the delicate art of regulating a decarbonising power market · •asymmetric fims: 8 firms, asym....

The Delicate Art of Regulating a Decarbonising Power Market

Caterina Miriello (IEFE, Università Bocconi)Joint with Derek W. Bunn (London Business School)

IEFE, Università Bocconi March 02, 2012

Themes and Motivation

• Increasing power from renewable sources

• EU Renewables Directive (20-20-20):

• EU-15: 5 billion € to support RES

(1/6 of total energy subsidies) – Source: EEA

• Alongside with Market liberalisation

• European Union “wants it all…”?

Mar 02, 2012 Caterina Miriello - IEFE Bocconi 2

Research questions

• To what extent is co-evolution of low carbon initiatives with market liberalisation feasible?

• Which situations need to be monitored?


Paper Outline

• Analysis of a wholesale electricity market experiencing an increasing share of wind power

• Methodology: ABM that simulates repeated dailyauctions

• Several scenarios


Research Background

• RES Lower average wholesale prices

• Twomey and Neuhoff (2009), Sensfuß et al. (2008), Sàenz de Miera et al. (2008)

• Price-based incentives more successful

• Butler and Nauhoff (2004), Lüthi and Wüstenhagen (2008)

• Bulan et al. 2009 on investment and market power


Proportion of RES in the EU countries


National targets

0

10

20

30

40

50

60

2005 2009 (prov.) 2020 target


Data source: http://ec.europa.eu/energy/renewables/targets_en.htm

Main contributions

• Generating firms’ ability to make profit (and to recover costs) is influenced by market structure

• A market composed by asymmetric firms is more likely to yield capital costs recovery

• New entrants renewable generators benefit from the existence of a strategic fringe


Data

• Stylised model

• Data source on:

– Fossil fuels: Eurostat

– Marginal costs: IEA, OECD

– Capital costs: EWEA


Model description (1)

• Set of agents: n generators

• Capacity

• Demand

• Generating plants with own capacity, seasonal availability profiles, marginal cost c

• Economy runs during periods


ni ,...,1

nKkn

20,...,1,0T

Model description (2)

• Trading arrangements: compulsory, uniform-price auction

1. Bids:

2. SMP

3. Output:


)( ibb

jij

ji

n

i

n

j

ji

jii

i

bbifk

bbifkn

kn

bbifk

bq

,0max

,0max1

,min1

,min

);(1 1

Firms’ Objective

1. Reaching a minimum utilisation target

2. Maximise profits:


iii qcSMP

Learning algorithm

• If Current Utilisation Rate ≥ Desired Utilisation Rate

• If Current Utilisation Rate < Desired Utilisation Rate


211

211

tttt

tttt

ifbb

ifbb

1 tt bb

Strategy

• Verify the investment performance through IRR:

• The higher the better; if IRR is high enough thenthe investment is profitable


0NPV

N

nn

n

r

C

0

0)1(

Cases

• Benchmark: 10 symmetric firms

• Oligopoly: 4 symmetric firms

• Asymmetric fims: 8 firms, asym. in size

• New entrant case: 8 firms asym. in size and technology portfolio

• For each case: strategic variation, in which all firmsbut one engage in capacity restrictions


Assumptions

• Existing plants fully depreciated

• Firms invest in wind sequentially, from 10% to60%

• Wind capacity replaces the existing fossil fuel capacity

• Carbon price: 15 € per ton of carbon emitted

• Green certificates (GC)


Results

1. Non-monotonic evolution of profit contributions


-

10.000.000,00

20.000.000,00

30.000.000,00

40.000.000,00

50.000.000,00

60.000.000,00

0% WIND 10%

WIND 15%

WIND 20%

WIND 30%

WIND 40%

WIND 50%

WIND 55%

WIND 60%

WIND 70%

WIND 80%

WIND 90%

WIND 100%

WIND 120%

WIND 150%

WIND 180%

Results - Benchmark

• IRR of the single projects always the same

• IRR of the totals low and decreasing in the share of wind


-2%

-1%

-1%

0%

1%

1%

2%

2%

10% 15% 20% 30% 40% 50% 55% 60%

IRR Totals

IRR for Wind Projects

-0,022

-0,021

-0,02

-0,019

-0,018

-0,017

-0,016

10% 15% 20% 30% 40% 50% 55% 60%


Results – Benchmark, Strategic

• Investment performance is going to decrease as the share of wind penetration increases


-2%

-1%

0%

1%

2%

3%

4%

5%

10% 15% 20% 30% 40% 50% 55% 60%

IRR (Totals)

IRR - Strategic Firm IRR - Non Strategic Firm

-10%

-5%

0%

5%

10% 15% 20% 30% 40% 50% 55% 60%

IRR (Single projects)

IRR - Strategic Firm IRR - Non Strategic Firm

Results – Oligopoly, Strategic

-3%

-3%

-2%

-2%

-1%

-1%

0%

10% 15% 20% 30% 40% 50% 55% 60%

IRR Oligopoly (Single Projects, Strategic case)

IRR Strategic Firm IRR Non Strategic Firm


Results – Oligopoly, Strategic

-2%

-1%

0%

1%

2%

3%

4%

5%

10% 15% 20% 30% 40% 50% 55% 60%

IRR Oligopoly (Totals, Strategic case)

IRR Strategic Firm IRR Non Strategic Firm


Wholesale Prices


Results – Asymmetry in size (1)

• Introducing some asymmetry

• Firms able to gain profits, even with symmetry in technology portfolio

• Smaller firms perform significantly better

• IRR still decreasing in the share of wind



0%

2%

4%

6%

8%

10%

12%

14%

16%

10% 15% 20% 30% 40% 50% 55% 60%

IRR (Single Projects)

IRR (BIG) IRR (MEDIUM) IRR (SMALL)



0%

5%

10%

15%

20%

25%

30%

35%

10% 15% 20% 30% 40% 50% 55% 60%

IRR (Totals)

IRR (BIG) IRR (MEDIUM) IRR (SMALL)



0%

5%

10%

15%

20%

25%

30%

35%

10% 15% 20% 30% 40% 50% 55% 60%

IRR (Totals. Strat vs Non strat)

IRR Strategic (BIG) IRR Strategic (MEDIUM) IRR Strategic (SMALL) IRR (BIG) IRR (MEDIUM) IRR (SMALL)


Results – New entrant case

• A new entrant wind firm enjoys the presence of a strategic fringe in the market


-4%

-2%

0%

2%

4%

1 2 3 4 5

IRR of a New Entrant Wind Firm (Single Projects)

IRR strategic IRR

-2%

0%

2%

4%

1 2 3 4 5

IRR of a New Entrant Wind Firm (Totals)

IRR strategic IRR

Conclusions

Results suggest:

• Firms’ ability to make profit (and to recover costs) influenced by market structure

• With perfect competition and symmetry costs are not recovered, even in concentrated markets

• Renewable generators benefit from the existence of a strategic fringe


Policy implications

• Market concentration need to be monitored

• Decommodisation

• Asymmetric evolution of the marketreinforced

• New entrants


Thank you for your attention


the delicate art of regulating a decarbonising power market · •asymmetric fims: 8 firms, asym....

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