The Market Value of Fluctuating Renewables What drives the market value of electricity from fluctuating renewables sources (fRES) such as wind and solar power? Lion Hirth, Vattenfall* 2011-10-04 Infraday, Berlin *The findings, interpretations, and conclusions expressed herein are those of the author and do not necessarily reflect the views of Vattenfall. Contact: Lion Hirth, Vattenfall Europe AG, Chausseestraße 23, 10115 Berlin. lion.hirth@vattenfall.com.
Motivation When will wind and solar power be competitive on the (wholesale) market? � cost development � revenue development 2
Two properties of fRES matter for market income Uncertainty Imbalance Costs fRES depend on fluctuating primary energy sources (non-dispatchable) • when day-ahead markets close, • costs of forecast errors uncertainty about generation remains • ~ 10% of spot market revenues • imbalances have to be closed at (today) intraday or imbalance markets Fixed Generation Profile Profile Costs • electricity price is different in every • costs of fixed generation profile hour • ~ 10% of spot market revenues • whenever it is windy / sunny (today) electricity price is lowered � to understand competitiveness of fRES, it is not sufficient to compare levelized costs of electricity to the average electricity price (base price) 3
The Mechanics of Price Setting Merit-order Curve and Price-reducing Effect of Wind residual load load 100 75 17 GW fRES Nuclear €/MWh Lignite 50 29 €/MWh Hard Coal CCGT 25 OCGT CHP 0 76 GW Size of the price drop during windy hours is a function of: • installed wind capacity • shape of the merit-order curve (“steepness”) • intertemporal flexibility (e.g. hydro reservoirs) 4 Stylized merit-order of Germany 2010 at 20 €/t CO2; bidding price including run-through discount; only dispatchable technologies; weighted with average availability
Market Data: Status Quo Onshore Wind in Germany Solar in Germany Base price Ave Revenue Value factor Base price Ave Revenue Value factor (€/MWh) (€/MWh) (1) (€/MWh) (€/MWh) (1) 2007 38 33 .88 - 2008 66 59 .90 2008 66 82 1.25 2009 39 35 .91 2009 39 44 1.14 2010 44 42 .94 2010 44 49 1.11 Average 47 42 .91 Average 50 58 1.17 Wind earned 9% less than the average electricity price. Solar earned 17% more. 5
Future development 1. Value factor curve status quo 1 • from market data value factors for the current state of the electricity system can be calculated Value Factor • we are interested in the future development of profile costs • particularly, we are interested in the relationship between profile costs and installed capacity Wind value factor 0 2. Understand Drivers Installed Wind Capacity • many parameters potentially influence profile costs (by influencing the shape of the merit-order 1 curve and intertemporal flexibility) • we want to identify and quantify drivers Value Factor • CO 2 price, fuel prices, power plant stack, interconnector development, capacity markets, electricity storage, generation flexibility, nuclear phase-out 0 • time series are too short for econometrics Installed Wind Capacity � model 6
The numerical model • stylized electricity market model - ten technologies (wind, solar, eight dispatchable, pump hydro) - perfect competition - electricity price is set by variable cost of marginal plant - no load flow, NTCs between market areas • integrated dispatch and investment Germany - hourly time steps for a full year market €/MWh model - existing plant stack, storage and interconnectors 60 - endogenous (dis-)investments in generation 30 - investments in storage and interconnectors 0 08 09 10 08 09 10 08 09 10 • parameterization of key inflexibilities base price peak price off-peak price - CHP must-run Wind Value factors in Germany - start-up costs model market - ancillary services 2008 0.93 0.90 • back-tested to market prices 2009 0.95 0.91 2010 0.94 0.94 7
Results Wind Value Factor • Main run - installed wind capacity is increased from zero to 1.00 100 GW (equivalent to 41% of consumption) - all other parameters are at long-term “best 0.75 guess” levels and are not changed • market value depends strongly on amount of 0.50 installed capacity 0.25 - value factor drops from 1.1 to 0.4 0 50 100 - � the value factor curve is (steeply) downward Installed Wind Capacity in Germany (GW) sloping - average revenue drops from 70 €/MWh to 21 Average Revenue for Wind Power €/MWh • compare to costs of onshore wind 60 - learning rate of 5% per doubling of global €/MWh income gap goes up installed capacity 40 - assumption: global capacity doubles twice as 20 quickly as German Average wind revenues - revenues fall quicker than costs Wind Power LCOE 0 • � it will be tough for wind power to become 0 50 100 Installed Wind Capacity in Germany (GW) competitive (under these conditions) 8
Results II Capacity • Capacity development pump - total dispatchable capacity is reduced sola 150 from 94 GW to 79 GW (decommissioning wind shed of hard coal and lignite) OCGT GW 100 - revenues from pump hydro storage CCGT coal double, but still too low to trigger 50 lign investment lCCS nucl - existing nuclear remain profitable 0 GW wind 1 20 40 60 100 • Price setter - price drops to zero in 500h (80GW) and Price Setting Fuel 2000h (100GW) 100% shed - curtailment remains limited: 10% of wind OCGT energy at 100GW CCGT coal 50% lign lCCS nucl zero 0% GW wind 1 20 40 60 100 there are no negative prices in the model 9
The effect of CO 2 pricing Wind Value Factor • higher CO 2 prices… - … increase the base price and thereby 1.00 increase wind revenues 0.75 - … but can decrease the value factor (sometimes) 0.50 - because higher CO 2 prices induce 0 €/t 20 €/t investments in nuclear or CCS, which 75 €/t 0.25 increases the steepness of the merit- 0 10 20 30 40 50 order curve, leading to low prices in Installed Wind Capacity in Germany (GW) windy hours Average Revenue for Wind Power • effects of parameter changes can counter-intuitive 60 - direct effect: higher CO 2 price � higher €/MWh variable cost � higher electricity price 40 and flatter merit-order curve � higher 20 revenues for wind power 0 €/t 20 €/t 75 €/t - indirect effects triggered by investments 0 0 20 40 60 80 100 Installed Wind Capacity in Germany (GW) 10
The effect of higher fuel prices Average Revenue for Wind Power • Do higher prices increase the revenues for wind power? � not necessarily 60 €/MWh • higher coal price 40 - direct effect: higher electricity price when coal is price setter (+) 20 bench doubleCoal - merit-order flatter (+) doubleGas 0 - investments in gas (+) 0 50 100 - investments in lignite (-) Installed Wind Capacity in Germany (GW) - � overall: increases wind revenues • higher gas price - direct effect: higher electricity price when gas is price setter (+) - merit-order steeper (-) - investments in coal and lignite (-) - � overall: non-monotonic effect; decreases wind revenues sometimes 11
More effects What affects wind revenues? Wind Value Factor Parameter change Effect on wind revenues 1.00 ↑ (+10 €/MWh at increase of 55 Higher CO 2 price €/t CO 2 ) 0.75 ↓ (-2 €/MWh at double gas price) Higher gas price 0.50 ↑ (up to +8 €/MWh at double coal Higher coal price price) 0.25 ↓ / → (-1 €/MWh at double IC More interconnector 0 50 100 Installed Wind Capacity in Germany (GW) capacity capacity) ↑ / → (+1 €/MWh at double IC More storage capacity capacity) ↓ (up to -13 €/MWh if all wind Spatial distribution of wind capacity power was in Ger) ↑ (up to +14 €/MWh with entirely More flexible CHP plants flexible CHP) ↑ (+3 €/MWh at 150 €/MWh cut- Capacity markets off price) 12
Take home 1. Don’t compare levelized costs of renewables to the average electricity price! (You can’t ignore profile and imbalance costs.) 2. The revenue of wind power drops significantly as more capacity is installed. (The wind value factor drops from 1.1 to 0.4 [0.3;0.7] as the wind power market share grows to 40%.) 3. It will be harder for renewables to become competitive than many studies suggest. (50% to 150% times harder than base price comparisons indicate.) 4. Changes in the electricity system can have unexpected effects. (Higher gas prices or more interconnection capacity might reduce wind revenues, for example.) 5. Increasing the flexibility of the electricity system is key to make fRES competitive. (Anything from storage, interconnectors, flexible CHP, flexible providers of ancillary services, …) 13
lion.hirth@vattenfall.com
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