Showing papers in "Economics of Energy and Environmental Policy in 2017"

Prosumage of solar electricity: pros, cons, and the system perspective

Abstract: We examine the role of prosumage of solar electricity, i.e. PV self-generation combined with distributed storage, in the context of the low-carbon energy transformation. First, we devise a qualitative account of arguments in favor of and against prosumage. Second, we give an overview of prosumage in Germany. Prosumage will likely gain momentum as support payments expire for an increasing share of PV capacities after 2020. Third, we model possible system effects in a German 2035 scenario. Prosumage batteries allow for a notable substitution of other storage facilities only if fully available for market interactions. System-friendly operation would also help limiting cost increases. We conclude that policymakers should not unnecessarily restrict prosumage, but consider system and distributional aspects.

“Prosumage” and the British Electricity Market

Abstract: Domestic electricity consumers with PV panels have become known as "prosumers"; some of them also have energy storage and we have named the combination "prosumage". The challenges of renewable intermittency could be offset by storing power, and many engineering studies consider the role and value of storage which is properly integrated into the 'smart grid'. Such a system with holistic optimal control may fail to materialise for regulatory, economic, or behavioural reasons. We therefore model the impact of naive prosumage: households which use storage only to maximise self-consumption of PV, with no consideration of the wider system. We find it is neither economic for arbitrage nor particularly beneficial for shaving peaks and filling troughs in national net demand. The extreme case of renewable self-sufficiency, becoming completely independent of the grid, is still prohibitively expensive in Britain and Germany, and even in a country like Spain with a much better solar resource.

A regulatory framework for an evolving electricity sector: Highlights of the MIT utility of the future study

Abstract: The electric power sector is once again evolving. A variety of distributed energy resources and improving computation, communication, and control technologies create an unprecedented degree of choice for electricity consumers, choices that are poorly guided by electricity rates and other incentives designed for a comparatively simpler era. These technologies also create new tools for regulated utilities, competitive suppliers, and other businesses to employ in the provision of electricity services. This paper summarizes the findings of a two-year, multidisciplinary MIT Energy Initiative research effort, the Utility of the Future study, and outlines a framework for proactive electricity regulation, market, and policy reform designed to enable the efficient evolution of the power sector over the next decade and beyond. Recommendations include a comprehensive system of efficient prices and charges for all electricity users, enhanced regulation of distribution utilities, careful reconsideration of industry structure to avoid conflicts of interest, and improvements to electricity markets. Together, this framework is intended to establish a level playing field for the provision and consumption of electricity services and enable the integration of a cost-effective combination of centralized generation, conventional network assets, and emerging distributed resources, whatever that mix may be.

Lessons learned from China’s regional carbon market pilots

Abstract: This paper gives an overview of the performance of China's seven regional carbon market pilots and the range of approaches they have used. We assessed the outcomes of these pilots using publicly available secondary market trading data. The differences in market performance are explained by the design of key market elements such as emission allowances, covered sectors, allowance allocation, monitoring, reporting and verification, compliance and penalties, and offset market. The lessons learned from the regional carbon market pilots are used to provide insights that can aid in the design of the upcoming national carbon market.

China’s National Carbon Dioxide Emission Trading System: An Introduction

Abstract: China is on the verge of launching what is expected to be the world’s largest carbon dioxide (CO2) emissions trading system (ETS). When fully implemented, this program will likely double the share of the world’s greenhouse gases covered by cap and trade.1 Under current plans, the facilities covered by the program will eventually account for over 50 percent of China’s GHG emissions. Internationally, much seems to be riding on this program. If perceived as successful, it could serve as a model for other countries wishing to implement an ETS. If viewed as a failure, it could impede the adoption of emissions trading programs in many parts of the world. China has learned a great deal from its experience with the seven pilot emissions trading programs it implemented starting in 2013 in major cities and provinces. At the same time, developing and operating an effective nationwide program is a huge challenge, given the country’s sheer size, industrial and geographic heterogeneity, income disparities, and diverse institutional characteristics. The significant presence of state-owned entities in the Chinese economy poses additional challenges. While market transactions have become increasingly prevalent in China in recent decades, state-owned enterprises are far more important in China than in the Western economies that have introduced emissions trading. These enterprises are especially important in the natural gas and electricity industries, where they have significant market power and where prices are administered rather than market-determined. Both monopolistic behavior and administered pricing can reduce the efficiency of the ETS by limiting the extent to which the costs of emissions abatement are reflected in the prices of goods and services. These features make the implementation of an effective ETS especially challenging. This volume examines the goals, structure, and challenges of emissions trading in China. It is the product of a two-day workshop held in Palo Alto in January 2017, a gathering co-spon-

Interactions between market reform and a carbon price in China's power sector

Abstract: The electricity sector accounts for a large share of China’s carbon dioxide emissions and of the economy-wide abatement potential. China’s planned national emissions trading scheme would include electricity generation, as nearly all emissions trading schemes do. The critical difference is that in most existing carbon pricing systems the power sector operates with competitive markets and cost-based pricing, while the Chinese power industry still uses a highly regulated dispatch and pricing system. Together these limitations mean that the effect of a carbon price on China is limited in terms of the impact on operational decisions for existing power stations and in terms of the effects on investment decisions. We explore the channels of interaction between electricity market reform and carbon pricing in China, and provide quantitative estimates of the effects and interactions on electricity sector emissions. A probabilistic discrete choice model is used to simulate the behavior of investors in the power sector. The analysis indicates that market reform can help reduce emissions intensity, but to meet China’s 2030 targets for non-fossil fuel generation a low to moderate carbon price is also necessary; conversely, a carbon price will only be effective with market reform that provides flexibility in dispatch. Using our simplified quantitative analysis, the carbon price required for the same share of non-fossil fuel generation would be about twice as high without market reform. Combining market reform and a carbon price could achieve significant rates of decarbonization and is likely to be the most effective and most feasibly policy package to cut emissions from China’s power sector.

Performance Incentives in Capacity Mechanisms: Conceptual Considerations and Empirical Evidence

Abstract: Performance incentives are elements of capacity mechanism design aimed at prompting committed agents to manage their resources in such a way that they eventually meet their obligations when the system is tight. These incentives can be introduced in practice by means of two different (but non-conflicting) approaches in capacity mechanisms. First, performance incentives can be linked to constraints on tradable quantities (the so-called firm capacity or firm energy), which limit the amount of "reliability" that a given resource may sell in the mechanism, and which may be recalculated penalising potential unfulfilments. Second, they can be implemented as financial penalties for failure to comply with the commitments foreseen in the capacity contract. The first approach has been applied since the outset of capacity markets. The second did not receive much attention in the early stages of the implementation of adequacy mechanisms, but there is a growing trend on implementing it in modern designs. In this paper, after framing the problem conceptually, empirical evidence (particularly from Colombia, ISO New England, PJM, United Kingdom, and France) is compiled to reveal current trends in enhancing short-term performance in capacity mechanisms.

Consumers or prosumers, customers or competitors? - Some Australian perspectives on possible energy users of the future

Abstract: Governance arrangements for electricity industries commonly claim the interests of consumers as their paramount objective. This would suggest a key decision making role for energy users, in all their diversity. However, the industry's critical role in societal, welfare, large environmental impacts, and the challenges of ensuring it's secure and reliable operation, all represent key shared long-term interests requiring high levels of coordination. The role of energy users within many electricity industries has transitioned over time from clients to citizens, then to consumers and now, in restructured industries, to customers. Increasingly, however, emerging distributed energy technologies including photovoltaics, storage and 'smart' loads are offering energy users new industry roles as prosumers rather than just consumers, and utility business partners, or potentially even utility competitors, rather than just customers. This paper outlines some of the experiences of energy users in the Australian National Electricity Market over the past decade as more than 15% of households have installed PV systems, and incumbent industry stakeholders and policy makers have struggled to reconcile formal market principles of encouraging energy user participation, with the realities of what such participation can do to existing business models. Australia's experience holds broader relevance as electricity industries worldwide look to better manage the challenges posed by prosumers while facilitating the societal benefits they can bring, particularly with the growing capabilities and falling costs of PV and energy storage systems. More generally, facilitating greater engagement with energy users will likely be essential in establishing the societal consensus required for the profound and highly disruptive transformation to a cleaner energy future.

Key issues in designing China’s national carbon emissions trading system

Abstract: The design of China's national carbon emissions trading system (ETS) has been shaped by major considerations including the significant disparities that exist between the different regions of the country, concerns about possible impacts of the ETS on the economy, the continuously evolving policy environment, and the need to divide responsibilities appropriately among relevant authorities. To address these issues and other policy constraints while adhering to the principles of high efficiency and effectiveness within a national system of unified rules, China created a legal framework with unique rules for the coverage and scope of emissions trading, allocations, cap setting, monitoring, reporting and verification, compliance, and division of responsibilities. The system was designed to maintain unified rules across the entire system while also providing flexibility in aspects ranging from coverage and scope, allocation and cap setting to compliance. This design will not only facilitate the formulation of a State Council regulation providing the necessary strong legal foundation for the ETS but will also avoid the frequent changes of regulations that often occur in an evolving policy environment.

Incentivizing firm compliance with China’s national emissions trading system

Abstract: When it launches in 2017, China's CO2 emissions trading system (ETS) will cover the largest CO2 emissions volume of any system to date and be among the very first to launch in a developing country. We evaluate the potential of an ETS to alter the emitting behavior of covered firms and to support the achievement of national CO2 intensity reduction targets at least cost. Specifically, we focus on two questions: (1) What factors have limited firms' past compliance with environmental policy in China, and (2) what can be done to strengthen compliance with China's national ETS? We argue that altering firm behavior will require a simultaneous effort to strengthen firms' compliance incentives through changes to national institutions - in particular, a strong legal foundation for the system, a nationally unified set of measurement, reporting, and verification requirements subject to independent scrutiny, and ongoing broader economic reforms to support system operation. It will also require signaling a sustained commitment to experimentation, evaluation, and modification of the system based on performance, given that system effectiveness will depend on expectations about its longevity and credibility, but will inevitably require adjustments. We illustrate the importance of these recommendations for firm compliance behavior by drawing on the experience of the Beijing pilot ETS (2013-2015). Given vast heterogeneity across provinces, special attention should be given to strengthening institutional foundations where they are least developed alongside the construction of a national ETS.

The Future of Russian Gas Exports

Abstract: Disputes between Russia and Ukraine over the terms for gas transit and deliveries prompted Russia to accelerate development of new gas pipelines to Europe circumventing Ukraine, as well as exploring the potential for gas export to additional markets like Turkey and China. The current paper examines implications of Russia increasing its gas exports capacity by building Nord Stream 2 (to Germany), Turkish Stream (to Turkey and Greece) and Power of Siberia (to China). We find that these projects have moderate effect on Russian gas exports and also that the impact on the European natural gas market is minor. We have also examined the impact of new Russian export pipes if subsidies to large Russian natural gas consumers are halved, or there are no sales to, or transit via, Ukraine. We find that the effects of increased export capacity are much stronger in these cases. The main policy implication of our study is that the EU and Russia have common interest in supporting further integration of European markets, although for somewhat different reasons. Russia wants to sustain, or increase, its exports to Europe, whereas the EU wants to make sure that the market functions well and that no country becomes vulnerable to pressure from Russia.

Climate Policy with the Chequebook An Economic Analysis of Climate Investment Support

Abstract: Across the globe, climate policy is increasingly using investment support instruments, such as grants, concessional loans, and guarantees - whereas carbon prices are losing importance. This development substantially increases the risk of inefficient public spending. In this paper, we examine the ability of finance instruments to effectively and efficiently address market failures related to clean energy investments. We characterise these market imperfections - emission externalities, knowledge spillovers and capital market imperfections - and identify their negative impacts on the investor-relevant risk-return characteristics. We argue that finance instruments are able to address the effects of these market failures. However, a carbon price is superior in internalising the emission externalities. With respect to the latter two inefficiencies, investment support instruments can effectively compensate the market failures if designed appropriately. We further provide policy recommendations on the choice of finance instruments to address the various market failures and guidance on how to use these instruments avoiding inefficient government spending.

An Option Analysis of the European Union Renewable Energy Support Mechanisms

Abstract: We examine the economic efficiency of incentive mechanisms used to promote Renewable Energy (RE) across the European Union (EU) by looking at returns to investors along with any negative externalities or social costs. Using electricity price data from 2009 to 2013, we evaluate the RE support mechanisms adopted by some of the largest EU economies. We explain the limitations of various metrics used to inform incentives for RE and propose an alternative metric reflecting investor requirements. Our results show that while the EU schemes were effective in delivering RE capacity, the incentives provided were overly generous and economically inefficient. To assess the indirect costs of RE in liberalized electricity markets we employ real option theory to quantify the costs of hedging and pricing the exposure faced by conventional fossil fuel generators required to accept RE under dispatch priority. We find that the cost of hedging against random RE output under dispatch priority is expensive while increasing RE in liberalized markets, by depressing prices and increasing price volatility, may place greater burden on conventional, dispatchable generators. As support for RE is presented as a public good, we argue that economically efficient RE support mechanisms require recognizing both their direct and indirect costs.

Influence of environmental policy and market forces on coal-fired power plants: evidence on the dutch market over 2006-2014

Abstract: Many governments aim to reduce the dependence on coal-fired generation to decrease carbon emissions. At the same time power markets with competition between independently operating power firms have been created which leave the actual decisions concerning electricity production to these firms. This paper analyzes the interaction between climate policies and policies to foster power markets. Using hourly plant-level data on the Dutch power market over 2006-2014, we find that the dispatch of fossil-fuel power plants is strongly influenced by relative fuel prices, despite the existence of several climate policy measures. Coal-fired power plants have become more important in the Dutch market since 2006, not only in share of total production, but also as provider of flexibility. Examining the short-term dispatch decisions and the past volatility in relative fuel prices, the maximum CO2 price which was needed to provide incentives for power producers to dispatch a gas-fired plant instead of a coal-fired plant was 43 euro/ton. We conclude that internalizing the external (CO2) costs by raising the CO2 price is a more appropriate measure than a forced closure of coal-fired power plants to align the principles of a market-based power industry and the wish to implement effective climate-policy measures at relatively low costs.