impacts of renewable electricity generation on spot market prices in germany - a detailed analysis of trade-offs between benefits and costs of renewable support schemes
Thao PHAM, Centre of Geopolitics of Energy and Raw Materials (CGEMP)
University of Paris Dauphine
Place du Maréchal de Lattre de Tassigny, 75775 PARIS Cedex 16, France
Phone: +33 (0) 1 44 05 43 53, Fax: +33 (0) 1 44 05 44 84
Email:
Overview
The nuclear accident in Fukushima in March 2011 has ignited the debates over nuclear revision across Europe. Germany is perhaps the most distinguished example of this energy policy trend. The next day of Fukushima, the German government decided to accelerate the phase-out of nuclear fleet by 2022, starting with the immediate closure of the eight oldest plants. Although fossil fuels fired energy has to put in place during the transitional period, renewable electricity generation is being considered as cornerstone of current and future energy supply.
Developing renewable energy taking into account all challenges requires a carefully designed connection policy. In Germany, a lot of support schemes for the development of renewable electricity generation have been put in place. The perhaps most popular, well functioned system to accelerate investment in renewable energy has been "feed-in-tariff" mechanism put in place since 1991. According to this law, all electricity generated from renewable energy sources will be bought by the grid operators and immediately integrated into the system (automatically dispachable). The renewable generators will be paid at a guaranteed feed-in-tariff, which is therefore independent from the conditions of supply and demand that determine the market price. If the market price is lower than the tariff, the loss suffered by the system operator is compensated by all consumers. Critics state that the burden borne by consumers is too high, and that "privileged dispatch" could create perverse effects such as negative prices or negative externalities on the network. This has raised concerns over the efficiency of the renewable support scheme.
An important aspect that must nevertheless be considered in the discussion is that electricity generated by renewable energy sources brings a lot of values. Besides its clear environmental effects, the integration of renewable into electricity system creates a price reduction effect (or merit-order effect). The trade-offs between the values brought by renewable electricity power and the challenges to put it in place have not been always clear. In this paper, I attempt to shed some light on this issue.
Methods
I first provide a detailed analysis of costs and benefits brought by putting in place the support schemes for the development of renewable electricity generation in Germany.
The evaluation of price effect created by renewable electricity generation is then carried out by econometric models using data in German wholesale electricity market during 2009-2012. I consider both linear and non-linear relationship between spot prices and wind power production by estimating autoregressive models with exogenous variables (AR-X) and generalized autoregressive conditional heteroskedasticity models (GARCH-X). Given the strong fluctuation of spot prices, I consider a double temporal segmentation: hourly and seasonal segmentations.
Results
In the first place, I show that the intermittent nature of electricity generation from renewable sources is a potential obstacle to the larger deployment of these technologies. With the presence of intermittence, the average pricespaid to renewable generators are lower than those of conventional generators (with coal or gas-fired plants). The existence of market powercan make the conditions even less favor to intermittent generators: wind power suppliers benefit less from the exercise of market power than conventional thermal suppliers. Other problems bound by the integration of renewables are perverse effects on the equilibrium prices and negative externalities on neighboring network systems.
Regarding econometric analysis, non-linear models (GARCH-X) are foundbetter able to capture relevant factors and dynamic considerations that are not present in linear models (AR-X). The results show that during period 2009-2012, wind power generation injected into German electricity network induces a slight decrease of electricity spot prices and an increase of their volatility. The magnitude of those two effects are different in different hours of the day and seasons of the year.
Conclusions
This paper analyses the trade-offs between benefits and costs of renewable support schemes as well as the impact of the supported renewable electricity generation on spot prices in Germany. Although the model-based results suggest that the renewable generation has a small impact on market prices during the period 2009-2012, this can be explained by many reasons: other effects such as closure of nuclear plants or network congestion might lead to an increase of market prices as a whole; or wind power production still comprises a small share of total output (~ 9% during the examined period). The volume of the merit-order effect created by wind power in the next 10 years is subject to future research.
References
Bollerslev, T. (1986) Generalized autoregressive conditional heteroskedasticity, Journal of EconometricsVolume 31, 307-27.
Green, R., Vasilakos, N., (2010) Market behaviour with large amounts of intermittent generation, Energy Policy, Volume 38, Issue 7, July 2010, p. 3211–3220.
Mountain, B., (2013) Market power and generation from renewables : the case of wind in the South Australian electricity market, Economics of energy & environmental policy Volume. 2.2013, 1, p. 55-72
Sensfub, F., Ragwitz, M., Genoese, M., (2008) The merit-order effect: A detailed analysis of the price effect of renewable electricity generation on spot market prices in Germany, Energy Policy, Volume 36, Issue 8, August 2008, p. 3086–3094.
Twomey, P., Neuhoff, K., (2010) Wind power and market power in competitive markets, Energy Policy, Volume 38, Issue 7, July 2010, p.3198–3210.