Tag Archives: economic curtailment

EU winter package brings renewables in from the cold

December 1, 2016 |

 

Joint press conference by Maroš Šefčovič and Miguel Arias Cañete on the adoption of a Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy

Christmas came early yesterday in Brussels, with the release of some heavy reading for the EU’s parliamentarians to digest over the festive season. Or at least that was the more jovial take on the launch of the EU winter package from Maroš Šefčovič, the EU vice-president in charge of the Energy Union (pictured).

Targets to cut energy use 30% by 2030, the phasing out of coal subsidies and regional cooperation on energy trading are central to the proposals, which updates the regulations and directives that support targets set out in 2014 as part of the Energy Package 2030.

Whether this gift is not just for Christmas will be down to the EU parliamentarians who have two years to debate these proposals and implement them.

So where does it leave us with the growth of renewables, the underpinning for a decarbonised power sector? If the EU meets its 2030 target, 50% of electricity should be renewable compared with an EU average of 29% today. That target remains unchanged, so those engaged in producing clean energy for Europe’s electricity grid should be reassured – up to a point.

A great deal was made of scrapping priority dispatch for renewables after that proposed change was ‘leaked’. In the end, the Commission merely soften its language but the outcome remains the same on priority dispatch, implying that policymakers think that renewable generation should be more responsive to the market.

Yesterday, Šefčovič and the Commissioner for Climate Action and Energy Miguel Arias Cañete both acknowledged that renewables need to be more integrated into wholesale markets, and those markets need to be more coordinated with each-other. Specifically, the package encourages member states to:

  • ensure that renewables participate in wholesale and balancing markets on a “level playing field” with other technologies. In particular, the new package removes the requirement for renewables to be given priority dispatch over other generation types (which most, but not all, member states currently abide by). It instead requires dispatch which is “non-discriminatory and market based”, with a few exceptions such as small-scale renewables (<500kW). In addition, renewables should face balancing risk and participate in wholesale and balancing markets.
  • increase integration between national electricity markets across the EU. Requirements include opening national capacity auctions to cross-border participation and an interconnection target of 15% by 2030 (ie, connecting 15% of installed electricity production capacity with neighbouring regions and countries). Earlier this year, the Commission established an expert group to guide member states and regions through this process.

What does this all mean for investors? The obvious concern is that removal of priority dispatch and exposure to balancing markets will increase revenue risk for renewables generators.

So, why is the EU removing these rules on priority dispatch once the mainstay of the Commission’s wholesale market rules? The main argument is to help reduce the costs of balancing supply and demand, and managing network constraints. Generally, it is most economic to dispatch renewables first because their running costs are close to zero regardless of whether they have priority dispatch.

But, when there is surplus generation, the most economic option is sometimes to curtail renewables ahead of other plant. For example, turning down an inflexible gas plant only to restart and ramp it up a few hours later can be expensive and inefficient. By contrast, wind generators can be turned down relatively easily.

Therefore, giving renewables priority dispatch can sometimes increase the overall costs of managing the system. When renewables were a small part of the market, any inefficiencies caused by priority dispatch were small and easy to ignore, while it helped reduce risks around renewables investment. But now renewables are set to become the dominant part of electricity markets it is harder to ignore.

Nevertheless, risks around balancing for wind can cause real headaches for investors. In our report from earlier this year, Policy and investment in German renewable energy we found that economic curtailment could increase significantly, potentially adding 17% to onshore wind costs by 2020.

The amount a generator is curtailed depends on a wide range of uncertain factors which wind investors have little or no control over (eg, electricity demand, international energy planning, network developments and future curtailment rules).

What could happen next?

So to maintain investor confidence (and avoid costly lawsuits) existing renewables investments need to be financially protected as rules are changed. There are many ways to do this. For example, priority dispatch status could be grandfathered for existing generators (as the winter package suggests) or, as set out in our recent report of Germany, generators could be fully compensated for curtailment through “take-or-pay” arrangements.

More generally, very clear rules around plant dispatch and curtailment are needed to avoid deterring investment. Ideally, dispatch will be determined by competitive, well-functioning balancing markets, where renewables are paid to be turned down based on what they offer, rather than by a central system operator curtailing without compensation.

The move to integrate renewables into balancing markets means they will compete with other options to balance the system such as storage and demand-side measures. These flexibility options should benefit from the sharper price signals and greater interconnection implied by winter package. But there is no clear consensus yet on the right business and regulatory models to support investment in flexibility. However, CPI is currently working on a programme as part of the Energy Transitions Commission to explore the role of flexibility in a modern, decarbonised grid and will be publishing our findings soon.

Ultimately, there is an unavoidable trade-off in designing electricity markets: it is very difficult to provide incentives for generators, storage and the demand-side to dispatch efficiently through market mechanisms without also exposing them to some risk. Yesterday’s announcement in the winter package means more countries will have to face this dilemma.

Disclaimer: Unless otherwise stated, the information in this blog is not supported by CPI evidence-based content. Views expressed are those of the author.

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EU Curtailment Rules Could Increase German Wind Costs by 17% by 2020

April 14, 2016 |

 

This week, members of CPI’s Energy Finance team traveled to Brussels to present and discuss findings from our analysis of financing for European low-carbon energy transitions to a panel of EU policymakers and regulators including representatives from DG Energy and DG Competition and investors. This followed a meeting in February to present findings on the German low-carbon energy transition to the Federal Ministry of Economic Affairs and Energy (BMWi) and the Federal Ministry of Finance (BMF). The discussions focused in particular on the subject of economic curtailment an issue that is not yet fully appreciated by most investors but has the potential to reduce the availability and increase the cost investment. BMWi are in the process of designing policy to help mitigate this risk.

Analysis from our latest report suggests that without appropriate policies to lessen curtailment risk the cost of onshore wind in Germany could increase by over 17% by 2020 and by even more in future years. German policymakers are in the process of designing policy to help mitigate this risk.

So what is economic curtailment? Under European Commission state aid guidelines, renewable energy generators should have no incentive to generate electricity at times of negative prices. In other words, revenue support should be suspended during these times so that suppliers of renewable power will stop generating electricity because they will be out of pocket if they continue to do so. We have defined this issue as ‘economic curtailment’ (as distinct from ‘grid curtailment’ which occurs when the grid has no more capacity to take on power) and, as renewable energy deployment increases, it is an issue that is likely to become more relevant until such time as effective energy flexibility solutions (e.g. storage and demand response) are found.

Germany has an agreement with the European Commission that this rule does not need to be applied until prices are negative for six consecutive hours or more. This reduces the potential impact on the levelised cost of electricity somewhat. Curtailing support on an hourly basis could increase the cost of electricity by over 30% in 2020. Applying a six hour rule almost halves the cost increase requirement to 17% by significantly reducing the number of negative price hours affected and therefore lowering the cost of investment by increasing the amount that debt investors would lend.

We identified and tested additional approaches that could further address the needs of policymakers and investors. The solutions we evaluated were:

Take-or-pay: One option would be to curtail production from renewable energy but continue to pay generators for the lost output. This option provides the lowest cost and risk while still offering flexibility, but under current interpretations would fall foul of EU state aid regulations by incentivising production when it was not needed.
Proportional curtailment: Negative prices generally occur when wind or solar generation is high. Our analysis shows that on average a reduction of only 15% of wind output during negative price hours would move prices into positive territory. Thus, a system that could curtail only the excess generation and allocate the cost of this curtailment amongst all fixed tariff generators would better reflect system economics. This option would only be 5% more expensive than the cost of electricity under the take or pay option.
Add to the end: Under this option any hours that are curtailed during the 20-year support period – after incorporating the 6 hour rule – can be accrued and power generation beyond this support period can claim additional support until such time as the accrued hours are used up. However, high discounting of cash flows 20 years from now, as well as the fact that such a policy does not extend the operating life of the generation assets (and therefore would add no value if future energy prices are at or higher than the fixed tariff prices), means that this policy would add almost no additional value to investors.
Cap: under this option we assume that in addition to the 6 hour cut-off there is a limit to the number of hours that can be economically curtailed each year. The impact varies depending on the cap level.

Figure 37 - Impact on bid prices of hourly, 6 hour rule and proportional

The appeal of these additional approaches depends on policymakers’ priorities and investors’ needs but our analysis suggests that if take-or-pay was not available as an option to remove economic curtailment risk then a low level cap or proportional curtailment would be the next best approaches for attracting levels of investment consistent with meeting renewable energy deployment targets and doing so at low cost.

The analysis presented in Brussels was financed by the European Climate Foundation and the Global Commission on the Economy and Climate to examine how policy impacts the availability and cost of investment for low-carbon energy transitions. It aims to inform thinking on how renewable energy deployment targets can be achieved whilst minimising the cost to consumers.

For more information, please see our paper ‘Policy and investment in German renewable energy’.

And keep a look out for a forthcoming paper that will also examine finance for renewable energy in other European countries, namely the UK, Nordic countries, Spain and Portugal.

A version of this blog appeared on EurActiv. Click here to read it.

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