www.eprg.group.cam.ac.uk

Irish, GB and EU policy towards wind and other renewables

David Newbery

University of Cambridge

Windfarms-2017 International Conference Comillas, Madrid

31 May 2017

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Outline

• Wind and Solar PV penetration

• Why support renewables?

• Challenges of high RES penetration

⇒high capital cost low variable cost

⇒ intermittent RES, lowers wholesale prices

• What implications for market design?

⇒Capacity payments, long-term contracts, auctions

⇒new flexibility services required

• How to support RES

⇒support installation, rectify carbon price short-fall

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Wind resource up to 50m depth, hub ht 80m onshore, 120m offshore

Green is good, red poor

EEA Technical report

No 6/2009 at https://www.energy.eu/pu

blications/a07.pdf

focussolar.de

≈Full hrs/yr

Green is bad, red good

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UK wind growing, Spain stalls, Germany accelerates

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UK wind capacity factor higher, outputs in DE, ES variable

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PV in UK now overtakes France and Spain!!

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Spain produces more PV than UK with less GW

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UK, DK good for windSpain good for PV

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Why support renewables?

• Learning-by-doing creates unrewarded spill-

overs that reduce later costs

– Justifies quite large subsidy for solar PV

– Rather less for wind (larger base, lower LbD rate)

=> subsidize installation, not output

• Low carbon price => second best subsidize low-C for CO2 abated

⇒ subsidy per MWh at marginal CO2 displaced

⇒ Shortfall @ €20/t CO2 => CCGT displaced €9/MWh

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On-shore wind: taller towers give higher capacity factors

Source: IRENA (2016

Cum investment $647 billion

Learning rate 7%

Log scale

Log scale

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Solar PV cost fall 20% as capacity x2 German wholesale prices fall 50% in

5 yrs, 40% of which due to RES

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ene-11 ene-12 ene-13 ene-14 ene-15 ene-16

Day Ahead Auction Power price (Euro/MWh)

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PV learning rates are highecons of scale important

Module learning rate

18-22%

BOS cost excl inverter

now 60% of total

On-shore

wind

support

policies,

Spring 2014

Source: May and

Neuhoff, 2017

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Support policies

• RES is capital-intensive, cost depends on WACC

• Feed-in tariffs provide stable revenue &

guaranteed access => low WACC, rapid growth

• Green certificates increase risk => high WACC

• Premium FiT (CfD) reduces risk in GB

• Auctions deliver lower costs

But all support output, not capacity

=> Distort location decisions

UK ROC, EUA, and electricity prices

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£/u

nit

ROC+RPD 1 yr centred MA

RPD

ROCwindfall profits

ROC price stable

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Dramatic rise in UK solar PV from overgenerous FiTs

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RES CfD 2015 auction results

Foolish bid - withdrew

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Post 2020 RES-E support

• Learning spill-overs need remuneration– Almost entirely from making and installing equipment

⇒Contract €X/MWh for N MWh/MW, Auction determines X and RES receives market returns

=>Subsidy targeted on learning source => investment aid– Reduces cost of capital and risk via debt finance

– Addresses failure to set right CO2 price

=> Exposes RES to current locational spot price=> incentivizes efficient location, connection

=> Does not over-reward high wind/sun– Not over-reward favoured locations with same learning

• Auction better than bureaucrats at minimizing cost

E: 2,000 hrs/yr

N: 2,500 hrs/yr

C: £50/MWh

£49/MWh

=>£98k/MW/yr

=>£198k + ROC

P1 £35/MWh

(after new T)

=>£87.5k/MW/yr

=>£212.5k + ROC

T cost

£15/

MWh

ROC = £50/MWh

With ROCs wind farm

inefficiently locates at N

Pay wind for availability

+ average spot price => efficient E

Location choices under LMP and spot pricing for wind

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Challenges from intermittent generation

• Output can vary widely over few hours

• Hard to forecast day-ahead

=> need fast flexible back-up capacity

• High non-synchronous penetration threatens

stability

=> need new frequency and voltage services

• High penetration lowers price => flexible back-

up less profitable without support

Missing markets => more missing money

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Wind on the island of Ireland and share of output

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Island of Ireland –the cutting edge of penetration

Monthly mean wind output and variability in the SEM

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MW

28 D MA + 1 SD

28 day MA

28 D MA - 1 SD

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Handling high wind in SEM

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Averaging over 9 hrs in successive 42 day periods

1-6% average wind output

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California PV is saturating summer days

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California solar PV lowers day-time prices

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Electricity characteristics

• Electricity characteristics and cost drivers:

– capacity (MW): max demand on links to Load

– energy (MWh) nodal for each time period: fuel + C

– quality (frequency, voltage etc.) nodal each second

• Pay for option to take capacity

–Drives investment in T & D

•Some depends on peak, some on local maximum demand

–Pay for energy at efficient price (SMC)

–Pay for capacity at LoLP(VoLL-SMC)

–QoS bundled with access, energy, capacity

• paid by final consumers to suppliers of service

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I-SEM flexibility services

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System services in the SEM

New Services Now Existing Services Now

SIR Synchronous Inertial Response 65% SRP Steady‐state reactive power 69%

FFR Fast Frequency Response 54% POR Primary Operating Reserve 87%

DRR Dynamic Reactive Response 82% SOR Secondary Operating Reserve 90%

RM1 Ramping Margin 1 hour 88% TOR1 Tertiary Operating Reserve 1 91%

RM3 Ramping Margin 3 hours 88% TOR2 Tertiary Operating Reserve 2 89%

RM8 Ramping Margin 8 hours 66% RRDReplacement Reserve (De-Synchronised) 83%

FPFAPR

Fast Post Fault Active Power Recovery 88% RRS

Replacement Reserve (Synchronised) 93%

Table 1 Proposed new and existing System ServicesSource: SEM-13-060

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Revised RES Directive

Revised RES Directive

16. “When designing support schemes and when allocating support, Member States should seek to minimise the overall system cost of deployment, taking full account of grid and system development needs, the resulting energy mix, and the long term potential of technologies.”

26. …”(allow) Member States to count energy from renewable sources consumed in other Member States towards their own”

•Art 3 proposes Union funds (financial instruments) to reduce cost of capital for RES projects.

•Art 4: ensure RES responds to market price signals and support is granted in an open, transparent, competitive, non-discriminatory and cost-effective manner

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Can liberalised markets deliver?

• Ambitious RES targets need flexible back-up

– Normally comes from old high-cost plant = coal

• EU Large Combustion Plant Directive 2016 limits coal

• Integrated Emissions Directive further threat to coal

• GB Carbon price floor + hostility to coal => close old coal

– high (pre-2015) EU gas prices and low load factors

• gas unprofitable, new coal prohibited by EPS

• Future prices now depend on uncertain policies

– on carbon price, renewables volumes, other supports

– on policy choices in UK, EU, COP21, …

Long-term contracts the solution?

=> Auctions for contracts

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3333

GB Electricity Market Reform

• UK Energy Act 18 December 2013 to address:– Security of supply and carbon/RES targets– Address problems with EU ETS & Market/policy failures

• To deliver secure low-C in UK affordably=> capacity payments=> Carbon Price Floor

• de-risk RES investment => CfDs to lower WACC

• Energy-only markets: capped, balancing market distorted,

flexibility under-rewarded

=> Missing Markets => Missing Market problems

=> new ancillary services

=> Auctions for long-term contracts

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Coal displaced by wind & gas

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D Newbery Cranfield 2012 35

GB 2014 Capacity Auction auction result

Source: National Grid (2014)

Net CONE – predicted entry price

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Post 2020 RES-E support

• Learning spill-overs need remuneration– Almost entirely from making and installing equipment

⇒Contract €X/MWh for N MWh/MW, Auction determines X

Reasons:

• Subsidy targeted on source of learning = investment aid– Reduces cost of capital and risk via debt finance

– Addresses failure to set right CO2 price

• Exposes RES to current locational spot price=> incentivizes efficient location, connection

• Does not amplify benefits of high wind/sun– Not over-reward favoured locations with same learning

• Auction better than bureaucrats at minimizing cost

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Conclusions

• RES support is justified by spillovers

=> support for capacity installed

• But the carbon price is inadequate– subsidy for shortfall in value of displaced CO2 ≈€10/MWh?

• RES are capital intensive => reduce WACC– long-term contracts with fixed capacity subsidy => debt finance

– auctions reduce cost

• Reliability needs capacity auction for flexible plant

• Ensure adequate payment for flexibility services to reduce cost

• Interconnectors provide both, need proper reward

• T&D tariffs need careful design

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Acronyms

BOS Balance of system (cost)CCGT Combined cycle gas turbine CfD Contract for DifferenceCONE Cost of New EntryEMR Electricity Market ReformFiT Feed-in tariffLbD Learning-by-doingLoLP Loss of Load ProbabilityQoS Quality of ServiceRES Renewable energy/electricity supplyRES-E Renewable energy supply from electricityRO Reliability OptionROC Renewables Obligation CertificateSEM Single Electricity Market of island of IrelandSMC System Marginal Cost = variable cost of most expensive generator in meritSO System OperatorT&D Transmission and Distribution

VOLL Value of Lost LoadWACC weighted average cost of capital