The public promotion of renewable energies sources in the electricity industry

1. Robert Schuman Centre for Advanced Studies Loyola de Palacio Chair on Energy Policy The public promotion of renewable energies sources in the electricity industry Yannick Perez Loyola de Palacio Chair RSCAS-EUI & Université of Paris-Sud yannick.perez@u-psud.fr

2. Productions décentralisées 95% 2 3 On-site Storage Backup Power Renewable 4 1 Massive RES (5%) From Old days to Renewables issues Generation Frequency management opportunities Residential Commercial Industrial EVs Transmission Distribution Loads Voltage issues and management opportunities

3. Demand-side strategic policies have emerged as the “preferred instrument” in most countries • The emergence of modern environmentalism has been accompanied by a desire to reap commercial benefits from individuals’ growing concern for the environment. • US surveys of willingness to pay for green energy have found that between 40% to 70% of respondents are willing to pay a premium for green energy (Fahrar and Houston 1996; Zarnikau 2003). • So as economist we expect a high “Willingness to paid” for Green Energy • => market incentives (market forces) will deliver green energy by demand needs.

4. Declared European WTP a premium ranging from 5% to over 25% Complied from Devries (2004)

5. What told us the revealed preferences on the market? • 2 to 4% population are taking the tariff solution by themselves... • if you look at revealed preference in actual market solution… • Bird et al., 2003; Morthorst & Jørgensen, 2005

6. How to explain the gap betweendeclared WTP and facts? • Usual suspects: • Free riding • Opportunisme • Lack of transparency • Switchingcosts / searchingcost • A clearlinkbetweenconsumption and increase of health (Experimentaleconomicsclassicalresults : WTP goesfrom 5% to 15% if the linkisclear)

7. First conclusion Demandsidestrategies are not a good tool for RES-E

8. Government support is necessary for Renewable Energy Sources in Electricity (RES-E) • although desirable from a social welfare perspective, their private costs are not competitive in power generation systems dominated by large electricity generation plants. • Three reasons account for the bias against RES-E in the electricity market: • (i) environmental costs are not adequately internalized for conventional electricity generation technologies; • (ii) the absence of scale effects on costs, due to the small size of the plants, • and (iii) the random nature of their intermittent production (wind power, mini-hydraulic) creates negative externalities.

9. EU Wind potential

10. Wind and solar production variability

11. Government support is necessary for Renewable Energy Sources in Electricity (RES-E) But how?

12. Offer-side strategies • So there are three instruments for “offer side” largely used: • feed-in tariffs (FIT), • bidding instruments (BI) for the assignment of long-term purchase contracts • and exchangeable quotas (EQ)

13. Definitions • FITobliges electricity distributors to purchase electricity from any new RES-E plant in their service area and pay a minimum guaranteed tariff per kWh that is fixed over a long period of time. • Bidding Instrumentsselects by auctions RES-E projects and obliges local electricity distributors to buy electricity from the successful plants by a long term contract on the basis of bid price in the reference design. • EQintroduces future obligatory targets for electricity suppliers to buy either green electricity directly from the RES-E producers, or green certificates issues to RES-E producers, targets being defined in terms of a percentage of their electricity deliveries.

14. National subsidizingschemes • Target: 20% of energyconsumptionfromrenewables by 2020 • RES integrationintomarketdiffersfrom one country to another • Feed-in tariff accesspriority start-up and shutdownconstraints on conventionalgenerators • Feed-in premium and green certificates  no accesspriority  more flexibility to manage situation of excessive energy Source: Ragwitz et al. 2012. Recent developments of feed-in systems in the EU – A research paper for the International Feed-In Cooperation

17. Energy mix

18. Economicanalysis of the RES-E Support mechanism Some new debates

19. The impact of Co2 and RES on the price of Electricity

20. Natural EU « MERIT ORDER » Price/MWh ( €) Peak Gas Coal Hydro / Nuke 0 Installedcapacity

22. EU « MERIT ORDER » with C02 Price/MWh ( €) Peak Coal Gas Hydro / Nuke 0 Installedcapacity

23. EU « MERIT ORDER » with C02 And RES PRIORITY Price/MWh ( €) Peak Coal Gas Hydro / Nuke 0 Installedcapacity

24. Coal Coal Nuclear Nuclear Fuel/Gas Fuel/Gas CCGT CCGT Wind Power Wind Power Other Other Interconnection Interconnection Wind generation in Spain 30-september-2010 6-Februray-2013 Wind 1% 17:45h Wind 66.5% 15:50h MW MW Wind Gas Wind Gas Hydroelectric Hydroelectric 24 Source REE, ENAGAS

25. Negativesprices EU « MERIT ORDER » Price/MWh ( €) Increasing Marginal cost 0 Installedcapacity Increasing Opportunitycost of inflexibilidad

26. Existence of Negative prices in electricity markets: the German case

27. Gas plants are loosing money (Source: RoquesIHS, 2013)

28. Economicanalysis of the RES-E Support mechanism Someolddebates

29. 1- Survey from the « Public Economics Perspective” litterature • Welfare economics suggest that an environmental tax reflecting the value of the marginal damage will provide incentives to achieve optimal levels of technology substitution and development of clean power Generation equipment. • But little agreement on tax.

30. Price or quantitypolicy instrument? • First is the debate on the choice between price-instrument and quantity-instrument in a world of uncertainty, in terms of RES-E : • FIT could be considered a price instrument, • whilebidding and Exchangeable quotas are quantity instruments. • Withperfect information + perfectrationality => choiceisequivalent.

31. But withimperfect information and rationality… • We have to introduce a value for errors…underestimation or surestimation risk… • Quantity instrument are the betterbecauseyouintroduce a limit (quantity) • whereaswithpricemechanism… the social costcanbeinfinite. • => Quantity instrument > price instrument • => EQ & BI > FIT

33. Second argument from PPE • The long termmarket compatibility withelectricitymarketincentives

35. Problemwiththis PPE result Denmark Spain and Germany, the 3 RES-E leaders are using FIT vs UK isusing the best economic support but weakresults…

36. Rational for Transaction Cost Economics (TCE) : • Our claim, the TCE perspective allows us a better understanding of support mechanism: • TCE insists on investment safeguard as a major determinant of social efficiency (Henisz and Zelner (2001)) • TCE shows that instruments’ conformity to its institutional environment (North 1990) is a determinant of its viability in a long run. • TCE offers ex ante & ex postsolutions to complete the “incomplete contract” problems

37. 3- Methodology • We compare and assess RES-E on several dimensions from both the Public Economicsand TCE perspectives: • Dimensions are : • market incentive intensity & control of the cost for consumers, • and conformity with the new market regime of electricity industry • safeguards of RES-E investments, • Ex ante adaptability of the instrument in order to preserve its stability in the long run, • Technological progress

41. Conclusions • We show that neither instruments offers an optimal solution in each of these dimensions… • So there is no first best mechanism to support RES-E technologies. • But each instrument “gives you what you paid for” even if you don’t know it at the beginning! • 2 options are possible here : • Government can select an instrument in accordance with the relative importance of its own objectives. • We can use our framework as a sort of “ex post tool” to reveal implicit or tacit preference of governments in these subject.

42. Robert Schuman Centre for Advanced Studies Loyola de Palacio Chair on Energy Policy The public promotion of renewable energies sources in the electricity industry Yannick Perez Loyola de Palacio Chair RSCAS-EUI & Université of Paris-Sud yannick.perez@u-psud.fr