1. The public promotion of renewable energies sources in the electricity industry Yannick Perez Loyola de Palacio Chair RSCAS-EUI & Université of Paris-Sud Robert Schuman Centre for Advanced Studies Loyola de Palacio Chair on Energy Policy yannick.perez@u-psud.fr

2. Loads Productions décentralisées 95% 2 Renewable On-site Storage Backup Power 4 From Old days to Renewables issues Generation DistributionTransmission 3 Massive RES (5%) 1 EVs Residential Commercial Industrial Voltage issues and management opportunities Frequency management opportunities

3. Loyola de Palacio Chair on Energy Policy Robert Schuman Centre for Advanced Studies 3 Demand-side strategic policies have emerged as the “preferred instrument” in most countries The emergence of modern environmentalism has been accompanied by a desire to reap commercial benefits from individuals’ growing concern for the environment. US surveys of willingness to pay for green energy have found that between 40% to 70% of respondents are willing to pay a premium for green energy (Fahrar and Houston 1996; Zarnikau 2003). So as economist we expect a high “Willingness to paid” for Green Energy => market incentives (market forces) will deliver green energy by demand needs.

4. Loyola de Palacio Chair on Energy Policy Robert Schuman Centre for Advanced Studies Declared European WTP a premium ranging from 5% to over 25% Complied from Devries (2004)

5. Loyola de Palacio Chair on Energy Policy Robert Schuman Centre for Advanced Studies What told us the revealed preferences on the market? 2 to 4% population are taking the tariff solution by themselves... if you look at revealed preference in actual market solution… Bird et al., 2003; Morthorst & Jørgensen, 2005

6. Loyola de Palacio Chair on Energy Policy Robert Schuman Centre for Advanced Studies How to explain the gap between declared WTP and facts? Usual suspects: –Free riding –Opportunisme –Lack of transparency –Switching costs / searching cost –A clear link between consumption and increase of health (Experimental economics classical results : WTP goes from 5% to 15% if the link is clear)

7. Loyola de Palacio Chair on Energy Policy Robert Schuman Centre for Advanced Studies DEMAND SIDE STRATEGIES ARE NOT A GOOD TOOL FOR RES-E First conclusion

8. Loyola de Palacio Chair on Energy Policy Robert Schuman Centre for Advanced Studies 8 Government support is necessary for Renewable Energy Sources in Electricity (RES-E) although desirable from a social welfare perspective, their private costs are not competitive in power generation systems dominated by large electricity generation plants. Three reasons account for the bias against RES- E in the electricity market: –(i) environmental costs are not adequately internalized for conventional electricity generation technologies; –(ii) the absence of scale effects on costs, due to the small size of the plants, –and (iii) the random nature of their intermittent production (wind power, mini-hydraulic) creates negative externalities.

9. Loyola de Palacio Chair on Energy Policy Robert Schuman Centre for Advanced Studies EU Wind potential 9

10. Loyola de Palacio Chair on Energy Policy Robert Schuman Centre for Advanced Studies Wind and solar production variability

11. Government support is necessary for Renewable Energy Sources in Electricity (RES-E) But how? 11

12. Loyola de Palacio Chair on Energy Policy Robert Schuman Centre for Advanced Studies 12 Offer-side strategies So there are three instruments for “offer side” largely used: –feed-in tariffs (FIT), –bidding instruments (BI) for the assignment of long- term purchase contracts –and exchangeable quotas (EQ)

13. Loyola de Palacio Chair on Energy Policy Robert Schuman Centre for Advanced Studies 13 Definitions FITFIT obliges electricity distributors to purchase electricity from any new RES-E plant in their service area and pay a minimum guaranteed tariff per kWh that is fixed over a long period of time. Bidding Instruments selects by auctions RES-E projects and obliges local electricity distributors to buy electricity from the successful plants by a long term contract on the basis of bid price in the reference design. EQEQ introduces future obligatory targets for electricity suppliers to buy either green electricity directly from the RES-E producers, or green certificates issues to RES-E producers, targets being defined in terms of a percentage of their electricity deliveries.

14. Loyola de Palacio Chair on Energy Policy Robert Schuman Centre for Advanced Studies National subsidizing schemes 14 Source: Ragwitz et al. 2012. Recent developments of feed- in systems in the EU – A research paper for the International Feed-In Cooperation Target: 20% of energy consumption from renewables by 2020 RES integration into market differs from one country to another Feed-in tariff  access priority  start-up and shutdown constraints on conventional generators Feed-in premium and green certificates  no access priority  more flexibility to manage situation of excessive energy

15. Loyola de Palacio Chair on Energy Policy Robert Schuman Centre for Advanced Studies 15

16. Loyola de Palacio Chair on Energy Policy Robert Schuman Centre for Advanced Studies 16

17. Loyola de Palacio Chair on Energy Policy Robert Schuman Centre for Advanced Studies Energy mix 17

18. Economic analysis of the RES-E Support mechanism Some new debates 18

19. THE IMPACT OF CO2 AND RES ON THE PRICE OF ELECTRICITY

20. Natural EU « MERIT ORDER » Installed capacity Price/MWh ( €) 0 Hydro / Nuke Coal Gas Peak

22. EU « MERIT ORDER » with C02 Installed capacity Price/MWh ( €) 0 Hydro / Nuke Coal Gas Peak

23. EU « MERIT ORDER » with C02 And RES PRIORITY Installed capacity Price/MWh ( €) 0 Hydro / Nuke Coal Gas Peak

24. Interconnection Hydroelectric NuclearFuel/Gas CCGTWind PowerOther Coal 30-september-2010 6-Februray-2013 MW Wind 66.5% 15:50h Wind 1% 17:45h Wind Gas InterconnectionHydroelectricNuclearFuel/Gas CCGTWind Power Other Coal Wind generation in Spain Source REE, ENAGAS 24

25. Negatives prices EU « MERIT ORDER » Installed capacity Price/MWh ( €) 0 Increasing Marginal cost Increasing Opportunity cost of inflexibilidad

26. Existence of Negative prices in electricity markets: the German case

27. Gas plants are loosing money (Source: Roques IHS, 2013)

28. Economic analysis of the RES-E Support mechanism Some old debates 28

29. Loyola de Palacio Chair on Energy Policy Robert Schuman Centre for Advanced Studies 29 1- Survey from the « Public Economics Perspective” litterature Welfare economics suggest that an environmental tax reflecting the value of the marginal damage will provide incentives to achieve optimal levels of technology substitution and development of clean power Generation equipment. But little agreement on tax.

30. Loyola de Palacio Chair on Energy Policy Robert Schuman Centre for Advanced Studies Price or quantity policy instrument? First is the debate on the choice between price-instrument and quantity- instrument in a world of uncertainty, in terms of RES-E : –FIT could be considered a price instrument, –while bidding and Exchangeable quotas are quantity instruments. With perfect information + perfect rationality => choice is equivalent.

31. Loyola de Palacio Chair on Energy Policy Robert Schuman Centre for Advanced Studies But with imperfect information and rationality… We have to introduce a value for errors…underestimation or surestimation risk… –Quantity instrument are the better because you introduce a limit (quantity) –whereas with price mechanism… the social cost can be infinite. => Quantity instrument > price instrument => EQ & BI > FIT

32. Loyola de Palacio Chair on Energy Policy Robert Schuman Centre for Advanced Studies 32 RESULTS FROM PPE Feed-in Tariffs Bidding Instrument Exchangeable Quotas Timing Parameters Ex anteEx postEx anteEx postEx anteEx post Incentives intensity and cost control +/0+++

33. Loyola de Palacio Chair on Energy Policy Robert Schuman Centre for Advanced Studies Second argument from PPE The long term market compatibility with electricity market incentives

34. Loyola de Palacio Chair on Energy Policy Robert Schuman Centre for Advanced Studies 34 RESULTS FROM PPE Feed-in Tariffs Bidding Instrument Exchangeable Quotas Timing Parameters Ex anteEx postEx ante Ex post Ex ante Ex post Incentives intensity and cost control +/0+++ Conformity with electricity market regime 00/+++

35. Problem with this PPE result Denmark Spain and Germany, the 3 RES-E leaders are using FIT vs UK is using the best economic support but weak results… 35

36. Loyola de Palacio Chair on Energy Policy Robert Schuman Centre for Advanced Studies 36 Rational for Transaction Cost Economics (TCE) : Our claim, the TCE perspective allows us a better understanding of support mechanism: –TCE insists on investment safeguard as a major determinant of social efficiency (Henisz and Zelner (2001)) –TCE shows that instruments’ conformity to its institutional environment (North 1990) is a determinant of its viability in a long run. –TCE offers ex ante & ex post solutions to complete the “incomplete contract” problems

37. Loyola de Palacio Chair on Energy Policy Robert Schuman Centre for Advanced Studies 37 3- Methodology We compare and assess RES-E on several dimensions from both the Public Economics and TCE perspectives: Dimensions are : –market incentive intensity & control of the cost for consumers, –and conformity with the new market regime of electricity industry –safeguards of RES-E investments, –Ex ante adaptability of the instrument in order to preserve its stability in the long run, –Technological progress

38. Loyola de Palacio Chair on Energy Policy Robert Schuman Centre for Advanced Studies 38 RESULTS Feed-in Tariffs Bidding Instrument Exchangeable Quotas Timing Parameters Ex anteEx postEx anteEx postEx anteEx post Incentives intensity and cost control +/0+++ Conformity with electricity market regime 00/+++ Investment safeguards ++-- + +/-

39. Loyola de Palacio Chair on Energy Policy Robert Schuman Centre for Advanced Studies 39 RESULTS Feed-in Tariffs Bidding Instrument Exchangeable Quotas Timing Parameters Ex anteEx postEx anteEx postEx anteEx post Incentives intensity and cost control +/0+++ Conformity with electricity market regime 00/+++ Investment safeguards ++-- + +/- Ex ante adaptability of the instrument +00

40. Loyola de Palacio Chair on Energy Policy Robert Schuman Centre for Advanced Studies 40 RESULTS Feed-in Tariffs Bidding Instrument Exchangeable Quotas Timing Parameters Ex anteEx postEx ante Ex post Ex ante Ex post Incentives intensity and cost control +/0+++ Conformity with electricity market regime 00/+++ Investment safeguards ++-- + +/- Ex ante adaptability of the instrument +00 Technological progress ++ 0 (Best available per technology band) - (The most mature technique)

41. Loyola de Palacio Chair on Energy Policy Robert Schuman Centre for Advanced Studies 41 Conclusions We show that neither instruments offers an optimal solution in each of these dimensions… So there is no first best mechanism to support RES-E technologies. But each instrument “gives you what you paid for” even if you don’t know it at the beginning! 2 options are possible here : –Government can select an instrument in accordance with the relative importance of its own objectives. –We can use our framework as a sort of “ex post tool” to reveal implicit or tacit preference of governments in these subject.

42. The public promotion of renewable energies sources in the electricity industry Yannick Perez Loyola de Palacio Chair RSCAS-EUI & Université of Paris-Sud Robert Schuman Centre for Advanced Studies Loyola de Palacio Chair on Energy Policy yannick.perez@u-psud.fr