Merit Order Effect of Wind Power – Impact on EU 2020 ... · Results: Merit Order and Volume Merit...

Merit Order Effect of Wind Power –Impact on EU 2020 Electricity Prices

15 June 2010AEE Madrid 20102

AEE Wind Energy Convention, Madrid June 15-16

Jesper MunksgaardPh.D., Senior Consultant

Agenda

• Background

• Literature review


• Modeling analysis

• Conclusions

Background

• By 2020 wind power will increase significantly

• Wind power will reduce average wholesale power price levels

• For EWEA we have analyzed the price impact when wind power replaces high cost thermal power plants in the “merit order curve”


replaces high cost thermal power plants in the “merit order curve”

• Study carried out in two phases:I. Review of previous studiesII. Analyses made by Pöyry power market model

What is Merit Order Effect ?

Coal

Gas

Marginal costs Demand

Merit ordereffect

Coal

Gas

Marginal costs Demand

Merit ordereffect


Coal

Generation volume

Renewables

Wind

Original merit order curve New merit order curve with additional wind generation

Nuclear

Coal

Generation volume

Renewables

Wind

Original merit order curve New merit order curve with additional wind generation

Nuclear

A1

Diapositiva 5

A1 I exchanged the picture with the latest one form the report where nuclear is inlcuded!Administrator; 10/06/2010

Phase I: Literature Review

• 14 studies within three categories:

a) Impact of wind power on spot market prices in a single country

b) Costs and benefits of renewable energy support schemes


b) Costs and benefits of renewable energy support schemes� analyze costs and benefits of support schemes from an end-user point of

view

c) Wind power and the power grid infrastructure � i.e. transmission capacities and dispatch mechanisms

MOE Price and Volume Effect in 2009 Prices

23

15

20

25P

rice

effe

ct in

Eur

o/M

Wh

3

4

5

6 Volum

e effect in billion Euro/year

MOE Price effect

MOE Volume effect

Merit Order Effect in € per MWh and billion € per year


8

17

4

23

11

3

5

0.1 1.3

0

5

10

Sensfu

ss e

t al.,

DEJo

nsso

n et

al.,

DK

Mun

ksga

ard

et a

l., DK

Delaru

e et

al.,

BE

Weig

t, D

ENeu

barth

, DE

Pric

e ef

fect

in E

uro/

MW

h

0

1

2

3

Volum

e effect in billion Euro/year

Phase Il: Pöyry‘s Modeling Analysis

• Aim: – To quantify merit order effect from wind power in Europe in 2020

• Methodology: – Scenario analysis: Compare a Reference to a Wind scenario– Marginal cost curves (short term) assuming a long term market

equilibrium– Grid investments are not considered


– Grid investments are not considered

• Pöyry applied The Classic Carbon Model – A power and carbon market model for the European power market– Conventional investments are determined by the model– Model results include wholesale and end-user prices for each market

area, trade flows, generation, demand, fuel use, CO2 emissions and the carbon (EUA) price

Coverage of the analysis

• EU 27 plus Norway and Switzerland

3000 (143)

11000 (1021)

2350 (430)

6500 (3180)

7000(102)

600(78)

300(27)

1100

MW installed in 2020

(MW installed in 2008)

Legend:

Total EU265 GW(65 GW)

3000 (143)

11000 (1021)

2350 (430)

6500 (3180)

7000(102)

600(78)

300(27)

1100



Legend:



Legend:

Total EU265 GW(65 GW)


4000 (995)

52000 (23903)

12500 (472)

(3180)34000(3241)

26000(3404)

42500(16740) 18000

(3736)

9000(2862)

1800(150)

1200(127)

1000(3)

3500(10)

3500(158)

8500(985)

700(0)

11400(2225)

4500(384)

(102)1100(54)

500(0)

700(35)

160(20)

4000 (995)

52000 (23903)

12500 (472)

(3180)34000(3241)

26000(3404)

42500(16740) 18000

(3736)

9000(2862)

1800(150)

1200(127)

1000(3)

3500(10)

3500(158)

8500(985)

700(0)

11400(2225)

4500(384)

(102)1100(54)

500(0)

700(35)

160(20)

The figure indicate assumed installed wind capacities in accordance to EWEAs Pure Power Scenario!

Modeling Analyses for 2020

• Two scenarios defined by EWEA:

– Reference Scenario: Renewable power generation mix in 2020 equals in shares the actual mix of 2008. No further wind and other RES investments are assumed

Wind Scenario: Wind power

Input ParameterReferenceScenario

Wind Scenario

Fuel prices

Forecast from IEA

Coal: 10.5 €/MWh, Gas: 28 €/MWh, Oil: 110 $/boe

Wind capacities As 2008High growth compared to

2008

EU target: -20% EU target: -20%


– Wind Scenario: Wind power capacities increased by 300% from 2008 until 2020 (~200 GW)

• The merit order effect is estimated as difference in market prices between the two scenarios

Carbonpolicies/targets

EU target: -20% to 1990

CO2 price: 48 €/ton

EU target: -20% to 1990

CO2 price: 30 €/ton

Conventionalinvestments

According tolong run

marginal costs

According to long run

marginal costs

Capacities of RESother than wind

As base year 2008

Share as base year 2008

For the same “Input Parameter”, blue marked cells represent the same value. Red marked cells are representing a different input value compared to the other scenario.

Results: Merit Order and Volume Merit Order Effect

• Wind generation displaces conventional gas and coal generation

• Average power market price in Europe is thereby reduced in

Wind generation

volume

Merit ordereffect

Volume order effect

Merit order effect per wind MWh

Year TWh/a €/MWh bio €/a €/MWh

2020 648 10.8 41.7 64.4

MOE has been estimated at


Europe is thereby reduced in Europe

• The Wind Scenario reduce wholesale market revenue by nearly 42 billion € per annum

MOE has been estimated at 10.8 €/MWh

Wholesale Prices in Europe in 2020

• Reference ScenarioIn Czech, Poland, Hungary and Slovakia average prices are about 50% higher than EU average

20

30

40

50

60

70

80

90

100

4

6

8

10

12

14

16

18

20

Price

diffe

ren

ce in

%

Wh

ole

sale

pri

ce in

€ce

nts

pe

r k

Wh

Average wholesale prices in 2020

Reference 2020

WIND 2020

Price difference


• Wind ScenarioIn Czech, Poland, Hungary and Slovakia the price level is about 15% higher than the EU average

0

10

20

0

2

4

Au

str

ia

Be

lgiu

m

Cze

ch

De

nm

ark

Fin

lan

d

Fra

nce

Ge

rma

ny

Hu

ng

ary

Ita

ly

Ne

the

rla

nd

s

No

rwa

y

Po

lan

d

Po

rtu

ga

l

Slo

va

kia

Slo

ve

nia

Sp

ain

Sw

ed

en

Sw

itze

rla

nd

Esto

nia

La

tvia

Lit

hu

an

ia UK

Wh

ole

sale

pri

ce in

4

6

8

10

12

14

16

18

20

Mar

gina

l Cos

ts in

€ c

ent/k

Wh

Demand

Equilibrium price

8.58 €c/kWh

Reference Scenario 2020 – Merit Order Curve

• European power demand is first served by waste, hydro and wind technologies with low short term marginal costs

• Nuclear provide 780 TWh at marginal costs of on average 1.5 €cent/kWh


Fuel Wind Hydro Nuclear Lignite Coal Peat Biomass HFO Oil Gas Waste

Colour

0

2

4

0 500 1000 1500 2000 2500 3000 3500 4000 4500

Cumulative generation in TWh

Mar

gina

l Cos

ts in

€ c

ent/k

Wh

1.5 €cent/kWh

• Major share of Europe’s demand is supplied at cost levels between 5 and 7 €cent/kWh, mainly by hard coal technologies

• At higher cost levels, gas technologies are dominating

4

6

8

10

12

14

16

18

Mar

gina

l Cos

ts in

€ c

ent/k

Wh

Demand

Equilibrium price

7.5 €c/kWh

Wind Scenario 2020 – Merit Order Curve

• Merit order curve and its technology mix and sequence very much resembles the Reference Scenario

• Wind power mainly replaces coal and gas


Fuel Wind Hydro Nuclear Lignite Coal Peat Biomass HFO Oil Gas Waste

Colour

0

2

4

0 500 1000 1500 2000 2500 3000 3500 4000 4500Cumulative generation in TWh

Mar

gina

l Cos

ts in

€ c

ent/k

Wh

replaces coal and gas power as compared with the Reference Scenario

• Marginal cost levels for the conventional technologies vary in the two scenarios mainly due to the resulting difference in the CO2 price

Comparison of the two scenarios’ merit order curve

10

12

14

16

18S

hort

term

mar

gina

l Cos

ts in

€

cent

/kW

h

Fuel price sensitivity in Reference Scenario

Reference Scenario 2020 Wind Scenario 2020

Merit order effect:

1.08 €c/kWh

Merit order effect


0

2

4

6

8

0 500 1000 1500 2000 2500 3000 3500 4000 4500

Sho

rt te

rm m

argi

nal C

osts

in

Cumulative generation in TWh

Merit order effect of different sensitivity cases

The sensitivity analysis included the increase of the EU GHG reduction targetfrom -20% to -30% and -40% as well as the increase of fuel prices by 25%.


Conclusions

• Wind power will have a strong impact on future spot market prices in European power market

• Previous studies find merit order effects in range 3-23 € per MWh


• Pöyry’s analyses find merit order effect of nearly 42 billion € per year on European level

• Wind power reduces EU carbon price level by one third in 2020

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