1. 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

2. 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

3. 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

4. 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

5. 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

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

7. Investments are inertial and the majority of investment differentials is zero
Inv.diff N
Mean
Min
Max
<0
295
-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

8. 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

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

10. Estimation specifications for the neoclassical investment model
Data
14 European Countries
Years
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= 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?

11. 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***
( )
( )
( )
( )
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

12. 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

13. 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

14. 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

15. 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
-3.79
-3.6
log_wvCF
-7.54
-5.63
wnohr
-1.81
0.07
-2.14
0.033
firmshare
-3.35
0.001
No change in investment
-3.8
-3.61
-7.41
0.0023
-5.56
0.032
-3.37
investment
3.87
3.66
8.01
0.0031
5.81
1.82
0.069
2.15
3.41

16. 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

17. The mark-up for CCGT plants shows a decreasing trend