The Missing Money Problem Nora Schindler, M.Sc., M.Sc.(WU) The Missing Money Problem The effect of diminishing wholesale prices on investments in power generating plants 26th of October 2015 “The Dynamic Energy Landscape” USAEE Pittsburgh

Higher share of RES feed-in leads to lower prices, fewer NOHR Higher share of RES feed-in leads to lower prices, fewer NOHR* and alters investment incentives Costs in € Feed-in of renewables ↑ Costs in € D D Oil Oil 𝑝 1 Gas Gas Variable cash-flows by type 𝑝 2 Coal Coal Nuclear Nuclear Hydro Hydro RES RES Capacity in MWh Capacity in MWh *NOHR: Number of Hours Running

Depending on the planttype different rationales for investment can be decisive Dixit & Pindyck (1994) Var(price) ↑  Investments ↓ Value of waiting Bar-Ilan & Strange (1996) Var(price) ↑  Investments ↑ Value of lost option

The Merit order curve in A and GER shifts to the right with higher feed-in of renewable energy sources such as wind 0 Geothermische Kraftwerke 0 Wind 0 Solar 20<VC<0 Atomkraft, Laufwasser, Müll 40<VC<20 Kohle, Pumpspeicherkraftwerke, Holzpelletkraftwerke 42<VC<40 Gaskraftwerke 42<VC<170 Ölkraftwerke Demand 66087 MW Wind Output 253 MW Demand 66180 MW Wind Output 22387 MW

The price is lower when the feed-in of renewables is higher, ceteris paribus Wind, Solar, Geo-thermal Wind, Solar, Geo-thermal Demand Supply Demand Supply 0 Geothermische Kraftwerke 0 Wind 0 Solar 20<VC<0 Atomkraft, Laufwasser, Müll 40<VC<20 Kohle, Pumpspeicherkraftwerke, Holzpelletkraftwerke 42<VC<40 Gaskraftwerke 42<VC<170 Ölkraftwerke Einflussfaktoren Verfügbarkeit Brennstoffkosten Wirkungsgrad Baujahr Demand 66087 MW Wind Output 253 MW Demand 66180 MW Wind Output 22387 MW

The German firm E.ON owns a very diversified generation mix that looks similar to a country‘s merit order curve

Investments are inertial and the majority of investment differentials is zero Inv.diff N Mean Min Max <0 295 -124.82 -2407 -2.22e-16 8,057 >0 961 68.73 2.22e-16 2000 Country Firm Year Type Inv. diff UK RWE 2012 9 CCGT 2000 D 5 Lignite Coal 1850 2010 1650 E.ON 2013 6 Hard Coal -1940 3 Nuclear -2223 -2407

The link between the NOHR The link between the NOHR* and the variance of the price varies by type and shows a similar pattern across countries *NOHR: Number of Hours Running

Scatterplots by generation type suggest different investment incentives Disinvestment No change in investment Investment

Estimation specifications for the neoclassical investment model Data 14 European Countries Years 2006- 2013 PLATTS PowerVision Power plant capacities Power exchanges Electricity Prices ∆𝐼 𝑖,𝑗,𝑡 =𝛼+𝛽 log 𝑤𝑣𝐶𝐹 𝑖,𝑗,𝑡 + 𝜀 𝑖,𝑗,𝑡 ∆𝐼 𝑖,𝑗,𝑡 =𝛼+𝛽 w 𝑁𝑂𝐻𝑅 𝑖,𝑗,𝑡 + 𝜀 𝑖,𝑗,𝑡 ∆𝐼 𝑖,𝑗,𝑡 =𝛼+𝛽 w𝑁𝑂𝐻𝑅 𝑖,𝑗,𝑡 ∗log 𝑤𝑣𝐶𝐹 𝑖,𝑗,𝑡 + 𝜀 𝑖,𝑗,𝑡 w𝑣𝐶𝐹 Weighted variable cash-flows 𝑣𝑐 Variable costs 𝐸𝐹 Efficiency factor 𝑎𝑣𝐶𝑎𝑝 Available capacity 𝑖 Country 𝑗 Firm 𝑘 Planttype 𝑡 Year ℎ Hour ∆𝐼 𝑖,𝑗,𝑡 = 𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦 𝑖,𝑗,𝑡 − 𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦 𝑖,𝑗,𝑡−1 𝑣𝐶𝐹 𝑖,𝑗,𝑡 = 𝑘=1 12 ℎ=1 8760 𝑝 ℎ,𝑡 − 𝑣𝑐 𝑘,ℎ ∗ 𝐸𝐹 𝑘,𝑡 ∗ 𝑎𝑣𝐶𝑎𝑝 𝑖,𝑗,𝑘,𝑡 𝑓𝑖𝑟𝑚𝑠ℎ𝑎𝑟𝑒= 𝑎𝑣𝐶𝑎𝑝 𝑖,𝑗,𝑡 𝑎𝑣𝐶𝑎𝑝 𝑖,𝑡 ∗100 Idea: Influence of Price on Investment I.e. E.ON is active in different countries How does a change in investment incentives change the investment decisions in other countries? Are there any strategic interaction effects present?

Results for the ordered logit model show a significant and positive influence of vCF and NOHR on investment Country and firm level VARIABLES (1) (2) (3) (4) (5) (6) (7) (8) l_loinvdiff 0.323*** 0.415*** 0.324*** 0.387*** 0.307*** 0.352*** 0.337*** (0.0835) (0.0842) (0.0840) (0.0837) (0.0844) log_wvCF 0.136*** 0.131*** 0.112*** 0.104*** (0.0161) (0.0163) (0.0176) (0.0180) wnohr 4.88e-05*** 2.77e-05* 5.05e-05*** 3.30e-05** (1.48e-05) (1.52e-05) (1.50e-05) (1.54e-05) wnohr*log_wvCF 5.30e-06*** 4.62e-06*** (8.88e-07) (8.97e-07) firmshare 0.0208*** 0.0387*** 0.0222*** 0.0341*** (0.00638) (0.00632) (0.00646) (0.00625) Observations 3,023 AIC 4374 4436 4372 4410 4364 4394 4362 4378 BIC 4398 4460 4402 4434 4424 4408 Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

The results for the marginal effects show the probability for a firm to be investing is higher for higher levels of vCF, NOHR and firmshare

The empirical analysis supports the assumptions made for the impact of vCF and NOHR on investments Analysis of the effect of wholesale prices on Variable cash-flows and NOHR Actual investment in capacity shows that higher variable cash-flows and more NOHR result in positive incentives to invest Further research Differentiate between different types of generating capacities Analyse whether there are strategic interaction effects between countries, firms and types

Thank you for your attention! FORSCHUNGSINSTITUT FÜR REGULIERUNGSÖKONOMIE RESEARCH INSTITUTE FOR REGULATORY ECONOMICS Welthandelsplatz 1, 1020 Vienna, Austria Nora Schindler, M.Sc., MSc(WU) T +43-1-313 36-5898 Nora.Schindler@wu.ac.at www.wu.ac.at

No change in investment The results for the marginal effects show the probability for a firm to be investing is higher for higher levels of vCF, NOHR and firmshare Regression (3) Regression (7) dy/dx Std. Err. z P>z disinvestment l_loinvdiff -0.0161875 0.00427 -3.79 -0.0153272 0.00425 -3.6 log_wvCF -0.0065531 0.00087 -7.54 -0.0052003 0.00092 -5.63 wnohr -0.00000139 -1.81 0.07 -0.00000165 -2.14 0.033 firmshare -0.0011058 0.00033 -3.35 0.001 No change in investment -0.0396116 0.01041 -3.8 -0.0377284 0.01046 -3.61 -0.0160359 0.00216 -7.41 -0.0128008 0.0023 -5.56 -0.00000339 -0.00000405 0.032 -0.0027218 0.00081 -3.37 investment 0.0557991 0.01442 3.87 0.0530556 0.01448 3.66 0.022589 0.00282 8.01 0.0180011 0.0031 5.81 0.00000478 1.82 0.069 0.0000057 2.15 0.0038276 0.00112 3.41

What influence do diminishing wholesale prices have on the NOHR What influence do diminishing wholesale prices have on the NOHR* and vCF** and ultimately on investments? globest news *NOHR: Number of Hours Running **vCF: variable Cash-Flows

The mark-up for CCGT plants shows a decreasing trend