced
(GWh)
Coal
10
2010 12
Supply of
permits
8
MC = |y| =4 +2* pp
MC= 15 +pp
With ETS Energy ( ): 8y c g+ =
Carbon ( ): 2 12x c g+ =
4 & 4c g= =
4+2 15pp pp× = +
11pp =
[ ]
4 2 11 26
p MAX MC=
= + × =

52. • Reduction of energy demand…
– Recession, demand reaction, efficiency increase
• has the same effect as subsidized clean
energy
– Reduces the carbon price cp
– Supports & indirectly “subsidizes” the dirty
technology (coal)
– Crowds out the clean technology (gas)

53. • EU (20-20-20):
– 20% reduction of CO2 by ETS
– 20% efficiency increase
– 20% increase in renewables (solar & wind)
by subsidies
+ 6-year long recession
• Reduces demand, and supports dirty
technology

55. “Europe is burning more coal, while demand for gas –
which emits much less CO2 than coal – is declining ”

56. • Under a cap& trade program:
–subsidy to renewables
–=
–subsidies to dirty production
• Net no effect on CO2

57. • Under a cap& trade program:
–subsidy to renewables
–=
–subsidies to dirty production
• Net no effect on CO2

59. Subsidized renewables:
- Politicians are for
- Popular among people
- Renewables industry has strong lobby
- Idealistic organisations support them
How to best adapt to them?

60. The grid

63. Need for long-distance transmission

64. STORAGE?

65. Batteries?

67. Hydro-plant and pumped storage

69. Hydro-plant and pumped storage

72. Need for long-distance transmission
Hydro potential

73. Need for long-distance transmission

74. European
Climate
Foundation
Increase
of almost
400%
The future of the EU transmission network
2050
Increase from
34 GW to 127
GW

76. •Storage is never going
to be enough

77. www.eirgrid.com.
Wind lulls
In every year easy to find a period of 1-2 weeks with
only about 5-10% of national wind generation

78. Solar produces very little in winter, even without snow

79. • Wind and solar should better be seen as:
– Wind and solar + gas backup (round 90%)
– Wind and solar + coal backup (round 90%)