Do cost fall faster than revenues?
Dynamics of renewable entry into electricity
markets
Richard Green ([email protected]) and
Thomas-Olivier Léautier ([email protected])
Presentation to the Chaire European Electricity Markets
January 2016
Renewable integration and subsidies
•  Renewable entry has already had a profound impact on the
generation mix and led to a high tax in Germany, and soon in
other European countries
•  This research project
1.  determines analytically the “laws of motion” of renewable entry, i.e.,
the dynamics of the generation mix, subsidy, and tax
2.  illustrates the analysis on the case of Great Britain
•  It finds that
1.  massive wind entry in the UK under the current physical dispatch
priority rule would push inflexible nuclear out of the market, and lead
to a significant increase in the subsidy and tax
2.  replacing physical dispatch priority by financial dispatch priority would
mitigate these negative effects without altering renewable economics
2
Long-term generation mix: Marcel Boiteux
forever
£/MWh
Marginal Cost
Nuclear
CCGT
Source: Green and Léautier, 2015
OCGT
GW
3
Generation mix evolution as renewables enter
£/MWh
Marginal Cost
plus tax
Nuclear
CCGT
Source: Green and Léautier, 2015
OCGT
GW
44
A bit of notation
•  Kn cumulative capacity of first n technologies (ordered
by MC), Ki0 installed capacity of renewable technology
i
•  θ is the state of the world
•  αi (θ) is the availability of renewable technology i in
state θ
•  Inverse demand is linear with constant slope
5
Free entry in generation
•  Wholesale spot price is p(K0,θ)
•  Expected marginal operating profit is equal to
marginal capacity cost for every technology
6
Subsidy and tax
•  Marginal subsidy for renewable technology i with marginal
investment cost r0(K0i)
•  Cumulative aggregate subsidy
•  Retail price is (p(K0,θ)+τ) where τ is the unit tax to finance
renewables
•  Total tax revenues
7
Dynamics of generation mix
•  vn is the vertical portion of the supply curve where
technology n produces at capacity
•  Long term equilibrium: conventional installed capacity
is reduced as renewables capacity increases
8
Impact of renewables: no correlation with
demand
Before
After
GW
GW
Renewables:
30
Peaking:
50
On-peak:
100
Off-peak:
Baseload: 50
50
Hours
On-peak:
Peaking:
100
50
Renewables:
30
Off-peak:
50
Baseload: 20
Hours
9
Resulting capacity mix in Great Britain
GW
Wind capacity (GW)
Source: Green and Léautier, 2015
10
Impact of renewables: strong correlation with
demand
Before
After
GW
GW
Renewables:
30
Peaking:
50
Peaking:
20
On-peak:
100
On-peak:
100
Off-peak:
Baseload: 50
50
Hours
Off-peak:
Baseload: 50
50
Hours
11
Dynamics of the marginal value of
renewable capacity
The marginal impact of renewable technology i on the value
of technology j is proportional to the covariance of
availabilities
12
Marginal value of wind turbines (status quo)
£ per kW per year
Wind capacity (GW)
Source: Green and Léautier, 2015
1313
Cost falls faster than the price: marginal subsidy
ends
Cost £/kW/year
Construction cost
Marginal subsidy
no longer
required
Market value of
renewable energy
Installed capacity (GW)
14
Price falls faster than the cost: marginal subsidy
required
Cost £/kW/year
Marginal subsidy
Construction cost
Market value of
renewable
energy
Installed capacity (GW)
15
Marginal subsidy to wind turbines
Subsidy (£ per kW per year)
Wind capacity (GW)
Source: Green and Léautier, 2015
16
Evolution of cumulative subsidy
Cost £/kW/year
Cumulative
subsidy
Incremental
Cumulative subsidy
Construction cost
Market value of
renewable
energy
Installed capacity (GW)
17
What if nuclear was flexible?
18
What about a feed-in premium?
19
What about financial distpatch insurance?
20
Generation mix evolution under financial
dispatch insurance
21
Marginal value of on-shore wind for different
scenarii
22
Evolution of the unit tax
Tax (£ per MWh)
Wind capacity (GW)
Source: Green and Léautier, 2015
23
Net surplus loss under different scenarii
24