Supporting wind: European examples and problems

1. Supporting wind: European examples and problems David Newbery USAEE/IAEE North American Conference Plenary: Developments in Electricity Generation and Distribution Anchorage, Alaska, 31st July 2013 http://www.eprg.group.cam.ac.uk Imperial College London 1 1

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 Imperial College London D Newbery 2013 2 2 2

3. 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) Imperial College London D Newbery 2013 3 3 3

4. Learning justifies Renewables Directive Costs after doubling relative to initial value Source: IEA D Newbery

5. Learning curves for generation technologies 2010 price $2,000/kWp =$(1990)1,220 Start of ETS Right measure of LbD driver 39GW 2010 1 5 Source: N. Nakicenovic, A. Grübler, and A. McDonald, eds., Global Energy Perspectives (CUP, 1998).

6. Renewables support replaces R&D 6 6 6 D 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 Imperial College London D Newbery 2013 7 7 7

8. Considerable locational variation D Newbery Cranfield 2012 8 8 8 Source Renewable Energy Foundation

9. Seasonal capacity factors Source: Green and Vasilakos (2010)

10. Hourly average wind and total demand Source: Green and Vasilakos (2010)

11. 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 Imperial College London D Newbery 2013 11 11 11

12. Carbon prices have crashed Source: EEX

13. UK’s Carbon Price Floor - in Budget of 3/11 to £70/t by 2030 Corrective tax Corrective tax As at 1 Jun 2011 D Newbery 2013 13 13 13 Source: EEX and DECC Consultation

14. Fossil plant naturally hedged Gas and coal-fired generation costs move in line with electricity prices

15. 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? Imperial College London D Newbery 2013 15 15 15

17. CCC’09 UK 2020 target is 27,000 MW UK’s target looks feasible at DE roll-out rate D Newbery 2013 17 17

18. 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 Imperial College London D Newbery 2013 18 18 18

20. 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 Imperial College London D Newbery 2013 20 20 20

21. Location choices under LMP and spot pricing for wind N: 2,500 hrs/yr With ROCs wind farm inefficiently locates at N P1 £35/MWh (after new T) =>£87.5k/MW/yr =>£212.5k + ROC ROC = £50/MWh Pay wind for availability + average spot price => efficient E T cost £15/ MWh E: 2,000 hrs/yr C: £50/MWh £49/MWh =>£98k/MW/yr =>£198k + ROC

22. 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 Imperial College London D Newbery 2013 22 22 22

23. Supporting wind: European examples and problems David Newbery USAEE/IAEE North American Conference Plenary: Developments in Electricity Generation and Distribution Anchorage, Alaska, 31st July 2013 http://www.eprg.group.cam.ac.uk Imperial College London 23 23