We Need for Electricity Markets?

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How Much European Regulation Do

How Much European Regulation Do

We Need for Electricity Markets?

Brüssel, 06 March 2013

Professor Dr Justus Haucap

Professor Dr. Justus Haucap

Düsseldorf Institute for Competition Economics (DICE)

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The German Energiewende

The German Energiewende

• Tsunami in Japan on 10 March 2011Tsunami in Japan on 10 March 2011

• Immediate shut-down of eight nuclear power plants in Germany (14 March 2011), complete move to nuclear-free electricity until 2022,

• Switch to renewable energies: 35% of electricity consumption in 2020, 50% until 2030 and 80% until 2050.

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• This is called Energiewende (energy turnaround).

• Regional and local Governments now even try to exceed these quotas. • Main instrument to foster build-out: feed-in-tariffs set by Parliament, • Feed-in tariffs are guaranteed for 20 years, g y ,

• Transmission line operators are required by law to purchase all

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The German Energiewende

The German Energiewende

• Philosophy: Reimburse producers (cost incl adequate rate of return)Philosophy: Reimburse producers (cost incl adequate rate of return), • This has now lead to a system of about 4000 different feed-in-tariffs

because costs differ due to

• Technology (solar, wind, bio mass, hydro, geothermal), • Location (on-shore/off-shore wind, solar on roofs/land), • Time of construction,

• Generation capacity

T i i li t h t h ll l t i it f

• Transmission line operators have to purchase all electricity from renewable energies and sell it on at the electricity exchange

• The difference between feed-in-tariff and revenue from sale at electricityThe difference between feed in tariff and revenue from sale at electricity exchange is borne by consumers, as a levy on every kwh.

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The German Energiewende

The German Energiewende

65% 80%

Percentage of power from renewable energies

50% 16% 17% 20% 23%** 35% 4% 4% 5% 5% 7% 7% 8% 8% 9% 10% 12% 14% 15% 16% 17% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 201 1 2012 2020 2030 2040 2050

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Electricity Generation in Germany

Electricity Generation in Germany

Natural Gas 11 3% Hard Coal19,1% Natural Gas 11,3% Others 6,0% Wind 7,3% Bio Masses 5,8% Hydro 3,3% Renewable 21,9% y Solar 4,6% Garbage 0,8% Nuclear 16,0% Brown Coal 25,6% g Source: BDEW

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Electricity Prices for Private Households

Electricity Prices for Private Households

2,05 2,05 2,05 21 6523,21 23,69 25,23 25,89 28,50 3 46 3,71 3,78 4,03 4,13 4,55 1,79 1 79 1 79 1,79 1,79 1,79 1,79 1,79 1,79 1,79 1,79 0,69 0,88 1,02 1,16 1,31 2,05 3,530 3,592 5,277 0,77 1,79 2,05 2,05 2,05 2,05 2,05 2,05 2,05 2,05 2,05 17,11 16,53 13 9414,32 16,1117,19 17,96 18,66 19,46 20,6421,65 12,91 11 60 10 85 11 22 11 72 12,19 12,99 14,12 13,89 13,80 14,17 14,13 2,33 2,28 1,92 1,97 2,22 2,37 2,48 2,57 2,68 3,30 3,46 1,79 1,79 1,79 1,79 1,79 1,79 1,79 , 1,28 1,53 1,79 13,94 11,60 8,62 8,58 9,70 10,25 10,85 11,22 11,72 12,19 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

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Development of Feed in Tariffs

Development of Feed-in-Tariffs

Bandwidth and Average Feed-in Tariff 2011 in ct/kWh

9,64 3,43 12,67 3,40 30,67 19,15 Hydro Bio Masses

Bandwith for Constructions until 31/12/2011 Average Feed-in-Tariff 2011 , , 4,04 11,00 7,36 Bio Masses Bio Gas 0 Bandwith Construction in 2012 9,18 7,16 27,00 20,69 Geothermal 5,28 10,20 9, 8 15,00 15,00 15,00 Wind on-shore Wind off-shore 40 16 9,48 62,40 Solar 40,16 Source: BDEW

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Development of Feed-in Tariffs

Development of Feed in Tariffs

48,0 43,6 45 50 W h 40,2 36,5 32,1 35 40 45 u ng* in ct/k W 19 2 19,6 18 8 19,8 20,7 22,1 23,6 24,1 24,3 24,5 24,6 29,4 26,3 25,6 25,7 25 30 EEG-Vergüt u 16,1 16,9 19,2 17,2 18,8 16,3 16,2 16,1 24,3 8,8 8,9 9,2 8,8 9,0 9,1 9,1 9,1 9,0 15,0 15,0 15,0 15,6 10 15 20 s chnittliche 7,8 8,3 9,6 8,5 8,7 8,6 8,5 8,4 8,4 7,1 7,2 7,4 7,2 7,8 7,8 7,9 8,0 8,0 0 5 10 2009 2010 2011 2012 2013 2014 2015 2016 2017 dur ch s 2009 2010 2011 2012 2013 2014 2015 2016 2017

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S b id

k h f G

El

t i it i G

Subsidy per kwh of Green Electricity in Germany

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Subsidies for Renewable Energies in Germany

Subsidies for Renewable Energies in Germany

Subsidy per MWh in 2013 246 €/MWh 126 €/MWh 138 €/MWh 182 €/MWh 49 €/MWh 126 €/MWh 121 €/MWh 20 €/MWh 30 €/MWh 49 €/MWh

Bio Gas Hydro Wind on- Bio Mass Wind off- Geothermal Solar Average

Bio Gas Hydro Wind on

shore

Bio Mass Wind off shore

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(More) Problems with Feed in Tariffs

(More) Problems with Feed-in Tariffs

• Producers of Green Energy have developed a “produce and forget”-Producers of Green Energy have developed a produce and forget mentality,

• Price signals do not play any role for investment or production of green electricity,

• New model: Decentrally planned economy.

f f

• If you are even paid if you do not produce, but just would have been able to, where do you locate best?

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A Riddle

A Riddle

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(And More) Problems with Feed in Tariffs

(And More) Problems with Feed-in Tariffs

• So-called redispatch costs are increasing (but that is only minor)So called redispatch costs are increasing (but that is only minor) • Costs for necessary network investment (both transmission and

distribution lines) is increasing – network stability is increasingly being jeopardised,

• Necessary investment into traditional (fossil) electricity generation

l t b j di d G t G t d

plants may be jeopardised – Government response: Government order to run and maintain certain power plants, more subsidies

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Alternative: A Renewable Quota Obligation

 Obligation on (a) electricity retailers, (b) electricity users which import,

generate or buy electricity on wholesale markets, and (c) electricity-intensive firms to use x % of green electricity per year (example: Sweden).

 To the extent to which electricity-intensive firms purchase electricity from retailers they do not need to fulfill the quota obligation (to avoid a double“ retailers they do not need to fulfill the quota obligation (to avoid a „double obligation)

G ( ) f f

 Green electricity generators receive a (tradable) green certificate for every 100 kWh of electricity they produce.

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A Renewable Quota Obligation

 Starting on 1 January 2015 an additional z % of green electricity can be added per year z=(35-B)/6, where B is the percentage of green electricity in 2013. If B was 26%, then we had z=1,5 % additional per year.

 Duty to fulfill obligation is demand side in wholesale electricity markets.  Duty to connect generators to the grid and distribution networks remains.  No ex post change for green electricity plants built until 31 December 2014..

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A Renewable Quota Obligation

 To fulfill their quota electricity retailers can produce green electricity on their own, purchase green electricity or simply purchase green certificates

 Obliged firms can contract for green electricity as they see fit.

 If firms fail to fulfill their obligations a penalty must be paid (e.g., 150% of average certificate price)

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A Rene able Q ota Obligation

 Advantage 1: Build-out of green energy can be better planned, hence also i f i d d di ib i li

A Renewable Quota Obligation

expansion of gird and distribution lines.

 Advantage 2: Electricity retailers compete for customers – concern for cost efficiency.

 Advantage 3: Competition between contractual forms (unlike in case of public procurement).

 Advantage 4: Self- consumed electricity can be rewarded with greenAdvantage 4: Self consumed electricity can be rewarded with green certificates.

 Advantage 5: Partial quotas (e.g., for offshore wind) can be added. ff

 Advantage 6: European market integration is possible, huge efficiency gains  Details (in German):

http://www.et-energie-online.de/Zukunftsfragen/tabid/63/NewsId/466/Zeit-fur eine grundlegende Reform der EEGForderung das Quotenmodell aspx fur-eine-grundlegende-Reform-der-EEGForderung--das-Quotenmodell.aspx

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Capacit Mechanisms

Capacity Mechanisms

• (National?) capacity payments? (State aid?)

(National?) capacity payments? (State aid?)

• Public procurement for security of supply (public good?)

• Is there really a problem?

• Alternatives?

Details (in German)

http //ideas repec org/p/ b /diceop/24 html

• Details (in German): http://ideas.repec.org/p/zbw/diceop/24.html

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Market Monitoring

Market Monitoring

• National market monitoring is of little use as markets are increasingly integrating (Böckers/Heimeshoff 2012 htt //id / / b /di d /50 ht l) integrating (Böckers/Heimeshoff, 2012,http://ideas.repec.org/p/zbw/dicedp/50.html) • As markets are integrating market surveillance should be located at the

European level (ACER)p ( )

• German initiative for a market transparency body has come too late and may provide only few benefits (if any), given that market integration has

i ifi tl i d

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Conclusions

Conclusions

• The current system of purely national (apart from Sweden/Norway) subsidy schemes for renewable energies jeopardizes the European subsidy schemes for renewable energies jeopardizes the European integration of power markets

• Huge efficiency gains are lost, as green electricity is produced i ffi i l

inefficiently

• A European quota system could heal many of the weaknesses of the current subsidy schemes based on national feed-in tariffs

current subsidy schemes based on national feed in tariffs

• Capacity mechanisms should not be designed at the national level, but rather at a regional (supranational) level to account for the extent of European power markets

• Similarly, market monitoring is a European task rather than a national one as electricity markets are no longer national

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Thank you for your attention!

Professor Dr. Justus Haucap

Heinrich-Heine-Universität Düsseldorf

Düsseldorf Institute for Competition Economics (DICE) Düsseldorf Institute for Competition Economics (DICE) Universitätsstr. 1

D-40225 Düsseldorf, Germany Fax: ++49 211 81-15499

email: haucap@dice.hhu.de

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References

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