40th IAEE InternationalConference
“Meeting the Energy Demands of Emerging Economies: Implications for Energy and Environmental Markets”
Singapore
2017, June 19
Combined Effects of Electricity Market
Liberalization and Climate Policy: Lessons
from Europe
Bianka Shoai Tehrani
Systems Analysis Group, Research Institute of Innovative Technology for the Earth (RITE)
Pascal Da Costa,
Laboratoire Genie Industriel, CentraleSupélec, Université Paris-Saclay
Keigo Akimoto
Systems Analysis Group, Research Institute of Innovative Technology for the Earth (RITE)
Yasuhide Nakagami
Systems Analysis Group, Research Institute of Innovative Technology for the Earth (RITE)
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Introduction: objective of the study
Market Liberalization
In the EU
Electricity market liberalization
pioneered by the United Kingdom in
the 1980s
Climate Policy
EU-ETS in 2005, first Climate and
Single liberalized European electricity Energy Package in 2008, NDC
submitted to COP21 in 2015
market in 1996
Market Liberalization
Electricity Market Reform from 1995
In Japan
Full retail competition in April 2016
Climate Policy
NDC submitted to COP21
17% reduction of electricity demand,
at least 44% low carbon electricity in
2030
Paradox between objectives and
achievements
In 2010-2013, EU coal power
generation and associated CO2
emissions rose by 5% due to shale gas
revolution in the US
Objective of the study:
• analyse the articulation of
electricity market
liberalization and climate
policy in the EU
• extract lessons for Japan
 To do so, we conducted a review of the literature and a series of semi-directive interviews with a
dozen experts from academia and electricity industry.
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Outline
• Current policies and implementation
•
•
•
•
EU Policy for liberalization and climate change
Current state of policy implementation: prices
Current state of policy implementation: climate policy
Issues inherent to EC Institutional framework
• Combined Effects of Electricity Market Liberalization and Climate
Policy
•
•
•
•
Combined effects of market liberalization and renewable support
Combined effects: a quantitative approach
Merit order effect. Volume loss
Policy burden, policy costs
• Policy recommendations for EU and application to Japanese case
• Current solutions in terms of policy recommendations
• Applicable recommendations for Japan: first thoughts
• Conclusions
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Current policies and
implementation
EU Policy for liberalization and climate change
Current state of policy implementation: prices
Current state of policy implementation: climate policy
Issues inherent to EC Institutional framework
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EU Policy for market liberalization
and climate change
1996
2005
• European Commission Directive on electricity market
• Creation of the European Union Emissions Trading Scheme (EU-ETS) in 2005
2009
• First Climate and Energy Package with targets for 2020:
• 20% GHG emissions reduction(compared to 1990 levels), 20% renewable energy share in
primary energy mix, 20% energy efficiency improvement (compared to BAU).
2014
• Second Climate and Energy Package with targets for 2030, consistent with NDC for COP21:
• 40% GHG emissions reductions (compared to 1990 levels), 27% renewable energy share in
primary energy mix, 27% energy efficiency improvement (compared to BAU).
2015
• Energy Union objective
• Submission of NDC to COP21 (consistent with Second Climate and Energy Package)
2016
• Winter Package: policy proposal to reconcile market liberalization and decarbonization
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Current state of policy implementation:
market liberalization: prices
Evolution of:
the highest regional wholesale electricity prices in the EU
the lowest regional wholesale electricity prices in the EU
and the PEP Index
Wholesale prices are falling
2008: 45-85 €/MWh
2016: 20-45 €/MWh
Figure 1: The evolution of the lowest and the highest regional
wholesale electricity prices in the EU and the Platts PanEuropean Power (PEP) Index [1]
Source: EC Quarterly report on electricity market, 2016 (European
Commission 2016; Platts 2016)
Retail prices are rising
Between 2008 and 2014,
taxes have risen by 47%
Figure 2: Evolution of household
price components and household
price breakdown from 2008 to 2014,
average EU figures
Source: Eurelectric 2015, Power Statistics
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and Trends.
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Current state of policy implementation:
climate policy
2020 target achievement results
(targets: 20% - 20% - 20%)
Emissions reductions
Renewable energy
• (+) over-achieving
• (+) emissions
reductions are expected
to be 24% lower in 2020
compared to 1990
levels
• (-) however this is
mainly due to economic
recession
• (-) low impact of EU ETS
• (+) achieving the target
• (-) although with high
costs in support
schemes
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Energy efficiency
• (-) under-achieving in
energy efficiency
• (-) 18-19% instead of
20% in 2020
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Issues inherent to EC Institutional
framework
The main tools to build the internal energy market are networks and competition regulation
 lack of protection of interests of European industrial champions
 risk of overcapacity of the grid
Sufficient
interconnections
for FranceGermany-Benelux
area (wholesale
price equalization)
Connections to be
reinforced:
UK-Continent
France-Italy
France-Spain
Source: ENTSOE, 2015
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Combined Effects of
Electricity Market
Liberalization and Climate
Policy
Combined effects of market liberalization and renewable support
Combined effects: a quantitative approach
Merit order effect. Volume loss
Policy burden, policy costs
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Combined effects of market
liberalization and renewable support
Impossible to phase out of
support scheme
Support
schemes for
renewables
Impossible
to invest in
clean
energy
Massive
renewable
investments
Taxes (FiTs
and other
supports
schemes)
Less
revenue for
power
companies
Total overcapacity
Rising retail
prices
‘Missing money’
Impossible to recover
fixed costs
Conventional
power plants are
not profitable
Renewables
bring wholesale
price down*
+
Less demand for
conventional
power plants
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*in particular peak prices,
usually a source of profit
for base or semi-base
plants
Minor phenomenon for now but could
potentially become more important
Compromises the
development of electric
cars (second phase of
decarbonization)
Debatable: currently little
elasticity of demand on the
short term, but potential
long-term effects
Less demand:
autoconsumption,
curtailment
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Combined effects: a quantitative
approach
Impossible to phase out of
support scheme
Support
schemes for
renewables
Impossible
to invest in
clean
energy
Massive
renewable
investments
‘Missing money’
Impossible to recover
fixed costs
Merit order
effect
Total overcapacity
Renewables
bring wholesale
price down*
+
Less demand for
conventional
power plants
*in particular peak prices,
usually a source of profit
for base or semi-base
plants
Volume loss
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Compromises the
development of electric
cars (second phase of
decarbonization)
Policy burden
in retail prices
Less
revenue for
power
companies
Conventional
power plants are
not profitable
Taxes (FiTs
and other
supports
schemes)
Minor phenomenon for now but could
potentially become more important
Rising retail
prices
Debatable: currently little
elasticity of demand on the
short term, but potential
long-term effects
Less demand:
autoconsumption,
curtailment
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Merit order effect (1/3): marginal increase
of 1 GWh of renewable power generation
The merit order effect is well documented in the literature
Table 1 : Effect of a marginal increase of 1 GWh of renewable power generation on wholesale price (€/MWh)
Country
Reference
Germany
(Cludius
2014)
France
Italy
Spain
et
Regression method
Electricity
price Data period
data source
al. augmented Dickey-Fuller day ahead SPOT price
test
2008-2012 for wind,
2010-2012 for solar
Impact of
solar
€/MWh
-0.84 to 1.37
NA
Impact of
wind
€/MWh
-0.97 to 2.27
-1.23
(Benhmad
et augmented Dickey-Fuller day ahead SPOT price
Percebois 2016)
test
2009-2013
(wind only)
(Percebois
et least square method, day ahead SPOT price
Pommeret 2016) Marquardt-Levenberg
algorithm
(Clò, Cataldi, et augmented Dickey-Fuller day ahead SPOT price
Zoppoli 2015)
test
2015
-1.38
-2.56
2005-2013
-2.3
-4.2
(Costa-Campi et augmented Dickey-Fuller wholesale weekly price
Trujillo-Baute
test
2015)
2009-2013
-2.5
-1.1
 A marginal increase of 1 GWh of renewable (wind or solar) induces a price
decrease around 1 or 2 €/MWh, up to 4 €/MWh in the Italian case.
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Merit order effect (2/3):
merit order effect per year in €/MWh
The total effect of renewable power generation can be calculated by multiplying the solar and wind coefficients by the actual
amounts of power generation.
Table 2 : Total merit order effect per year on wholesale price in €/MWh
Country
Germany
Reference
(Cludius et al. 2014)
Italy
(Clò, Cataldi,
Zoppoli 2015)
Spain
(Costa-Campi
et
Trujillo-Baute 2015)
et
Source
Solar
Wind
Solar
Wind
Solar
Wind
2008
n.a.
2009
n.a.
2010
2011
2012
-6.87
0.00
-5.00
-2.32
-5.27
-3.19
-6.22
2013
n.a.
n.a.
-10.52
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
-11.20
-4.50
-0.77
-13.37
-1.77
-12.3
-1.48
-14.06
-1.35
-9.08
-2.34
-15.48
n.a.
n.a.
Evolution of:
the highest regional wholesale electricity prices in the EU
the lowest regional wholesale electricity prices in the EU
and the PEP Index
Wholesale prices are falling
2008: 45-85 €/MWh
2016: 20-45 €/MWh
Roughly 0 to – 8 €/MWh per year in average
Figure 1: The evolution of the lowest and the highest regional
wholesale electricity prices in the EU and the Platts PanEuropean Power (PEP) Index [1]
Source: EC Quarterly report on electricity market, 2016 (European
Commission 2016; Platts 2016)
 Although the merit order effect is not the only explanatory variable for electricity prices evolution, these
orders of magnitude are consistent with the hypothesis that renewable generation played a prominent role
in the collapse of electricity wholesale prices.
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Merit order effect (3/3): total loss.
Volume loss for conventional plants
From these estimations of price decrease, the cumulated loss of revenue due to merit order effect
for power utilities can be also assessed.
 revenue loss for utilities:
 France, 2015:
 Italy, 2013:
€1.08 bn due to solar,
€2.75 bn due to solar,
€1.63 bn due to wind
€1.30 bn due to wind
(Percebois et Pommeret 2016)
Merit order
effect
Source: Clò, Cataldi, et Zoppoli 2015
Renewables bring
wholesale price
down*
+
Less demand for
conventional
power plants
Volume loss
Loss due to the decrease in electricity demand for conventional power plants - in addition to the merit order effect
that lowers wholesale price.
 Few quantified assessments of this effect
 France, 2015: €0.189 bn (Source: Percebois and Pommeret 2016)
 Fairly inferior to the merit order effect (€2.704 bn )
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Policy burden in retail price: examples
of France and Germany
France
• CSPE tax (“Contribution to the public
service of electricity)
• renewable support for one household:
 30 €/yr in 2012
(total CSPE: 60€/yr)
 expected to reach about 100€/yr in 2020
(CSPE expected to reach about 150€/yr).
Source: Avril, Berwald, and Legée 2012
Germany
• EEG tax (“Erneurbare Energien Gesetz”, for
renewable entirely)
• renewable support for one household:
 185 €/yr in 2012
Taxes (FiTs
and other
supports
schemes)
Policy burden
in retail prices
 potential decrease or at least stabilization in
the future
Source: Avril, Berwald, and Legée 2012
Figure 3: Evolution of CSPE tax and EEG tax in France and Germany (Source: CRE, EEG KWK)
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Policy recommendations
for EU and application to
Japanese case
Current solutions in terms of policy recommendations
Applicable recommendations for Japan: first thoughts
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Current solutions in terms of policy
recommendations for Europe
Electricity market:
towards more regulation
Climate policy: marketfriendly schemes
• Capacity mechanisms
• Transfer the price signal
of wholesale market to
retail consumers
through smart home
system and demand
response
• Centralized planning of
capacity
• Long term
arrangements are
mostly banned by
competition regulation,
but allowing them in
some form would allow
revenue guarantee
• A stability reserve will
be implemented from
2019, allowing to freeze
a certain proportion of
allowance if needed
• A carbon floor price
around 30 €/tCO2
would allow to shift
from coal to gas
• Market-friendly
renewable support such
as Contract for
Difference or Feed-inPremium
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Upcoming issues:
transmission and
distribution
• Reinforcement of the
grid required by both
market liberalization
and renewable
integration
• Remuneration of fixed
costs as they are not
properly remunerated in
most European
countries
• Need for alternative
regulations for instance
at distributor level
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Application to Japan: first thoughts
Market liberalization and climate policy in Japan
Market Liberalization
Electricity Market Reform from 1995
Full retail competition in April 2016
Climate Policy
NDC submitted to COP21
17% reduction of electricity demand,
at least 44% low carbon electricity in
2030
Policies under consideration
Capacity market
Compared to Europe
Comparable goals, less complexity:
 One country (vs EU-28)
 Homogenous electricity sector
But more limited:
 Only nationwide (island)
 2 frequencies zones
Low-carbon targets:
 Centralized decision for electricity mix
 Renewable target: similar risk for merit order effect
 Capacity replacement issue for nuclear
 debate on whether to privilege new investments or be neutral to both existing and new capacities
Non-fossil fuel power market
 reserved to nuclear and renewables in order to guarantee the 44% low-carbon power target
Integration of regional grids
 generalized auctioning of grid connection line utilization
Baseload power source markets
 reserved to nuclear, coal and general hydropower, to allow sources with low operating costs to compete on a separate
market, and encourage cheap baseload power generation.
 issue of fairness in competition given that it is difficult for new entrants to compete with historical utilities regarding
baseload power generation.
Guidelines to encourage participation in the wholesale market rather than over-the-counters contracts
 however the government’s power of intervention on over-the-counter private contracts is limited.
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Conclusions
Simultaneous implementation of market liberalization and renewable support without
coordination has unexpected effects:
 For utilities, the missing money is due to two phenomena:
• Merit order effect on wholesale prices
• Volume loss for conventional power generation
 For retail customers
• Policy cost for retail prices that could threaten utilities’ revenue in the future
Results from quantitative assessment:
 Merit order effect has the largest impact on prices.
 It is comparable to the observed decrease in wholesale prices.
EU and Japan electricity market reforms take place within very different environments.
Japan has a chance to implement from the beginning the so-far identified solutions for
smooth articulation between climate objectives and efficient liberalization.
 Further research
• Quantitative assessment on several countries’ price data under harmonized framework
• In the future, assessment with Japanese price data
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Thank you for your
attention
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Appendix
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Towards a combined policy package
• Recent evolution towards a combined policy package
• 2014 EC Internal Market Progress Report
• February 2015, objective for 2019, the creation of an ‘Energy Union’
Energy Union objectives
Geopolitical objectives
• diversifying energy
sources
• reducing import
dependency of EU
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Climate objectives
• GHG reduction
target: -40% in 2030
compared to 1990
levels (as in NDCs).
• renewable energy
target (27%),
• improve energy
efficiency
• reform the EU-ETS
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Market integration and
competition objectives
• Investment in energy
infrastructure: 647
million € in ‘Projects
of Common interest’
• 70% should be
completed in 2020
Synergy with security of supply
and reduce CO2 emissions
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List of affiliations of interviewees
Institution name
Type
EDF Electricite de France
Industry - French power utility
RTE Reseau de transport d’electricite
Industry -French transmission utility
Enedis (Former ERDF Electricité Réseau Distribution France)
Industry -French distribution utility
WEC World Energy Council
Professional association - energy
CFE French Energy Council
Professional association - energy
CREDEN (Centre de Recherche en Economie et Droit de l'Energie),
Montpellier I University
Academic – energy economics
LARSEN (Laboratoire d’Analyse économique des Réseaux et des
Systèmes Energétiques), CIRED(Centre International de Recherche
sur l’Environnement et le Développement), Paris
Academic – climate and energy
CERNA (Center for industrial economics), Mines, Paris
Academic – energy economics
I-tese, CEA Saclay
Academic – energy economics
LGI (Laboratoire Genie Industriel), CentraleSupélec,
Université Paris-Saclay
Academic – sustainable
development economics
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The Platts Pan-European Power (PEP)
• [1]The Platts Pan-European Power (PEP) is a
demand-weighted day-ahead baseload index
indicating price trends for Europe’s free electricity
markets as a whole. The indice uses the mid-points
of Platts assessments for the European power
markets, giving each country a weighting according
to demand. As spot trade has developed at a
different pace in each European market, Platts has
used demand weighting to replace traditional trade
volume weightings to give a more representative
price for the pan-European market (Platts 2016).
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Functioning of Contract for Difference,
detailed graph
Figure 7: Functioning of Contract for Difference, detailed graph
Source: Government of UK 2015
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