Outline RES penetration Case study Modeling Results Conclusions Hedging the Risk of Renewable Energy Sources in Electricity Production Giorgia Oggioni 1 Cristian Pelizzari 2 Mercati energetici e metodi quantitativi: un ponte tra Universit` a e Aziende Padova October 8th, 2015 1University of Brescia, Department of Economics and Management, 25122 Brescia, Italy. E-mail: giorgia.oggioni@unibs.it. 2University of Brescia, Department of Economics and Management, 25122 Brescia, Italy. E-mail: cristian.pelizzari@unibs.it. 1/ 38
Outline RES penetration Case study Modeling Results Conclusions Outline 1 Effects of renewable energy sources penetration 2 Wind strategies 3 Modeling wind penetration in a risk neutral world Reference equilibrium model: no wind energy production Modeling wind energy production 4 Results 5 Conclusions 2/ 38
Outline RES penetration Case study Modeling Results Conclusions The 20-20-20 European targets Europe 2020, the 2020 climate and energy package, sets demanding climate and energy targets to be met by 2020, known as the “20-20-20” targets: 20% reduction of GHG emissions by 2020 compared to 1990 through the EU Emissions Trading System (Directives 2003/87/EC and 2009/29/EC); 20% share of renewable energy sources (RES) based energy in final energy consumption by 2020 (Directive 2009/28/EC); 20% reduction in EU primary energy consumption by 2020, compared with projected levels, to be achieved by improving energy efficiency. In addition, Europe 2030, 2030 framework for climate and energy policies, and Europe 2050, Roadmap for moving to a low-carbon economy in 2050, set more ambitious objectives, to the aim of a full decarbonization of the energy sector. 3/ 38
Outline RES penetration Case study Modeling Results Conclusions Effects of RES penetration BUT RES penetration implies: 1 Intermittence of energy production; 2 Reduction of electricity prices that implies a significant revenue drop and thus: reduction of incentives to invest in conventional power plants; mothballing and/or dismantling of existing power plants, with the result that the security of supply becomes riskier and riskier. RES penetration has some side effects that need to be quantified in relation to the relevant market design! 4/ 38
Ireland 3,762.5 Serbia Slovenia Slovakia 2,599.6 4,730.4 3,389.5 2,805 2,958.5 2,671 Malta 22,959.1 Luxembourg 8,557.9 Italy 2,271.7 2,049.3 Iceland 9,285 329,2 1,865,9 Spain Sweden 3,238,4 34,250.2 5,279,2 4,807 Austria 1,683.8 2,095 Faroe Islands 1,665.5 1,959 681,1 Switzerland Czech Republic ** Former Yugoslav Republic of Macedonia 4,381.6 1,050.2 5,424.8 Note: due to previous year adjustments, 423.5 MW of project decommissioning, repowering and rounding of fjgures, the total 2014 end-of-year cumulative capacity is not exactly equivalent to 4,845 8,243 1,042 10,710.9 1,736.4 12,440.3 2,075 UK FYROM 39,165 Outline RES penetration Case study Modeling Results Conclusions Wind installed capacity in Europe MALTA 0 Installed Installed End CYPRUS End 2013 2013 2014 2014 146.7 European Union: 128,751.4 MW EU Capacity (MW) Candidate Countries: 3,799.5 MW 308.4 411.2 EFTA: 882.6 MW Belgium 275.6 293.5 Bulgaria 7.1 9.4 690.5 Total Europe: 133,968.2 MW Croatia 81.2 260.8 85.7 346.5 Cyprus - 146.7 - 146.7 8 268.1 14 281.5 Installed 2013 End 2013 Installed 2014 End 2014 Denmark* 694.5 67 Candidate Countries (MW) Estonia 10.5 279.9 22.8 302.7 - - 37 37 Finland 163.3 449 184 627 - - - - France 630 Turkey 646.3 804 Germany Total 646.3 2,958.5 841 3,799.5 Greece 116.2 113.9 1,979.8 EFTA (MW) Hungary - 329.2 - 1.8 1.8 1.2 3 343.6 222.4 Liechtenstein - - - - 437.7 107.5 8,662.9 Norway 110 771.3 48 819.3 Latvia 2.2 61.8 - 61.8 13.3 60.3 - 60.3 Lithuania 16.2 278.8 0.5 279.3 Total 125.1 833.4 49.2 882.6 - 58.3 - 58.3 Other (MW) - - - - Belarus - 3.4 - 3.4 Netherlands 295 141 4.5 6.6 11.7 18.3 Poland 893.5 444.3 3,833.8 Russia - 15.4 - 15.4 Portugal* 200 184 4,914.4 Ukraine 95.3 371.2 126.3 497.5 Romania 694.6 354 2,953.6 Total 99.8 396.7 138.0 534.7 - 3.1 - 3.1 Total Europe 12,228.5 121,572.2 12,819.6 133,968.2 2.3 2.3 0.9 3.2 175.1 27.5 22,986.5 * Provisional data 689 Total EU-28 11,357.3 117,383.6 11,791.4 128,751.4 the sum of the 2013 end-of-year total plus the 2014 additions. EWEA (2015). Wind in Power - 2014 European Statistics. Available at http://www.ewea. org/fileadmin/files/library/publications/statistics/EWEA-Annual-Statistics-2014.pdf . 5/ 38
Outline RES penetration Case study Modeling Results Conclusions Wind strategies 6/ 38
Outline RES penetration Case study Modeling Results Conclusions Wind policies and assumptions Wind penetration levels 1 No wind penetration (reference case without wind production); 2 Wind penetration (priority dispatch). Load and wind electricity production uncertainty 1 Load and wind-power scenarios. Wind derivatives (in a risk neutral world) 1 Call option (hedge of “too strong” wind); 2 Put option (hedge of “too weak” wind); 3 Monte Carlo pricing based on wind speed scenarios. Link between wind speed scenarios and load/wind-power scenarios 1 closeness of simulated wind-power duration curves to observed wind-power duration curve; 2 probability distribution of observed distances; 3 probabilistic assignment of wind speed scenarios to wind-power scenarios. 7/ 38
Outline RES penetration Case study Modeling Results Conclusions Reference equilibrium model: no wind energy production 8/ 38
Outline RES penetration Case study Modeling Results Conclusions Notation Sets m ∈ M : Set of plant types. M = res ∪ conv , where res and conv respectively indicate wind and conventional power plants; b ∈ B : Set of demand blocks. Parameters G m : Capacity of plant type m (MW); d b : Power consumed in block b (MWh); c m : Variable costs of plant type m ( e /MWh); e m : Emission factor associated to plant type m (ton/MWh); p CO 2 : Allowance price ( e /ton); pc : Price cap ( e /MWh); H b : Duration in hours of each block b . Variables g b,m : Power generated in block b by plant type m (MWh); gs b : Power sold in block b (MWh); n b : Shortage in block b (MWh); p b : Electricity price in block b ( e /MWh). 9/ 38
Outline RES penetration Case study Modeling Results Conclusions Reference equilibrium model Generator’s profit maximization problem � � � � c m · g b,m − p CO 2 · � H b · p b · gs b − e m · g b,m Max m ∈ conv m ∈ conv b subject to: G m − g b,m ≥ 0 ( ϕ b,m ) ∀ b ∀ m ∈ conv � g b,m = gs b ( η b ) ∀ b m ∈ conv g b,m ≥ 0 ∀ b ∀ m ∈ conv gs b ≥ 0 ∀ b Clearing of the energy market � H b · pc · n b Min b subject to: gs b + n b − d b = 0 ( p b ) ∀ b n b ≥ 0 ∀ b 10/ 38
Outline RES penetration Case study Modeling Results Conclusions Complementarity formulation of the reference equilibrium model 0 ≤ c m + e m · p CO 2 + ϕ b,m − η b ⊥ g b,m ≥ 0 ∀ b ∀ m ∈ conv 0 ≤ − p b + η b ⊥ gs b ≥ 0 ∀ b 0 ≤ G m − gp b,m ⊥ ϕ b,m ≥ 0 ∀ b ∀ m ∈ conv � g b,m − gs b = 0 ( η b free ) ∀ b m ∈ conv gs b + n b − d b = 0 ( p b free ) ∀ b 0 ≤ pc − p b ⊥ n b ≥ 0 ∀ b 11/ 38
Outline RES penetration Case study Modeling Results Conclusions Modeling wind energy production 12/ 38
Outline RES penetration Case study Modeling Results Conclusions Notation Additional Sets s ∈ S : Set of scenarios considered in each block b . Additional Parameters θ s,b : Wind power capacity factor in scenario s and block b (%); d s,b : Power consumed in scenario s and block b (MWh); τ s,b : Probability of scenario s associated to block b ; α : Wind derivative (call/put option) price ( e /MWh); β s,b : Wind derivative (call/put option) payoff in scenario s and block b ( e /MWh). Variables g s,b,m : Power generated in scenario s and block b by existing plant of type m (MWh); gs s,b : Power sold in scenario s and block b (MWh); n s,b : Shortage in scenario s and block b (MWh); p s,b : Electricity price in scenario s and block b ( e /MWh). 13/ 38
Outline RES penetration Case study Modeling Results Conclusions Generator’s profit maximization problem � � � τ s,b · H b · p b · gs s,b − τ s,b · H b · c m · g s,b,m Max m s,b s,b � τ s,b · H b · p CO 2 · � − e m · g s,b,m s,b m ∈ conv � � + τ s,b · H b · ( β s,b − α ) · g s,b,m m ∈ res s,b subject to: G m − g s,b,m ≥ 0 ( ϕ s,b,m ) ∀ s, b ∀ m ∈ conv G m · θ s,b − g s,b,m ≥ 0 ( ϕ s,b,m ) ∀ s, b ∀ m ∈ res � g s,b,m = gs s,b ( η s,b ) ∀ s, b m g s,b,m ≥ 0 ∀ s, b, m gs s,b ≥ 0 ∀ s, b 14/ 38
Outline RES penetration Case study Modeling Results Conclusions Clearing of the energy market � τ s,b · H b · pc · n s,b Min s,b subject to: gs s,b + n s,b − d s,b = 0 ( p s,b ) ∀ s, b n s,b ≥ 0 ∀ s, b 15/ 38
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