Subsidies to renewable energy in inflexible power markets

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Subsidies to renewable energy in inflexible power
markets

• Orvika Rosnes
• June 9, 2008
• NOREL Workshop, Stockholm

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Introduction

• Renewables especially wind power in focus in
  Europe
• Ambitious targets in the EU
• Denmark 20 today, 50 as goal in 2025
• Wind power is variable requires system
  flexibility
• Flexibility of other technologies adjusting
  production level is costly
• Variety of policy measures to boost investments
  in wind power
• Investment subsidies, feed-in tariffs, green
  certificates,
• Subsidies to renewables influence also the
  short-term production decision
• Different subsidies have different impact
• How do the production costs of the whole power
  system depend on wind power support and the
  flexibility of the power system?
• Investment subsidy vs. fixed price per kWh to
  wind power
• Start-up costs and minimum production levels in
  thermal power plants

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Main result Flexibility is crucial for costs and
emissions

• Subsidies have different impact
• Investment subsidy yields optimal solution
• No distortion of wind power producers production
  decision
• Production subsidy increases costs
• Gives incentives to produce for too low prices
• Fixed price reduces emissions most, but for
  highest cost
• Market signals not passed through to wind power
• Forces thermal power plants to stop
• Subsidies should not conceal market signals in a
  market with inflexible technologies
• Subsidies that promote flexibility is the
  cheapest way of wind power integration

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Contents
The model Thermal power producer Wind power
producer Numerical model Impact of different
subsidies to wind power
14 November 2009
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Thermal power plants

• Marginal production costs
• Fuel costs and efficiency, OM costs
• Start-up costs
• Fuel costs
• Indirect costs
• Minimum production level (typically 30 of
  installed capacity)
• Efficiency loss when producing at sub-optimal
  production level
• Price vs. marginal cost consideration not enough
• Production decision becomes an intertemporal
  decision
• Mansur (2003), Tseng Barz (2002), Rosnes (2008)

• Start-up costs correspond to marginal production
  costs in
• ¾ hour (fuel), 7.5 hours (indirect) in coal-fired
  power plant
• ½ hour (fuel), 4 hours (indirect) in gas-fired
  power plant

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Thermal power plants Intertemporal production
decision

• Determines the producers bids to the market
  organizer
• Combination of price level (incl. negative) and
  duration to avoid stopping

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Time-dependent start-up cost
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Contents
The model Thermal power producer Wind power
producer Numerical model Impact of different
subsidies to wind power
14 November 2009
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Wind power Static production decision

• Production in different periods independent
• Flexible
• Production limited by available wind

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Subsidies to wind power change the production
decision

• Investment subsidy
• Does not change the production decision
• Production subsidy (feed-in tariff)
• Incentives to produce for too low prices
• Fixed price/priority
• Produce independent of market price

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Contents
The model Thermal power producer Wind power
producer Numerical model Impact of different
subsidies to wind power
14 November 2009
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Numerical power market model for West Denmark

• Deterministic dynamic programming
• Short term focus
• Weekly decision (simultaneous optimization for
  168 hours)
• Infinite horizon (identical week repeated ad
  infinitum)
• No investments
• 10 thermal units (3500 MW in total)
• Coal, gas, heavy fuel oil
• Inflexible start-up costs, minimum production
  requirements
• Wind power (2400 MW in total)
• Flexible
• But availability depends on wind
• No trade
• Inelastic demand
• Variation over day/night

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Contents
The model Thermal power producer Wind power
producer Numerical model Impact of different
subsidies to wind power
14 November 2009
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Fixed price Wind power produces at max level

• Wind power does not adjust to market price
• Thermal units must close when wind power
  production is high

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Investment subsidy Wind power adjusts production

• Wind power producer responds to market signals
• Wind power production reduced from the maximal
  available level in 49 hours
• Cost savings 9 higher production at 12 lower
  cost
• Thermal power plants avoid starting and stopping,
  plus more efficient plants

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Production subsidy Wind power adjusts production
somewhat

• Production subsidy market signals distorted
• Reduces production in 42 hours (-4)

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Thermal power production with different subsidies
to wind power

• Fixed price thermal power plants forced to close
  in some hours
• 9 less production in thermal plants than with
  investment subsidy
• Trade-off between expensive production and cheap
  start-up
• Production subsidy
• Some adaptation of wind power reduces starting
  and stopping in thermal

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Costs increase with wind power capacity

• Easier to accommodate small volumes of wind power
• Capacity increase does not lead to proportional
  production increase
• Cannot always use all of the wind power capacity
  some of the capacity increase is in vain
• Example week Doubling of wind power capacity
  leads only to 50 increase in wind power
  production

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Conclusions Flexibility is crucial for costs

• Investment subsidy gives correct production
  incentives to wind power
• Responds to market signals
• Fixed price (and production subsidy) distort the
  market signals
• Incentives for too high wind power production
• Wind power does not adapt to the market imposes
  costs on others
• Coal and gas-fired power plants must adjust
  production costly
• Subsidies should not conceal market signals in a
  market with inflexible technologies
• Investments in additional flexibility
• More flexible supply side
• More flexible demand side
• Trade possibilities
• Correct economic incentives is the cheapest way
  of wind power integration!

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Oslo
Stockholm
PO Box 5, 0051 Oslo, NORWAYBiskop Gunnerus gate
14A, 0185 Oslo, NORWAY Telephone [phone]
00Fax [phone] e-mail oslo_at_econ.no
Artillerigatan 42, 5th floorS-114 45 Stockholm,
SWEDEN Telephone [phone]Fax 46 8 528
01 220e-mail stockholm_at_econ.se
Stavanger
Copenhagen
Kirkegaten 34006 Stavanger, NORWAY Telephone
47 45 40 50 00Fax [phone]e-mail
stavanger_at_econ.no
Nansensgade 19, 6th floorDK-1366 Copenhagen,
DENMARK Telephone [phone] Fax 45 33
91 40 46 e-mail copenhagen_at_econdenmark.dk
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Costs of different subsidy schemes

• Fixed price to wind power yields
• Lower thermal production (9)
• Lower emissions (10)
• Higher production costs (12)
• than investment subsidy
• Production subsidy yields
• Lower thermal production (4)
• Lower emissions (3)
• Higher production costs (1)
• than investment subsidy

Even slight flexibility pays off!
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Impact of wind power availability or capacity

• Similar results, but different scale
• More wind cannot always use all of the capacity
• Some of the capacity increase is in vain

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Contents
The model Thermal producer Wind power
producer Numerical model Impact of different
subsidies to wind power Impact of CO2-cost
14 November 2009
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Importance of flexibility
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Emissions with different CO2 cost levels

• How do the effects of a CO2 cost depend on the
  flexibility of the power system?
• CO2 cost influences both marginal costs and
  start-up costs
• Is fuel switching easier or not with start-up
  costs?
• Trade-off between continuous production and
  shut-down
• Clean plants produce more to avoid stopping?
• Clean plants produce less (too expensive to
  produce continuously)?
• Outcome of the climate policy (introduction of
  CO2 cost) depends both on the level of CO2 cost
  and flexibility of the system
• Emissions from start-up itself low

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Conclusions

• Start-up costs make the power plants inflexible
• Trade-off between continuous production and
  shutdown (? start-up later)
• Inflexibility due to start-up costs may hinder or
  facilitate emission reduction
• Start-up process itself causes some emissions
• Fuel switching may be more difficult
• Illustrates the difficulty of emission reduction
  in a power system heavily dependent on a few
  technologies
• Trade
• Various technologies