International Energy Workshop

University of Cape Town

2012-06-19

Lion Hirth, Falko Ueckerdt

Redistribution Effects of Energy and Climate Policy

• Redistribution: changes in economic surpluses of 3 sectors.• Three sectors: Producers (existing generators), Consumers, Government• Two policies:

1. Renewable support 2. CO2 pricing• The same methodological framework is applied in two models

1. Analytical model: understand chain of causality, derive qualitative findings2. Numerical model (North-Western Europe): quantify, assess ambiguous results

Goal: explain and quantify the redistribution flows induced by climate and energy policy

Producers

Consumers

Government

Producers Government

Consumers

RES support CO2 pricing

• Redistribution large relative to welfare effects• RES support:

– electricity price decreases producers lose, consumers win– RES support State pays

• CO2 pricing:– electricity price increases effect on producers depends on technology mix, consumers lose– auction / tax revenues government net income increases

• Opposite flows policy mix allows CO2 mitigation without changing profits

Conclusions

Producers

Consumers

Government

Producers Government

Consumers

RES support CO2 pricing

Consumers

Producers

• Redistribution large relative to welfare effects• RES support:

– electricity price decreases producers lose, consumers win– RES support State pays

• CO2 pricing:– electricity price increases effect on producers depends on technology mix, consumers lose– auction / tax revenues government net income increases

• Opposite flows policy mix allows CO2 mitigation without changing profits

Conclusions

Government

RES support

+

CO2 pricing

5

Connecting two branches of the literature

• Merit-order literature- How much does subsidized wind generation reduce the electricity price?- Do consumers gain, even if they pay the subsidy?- Sensfuss (2007), Sensfuß et al. (2008), Sáenz de Miera et al. (2008), Munksgaard & Morthorst (2008),

MacCormack et al. (2010), Rathmann (2007), O’Mahoney & Denny (2011), Gil et al. (2012)

• CO2 pricing literature- How do producer profits change when carbon trading is introduced (depending

on different allocation rules for emissions allowances)?- To what extend can CO2 costs be passed through to consumers?- Martinez & Neuhoff (2005), Chen et al. (2008), Burtraw et al. (2002), Bode (2006), Sijm et al. (2006)

6

Difference between policies (def.):

compare profits between

two new STEs

Long-term equilibrium (LTE) without policies• capital stock endogenous (“green field approach”)• scarcity prices long-term profits zero (free market entry, perfect competition)

Short-term equilibrium (STE) prior to policy

• capital stock is given (investment is possible)

• no scarcity prices

short-term profits positive (used to pay back capital cost)

New STE with RES support

short-term profits changed

investments sunk

CO2

pricing

Both

policies

New LTE with RES support

• LTE changed

zero LT profits

… …

capital stock endogenous

policy introduced

Effect of a policy (def.):

compare profits

before and after

policy is introduced

met

hodo

logi

cal f

ram

ewok

This framework is applied in an analytical and a numerical model

7

qLoad

(MW)

 

 

p(€/MWh)

T1

Δps

T (hours per year)

Ctotal costs

(€/MW-year)

T1

CoalGas 

 

  

Long-term screening curves

(Residual) load duration curve

Price duration curve

Analytical model

• Two generation technologies: coal and gas

• Methodology

- “classical approach” to investment planning:

1. screening curve

2. load duration curve (LDC)

3. price duration curve (PDC)

- assumptions: inelastic demand, no externalities, perfect competition, perfect

foresight, no intertemporal constraints, no trade, no storage, energy-only

markets

• Long-term equilibrium (derived in the paper)

- market equilibrium is cost-minimum

- long-term profits of all technologies are zero

- scarcity prices assure that there is no “missing money”

 

 

T (hours per year)

8

qLoad

(MW)

 

 

p(€/MWh)

T1

Δps

T (hours per year)

 

 

Ctotal costs

(€/MW-year)

T1

CoalGas 

 

  

Long-term screening curves

(Residual) load duration curve

Price duration curve

The short-term equilibrium

• investments are sunk

no capital cost

• capacity is constrained

• no scarcity prices

• Results

- base-load technology makes ST profits

Short-term screening curves

T1

T

T

Coal

T T1

 

 

 

 

T (hours per year)

9

Short-term screening curvesC

(€/MW-year)

T1

q

(MW)

T

T

Coal

T

p

(€/MWh)

T1

RES support

CO2 pricing

 

 

 

 

10

 

 

Short-term screening curvesC

(€/MW-year)

T1

T

T

Coal

T T1

 

 

 

 

q

(MW)

T

T

T

Short-term screening curves

With wind support

p

(€/MWh)

Coal

Gas

T1

T1T2wind

Without supportWind Support

• changes the LDC to RLDC

• strictly reduces producer rents

RES support

C

(€/MW-year)

q

(MW)

p

(€/MWh)

11

Short-term screening curves

T1

q

(MW)

T

T

Coal

T

p

(€/MWh)

T1

CO2 pricing

 

 

 

 

CO2 pricing

• Is more complex and shown in paper

• Effect on producers depends on

technology and CO2 price

C

(€/MW-year)

Model & scenario setupNumerical model

• why numerical modelling?- quantitative estimates for North-Western

Europe (orders of magnitude)- ten technologies (wind, solar, eight

dispatchable, pump hydro)- interconnectors, storage, CHP, ancillary services

• Same framework applied1. long-term equilibrium2. short-term equilibrium3. policy shocks

• integrated dispatch and investment- hourly time steps for a full year- existing plant stack, storage and interconnectors- endogenous (dis-)investments in generation,

storage and interconnectors via annualized investment costs

• 1M equations, 4M non-zeros, solving time ½ h

13

How big is the redistribution effect of wind support?

PANEL 1: REDISTRIBUTION (€/MWH) WHEN INCREASING THE WIND SHARE FROM ZERO TO 30 %.

Conv Producers Nuclear Rents - 13 Coal Rents - 9 Gas Rents - 1

Producer Surplus - 22

Effect on Government Budget CO2 / Wind - 18

Gov’t Budget - 18

Consumer Surplus Electricity market + 28 Heat market - 2 AS market - 0 Interconnectors - 0

Cons Surplus + 25

Welfare Consumers + 25 Producers - 22 Government - 18

Welfare - 15

70% of Nuclear, 60% of

coal, 50% of gas profits

are taken away

Redistribution effect is

large

Consumers gain even if they pay for

subsidies

Externalities ignored

Wind support

PANEL 1: REDISTRIBUTION (€/MWH) WHEN INCREASING THE WIND SHARE FROM ZERO TO 30 %.

Conv Producers Nuclear Rents - 13 Coal Rents - 9 Gas Rents - 1

Producer Surplus - 22

Effect on Government Budget CO2 / Wind - 18

Gov’t Budget - 18

Consumer Surplus Electricity market + 28 Heat market - 2 AS market - 0 Interconnectors - 0

Cons Surplus + 25

Welfare Consumers + 25 Producers - 22 Government - 18

Welfare - 15

PANEL 2: REDISTRIBUTION (€/MWH) WHEN INCREASING THE CO2 PRICE FROM ZERO TO 100 €/T

Conv Producers Nuclear Rents + 21 Coal Rents - 10 Gas Rents + 0

Prod Surplus + 12

Government CO2 + 20 Wind / Gov’t Budget + 20

Consumer Surplus Electricity market - 43 Heat market - 6 AS market - 0 Interconnectors - 0

Cons Surplus - 49

Welfare Consumers - 49 Producers + 12 Government + 20

Welfare - 17

Existing generators’ ST profits

increase

Technology dependence

CO2 pricing

Wind support and CO2 pricing induce opposite redistribution flows

Questions?

Comments?

Ideas?

Falko.ueckerdt@pik-potsdam.de

16

How big is the redistribution effect of CO2 pricing?

PANEL 2: REDISTRIBUTION (€/MWH) WHEN INCREASING THE CO2 PRICE FROM ZERO TO 100 €/T

Conv Producers Nuclear Rents + 21 Coal Rents - 10 Gas Rents + 0

Prod Surplus + 12

Government CO2 + 20 Wind / Gov’t Budget + 20

Consumer Surplus Electricity market - 43 Heat market - 6 AS market - 0 Interconnectors - 0

Cons Surplus - 49

Welfare Consumers - 49 Producers + 12 Government + 20

Welfare - 17

Existing generators’ ST

profits increase

Wind support and CO2 pricing induce opposite redistribution flows

Technology dependence

Ctotal costs

(€/kW - year)

T

Coal

Gas

T1

C

T

CoalGas

T1

Ctotal costs

(€/kW - year)

T

CoalGas

T1

C

T

Coal

Gas

New Gas

Ctotal costs

(€/kW - year)

T

Coal

Gas

New Gas

(c)

(e)

(d)

(b) (a)

T2CO2

T2CO2

CO2 pricing: short-term screening curves pivot(a) Rents are generated by coal power plants when gas power plants are price-setting.(b) The difference of variable costs decreases, thus the coal rents decrease. The dispatch remains unchanged.(c) No rents occur because variable costs of coal and gas power plants are equal. (65€/t CO2)(d) Now the dispatch changes: Gas power plants now have least variable costs and cover base load. Coal power plants only cover the remaining base, mid and peak load. Gas power plants generate rents when coal power plants are price-setting.(e) The screening curve of coal touches the screening curve of new gas power plants. The rents of gas power plants reach a maximum. (80€/t CO2)(f) Now, new investments in gas power plants lead to decommissioning of existing coal capacity. Old gas power plants are the only plants that generate rents. These rents remain at their maximum value.

C

T

Coal

(f)

T2CO2

Gas

New Gas

Assuming variable costs of 25 €/MWhth (gas) and 12 €/MWhth (coal), efficiencies of 48% (gas) and 39% (coal), carbon intensities of 0,24

t/MWhth (gas) and 0,32 t/MWhth (coal) and investment costs of 100€/kWa (gas).

Short-term screening curvesC

(€/MW-year)

T1

q

(MW)

T

T

Coal

T

p

(€/MWh)

T1

𝑞 ❑1𝑐𝑜𝑎𝑙

𝑐 ❑𝑔𝑎𝑠❑

𝑐 ❑𝑐𝑜𝑎𝑙❑

𝑞 ❑1𝑔𝑎𝑠

The effect of CO2 pricing• With high CO2 price:

Shift of rents only depends on the initial long-term capacity mix

General results• Total producer profits

depend on long-term capacities and CO2 price– Large redistribution

within producers depending on technologies

– More low-carbon technology total producer rents tend to increase

• Consumers pay• State benefits

No CO2-Pricing CO2-Pricing

T

New gas

T

Coal

GasNew Gas

T

T1

Short-term screening curves

𝑞 ❑2𝑔𝑎𝑠

𝑞 ❑2𝑐𝑜𝑎𝑙

𝑐 ❑𝑐𝑜𝑎𝑙𝐶𝑂2

𝑐 ❑𝑔𝑎𝑠𝐶𝑂2

C

(€/MW-year)

q

(MW)

T1 T2CO2

T2CO2

replaced

𝑅2𝑔𝑎𝑠−𝑅1

𝑐𝑜𝑎𝑙=𝐼𝑔𝑎𝑠 (𝑞1𝑔𝑎𝑠−𝑞1

𝑐𝑜𝑎𝑙 )

North-Western Europe?

Numerical model

Policy Mix: redistribution can be minimized

Expenditure of the electricity industry

25 1619

2425

0

20

40

60

80

0 €/t 17 €/t 33 €/t 66 €/t 100 €/t

0% 5% 10% 20% 30%

€/M

Wh

0

27

55

82

110

€ bn

p.a

.

Rents of conventional generators (with numbers)Generation Costs w/o CO2CO2 paymentsRents needed to recover investment costs

CO2

wind

Redistribution effects of policy changes

-50

-25

0

25

ConsumerRent

Producer RentState Revenue EconomicWelfare

€/M

Wh

-69

-34

0

34

€ bn

p.a

.

Wind penetration from 0 to 30%CO2 price from 0 to 100 €/tBoth policies simultaneously

This paper brings together two branches of literature

Merit-order literature• Decrease of spot market prices due to

renewable electricity generation savings for the consumer

• Sensfuss 2007, 2008, de Miera et al. 2008, Munksgaard & Morthorst 2008

CO2 pricing literature• How do producer profits change

(depending on different allocation rules for emissions allowances)?

• To what extend CO2 costs can be passed through to consumers?

• Martinez & Neuhoff 2005, Chen et al. 2008, Burtraw et al. 2002

Our work adds to the literature in three ways.

• effects of both policies in a consistent framework with the long-term equilibrium as benchmark

• focus on redistribution effects: evolution of effects at different levels of policy intervention and comprehensive accounting of all flows

• analytical model to trace causal mechanisms and numerical model for quantifications

T T

T

CoalGas

No CO2-Pricing CO2-Pricing

T1

T T T1

Coal

Gas

New Gas

T

T1

Short-term screening curvesShort-term screening curves

𝑞 ❑1𝑔𝑎𝑠

𝑞 ❑1𝑐𝑜𝑎𝑙 𝑞 ❑1

𝑔𝑎𝑠

𝑞 ❑2𝑐𝑜𝑎𝑙

𝑐 ❑𝑔𝑎𝑠❑

𝑐 ❑𝑐𝑜𝑎𝑙❑

𝑐 ❑𝑐𝑜𝑎𝑙𝐶𝑂2

𝑐 ❑𝑔𝑎𝑠𝐶𝑂2

C

(€/MW-year)

q

(MW)

C

(€/MW-year)

q

(MW)

p

(€/MWh)

p

(€/MWh)

T1 T2CO2

T2CO2

(c)

(e)

(d)

(b) (a)

(f)

𝑐 ❑𝑛𝑢𝑐❑

𝑞 ❑1𝑛𝑢𝑐𝑞 ❑1

𝑛𝑢𝑐

CO2 pricing within a nuclear system tends to increase conventional rents

• xx

Ctotal costs

(€/MW-year)

T1

qLoad

(MW)

T (hours per year)

CoalGas

p(€/MWh)

T1

Δps

T (hours per year)

T (hours per year)

(c)

(a)

(b)

Long-term screening curves

𝑞 ❑1𝑐𝑜𝑎𝑙

𝑞 ❑1𝑔𝑎𝑠

𝑐 ❑𝑔𝑎𝑠❑

𝑐 ❑𝑐𝑜𝑎𝑙❑

𝑐 ❑𝑔𝑎𝑠❑

𝑐 ❑𝑐𝑜𝑎𝑙❑

𝐼 ❑𝑔𝑎𝑠❑

𝐼 ❑𝑐𝑜𝑎𝑙❑

𝑞 ❑1𝑛𝑢𝑐𝑙𝑒𝑎𝑟

Long-term equilibrium with nuclear• Back-up slide

23/14

Model & scenario setup• why numerical modelling?

– quantitative estimates for North-Western Europe (orders of magnitude)

– ten technologies (wind, solar, eight dispatchable, pump hydro)– interconnectors, storage, CHP, ancillary services

• Same framework applied1. long-term equilibrium2. short-term equilibrium3. policy shocks

• integrated dispatch and investment– hourly time steps for a full year– existing plant stack, storage and interconnectors– endogenous (dis-)investments in generation, storage and

interconnectors via annualized investment costs• stylized electricity market model

– total system costs are minimized with respect to investment and dispatch decisions under a large set of technical constraints

– no market power, externalities or other market imperfections cost minimization is equivalent to profit-maximizing firms

– electricity price is set by variable cost of marginal plant– no load flow, NTCs between market areas

• back-tested and calibrated to market prices• 1M equations, 4M non-zeros, solving time ½ h