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Economics of Energy & Environmental Policy
Volume 10, Number 1

Uncertainties in Energy and Electricity Markets

Uncertainties in Energy and Electricity Markets: An Introduction

Christian Furtwängler, Christoph Weber, and Florian Ziel

Coping with Uncertainties in the Electricity Sector - Methods for Decisions of Different Scope

Christoph Weber, Sina Heidari, and Michael Bucksteeg

DOI: 10.5547/2160-5890.10.1.cweb
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Decision-making in the energy sector and notably the power industry has to cope with multiple uncertain factors such as renewable forecasts, technology developments or demand growth. At the same time, multiple methods are available to support decision-making under uncertainty. The focus of the present review is to identify the merits of different optimization modelling approaches regarding various types of decision problems under uncertainty with a focus on the electricity system. Stochastic optimization and robust optimization are scrutinized along with other, less known methods like information gap decision theory (IGDT) or modeling-to-generate-alternatives (MGA). Also, simple deterministic equivalents, scenario and sensitivity analyses are considered when it comes to solving operational decision problems, investment decisions and policy choices regarding regulatory settings. The latter deserve particular scrutiny in a context of decarbonization and energy system transformation which embraces several decades and multiple decision makers in a multi-level governance context.

(Anti) Competitive Effects of RES Infeed in a Transmission-Constrained Network

Franz Hubert and Olga Spiridonova

DOI: 10.5547/2160-5890.10.1.fhub
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Many countries are adding substantial capacities of wind- and solar-based power generation to their portfolios. While ownership of conventional capacities is typically concentrated, renewable energy (RES) is often provided by new, independent producers. Hence, one might expect competitive pressure to increase as RES production is ramped up. However, the best locations for RES are often distant from customers. In this paper we show that an increase of RES infeed in a surplus region might lead to a decline in total generation and consumer surplus in the market if transmission capacities are insufficient. The reason for this somewhat counter-intuitive effect is a switch from an equilibrium in which the market is fully integrated to an equilibrium in which transmission constraints are binding. The resulting fragmentation of the market allows the dominant conventional producers to exploit their local market power more aggressively. We also show that conventional generation and nodal prices may be stochastic even if RES infeed, generation cost and demand are perfectly predictable and known to all market participants.

Inland Hard Coal Transportation Costs in the European Union—A Model Based Approach

Nico Lehmann, Natalie Lanzrath, and Armin Ardone

DOI: 10.5547/2160-5890.10.1.nleh
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Although some EU countries have already ceased coal-fired electricity generation, coal will still be a relevant topic within the European electricity mix in the medium term. A hard coal power plant competes in the merit order mainly with other hard coal power plants and also with gas power plants. One of the main cost drivers of fuel supply is the transport costs of steam coal from import harbors to the power plant sites. These costs consist either of freight rates of the barges, charges for transport by train, or a combination of both, and additional transshipment costs that arise during transport. The resulting costs differ considerably depending on the country and the region within a country. This work aims at determining country-specific regional transport costs for hard coal to power plant sites in the European Union. The geographical resolution for this work is at the municipal level of each country, in which each municipality is characterized by specific costs, depending on distance and means of transport. In total, transport costs are modelled for 119,978 municipalities. The results show a clear ranking of preferred locations with regard to transport costs, starting with locations close to the open sea followed by inland locations near riverbanks. Locations remote from both sea and waterway access are the most expensive sites. The resulting data basis can be used as an input for energy system models.

The Impact of Renewable Energy Forecasts on Intraday Electricity Prices

Sergei Kulakov and Florian Ziel

DOI: 10.5547/2160-5890.10.1.skul
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In this paper we study the impact of errors in wind and solar power forecasts on intraday electricity prices. We develop a novel econometric model which is based on day-ahead wholesale auction curves data and errors in wind and solar power forecasts. The model shifts day-ahead supply curves to calculate intraday prices. We apply our model to the German EPEX SPOT data. Our model outperforms both linear and non-linear benchmarks. Our study allows us to conclude that errors in renewable energy forecasts exert a non-linear impact on intraday prices. We demonstrate that additional wind and solar power capacities induce non-linear changes in the intraday price volatility. Finally, we comment on economical and policy implications of our findings.


The Role of Energy Poverty on Economic Growth in Sub-Saharan African Countries

Kerschyl Singh and Roula Inglesi-Lotz

DOI: 10.5547/2160-5890.9.2.ksin
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Appreciating firstly the importance of access to basic services and secondly, the lack of infrastructure particularly in the energy domain in the African continent, the aim of this paper is to examine empirically the role of energy poverty to economic growth in the sub-Saharan region. The findings aim to assist in proposing directions to policy makers for the implications of lack of access to energy as well as to relevant organisations to aid with deployment of sound policies and efforts towards well-functioning energy options. The empirical analysis is based on fixed effects panel data estimation as well as a Generalized Method of Moments (GMM) estimation including of fourteen sub-Saharan African countries (Benin, Botswana, Cameroon, Congo – Republic, Kenya, Mauritius, Mozambique, Namibia, Nigeria, Senegal, South Africa, Swaziland (Eswatini), Tanzania and Togo) for the period from 1990 to 2016. The empirical investigation found that access to electricity is a positive contributor to this group of countries’ economic growth, with relatively low impact on a direct basis. This study provides evidence for the direct effect and also, raises the issue of all the health, education, income generating impact that access to electricity will provide to future generations.

Clean Cooking: Why is Adoption Slow Despite Large Health and Environmental Benefits?

Govinda R. Timilsina and Sunil Malla

DOI: 10.5547/2160-5890.9.1.gtim
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More than one-third of the world’s population, mainly the low-income group, still rely on traditional biomass fuels for household cooking. The indoor air pollution from household cooking is one of the main drivers of child mortality in developing countries. It also causes deforestation and emissions of black carbon. A large number of studies show that the benefits of clean cooking, including health and environmental benefits and value of time savings from fuelwood collection, are much higher than the cost of adoption of clean cooking. Over the last four decades, several programs and initiatives have been launched by governments and non-governmental organizations in many developing countries with the help of multilateral and bilateral donor agencies to adopt clean cooking. Two common options adopted are improved-cookstoves and cleaner fuels. However, the adoption of clean cooking has been very slow. This paper discusses the main factors responsible for the slow adoption of clean cooking. We present an extensive review of empirical literature for this purpose. We find that lack of information or awareness, low household income or affordability, and human behavior and social factors are the main barriers to expedite the adoption of clean cooking in developing countries. Finally, we offer some innovative approaches to promote clean cooking policies and programs.

Electricity Markets in the Resource-Rich Countries of the MENA: Adapting for the Transition Era

Rahmatallah Poudineh, Anupama Sen, and Bassam Fattouh

DOI: 10.5547/2160-5890.10.1.rpou
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The Middle East and North Africa’s (MENA) resource-rich economies are pursuing two parallel strategies in their electricity sectors: (i) increasing and integrating renewables into their power generation mix to mitigate the impact of rising domestic oil and gas demand on their economies and boost hydrocarbon export capacities; and (ii) undertaking power sector reforms to attract investment in generation capacity and networks, remove subsidies, and improve operational efficiency. These goals imply that the design of reforms (including regulations governing wholesale and retail markets and networks) needs to be carried out with a view to a rising share of non-dispatchable resources. The lack of an integrated approach to simultaneously address these two strategies is likely to lead to several misalignments between renewables and various components of future electricity markets, as the share of intermittent resources increases in the generation mix. The key challenge is that the ‘ultimate model’ capable of reconciling these two goals is as yet unknown, and is still evolving, due to uncertainties around the development of technologies, institutions, and consumer preferences. We argue that resource-rich MENA countries can, however, move towards adopting a transition model of electricity markets, the individual elements of which can be adapted to suit either centralized or decentralized future electricity sector outcomes. We outline the key components of this model for the wholesale market, retail market, and network regulation, considering governments’ objectives and the specific contexts of the countries in the region.

Ownership Unbundling of Electricity Distribution Networks

Paul Nillesen and Michael Pollitt

DOI: 10.5547/2160-5890.10.1.pnil
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Traditional restructuring of power markets has focused on legally separating monopolistic transmission and distribution infrastructure with sufficient regulatory oversight to ensure non-discriminatory access to networks, and transparent and cost-reflective tariffs. There is consensus that ownership separation for transmission assets is beneficial for competition and transparency. However, at the distribution level the benefits of going beyond legal unbundling are questionable. This paper reviews the theoretical arguments for ownership unbundling and summarises the findings from 23 academic papers and consulting reports. In addition, this paper empirically demonstrates that forced distribution ownership unbundling in New Zealand (from 1998) and the Netherlands (from 2009) did not increase retail competition and did not increase network quality. It resulted in significant one-off and structural costs. The combination of increasingly active distribution networks with bi-directional power flows from distributed renewables, in combination with the digitalisation of energy supply and creation of distribution data platforms, suggests that interaction between networks and customers, traditionally separated from a regulatory and competition perspective may become more interlinked in future. Policymakers should therefore assess a broader set of policy measures, taking into account this changing network landscape, when focusing on increasing retail competition and network quality.

Fossil Fuel Subsidies, the Green Paradox and the Fiscal Paradox

Maria Elisa Belfiori

DOI: 10.5547/2160-5890.10.1.mbel
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Fossil fuel subsidies amounted to about 0.4% of global GDP in 2015, and there is an active call worldwide for eliminating them. The main argument in favor of removing subsidies is that it will lead to a reduction in global carbon emissions and a decrease in fiscal deficits. This paper shows that there are also some overlooked adverse effects of eliminating the current fossil fuel subsidies. A version of the "Green Paradox" arises when oil firms learn that fossil fuel subsidies will be removed. In fear that their assets will lose value, firms have incentives to accelerate extraction before subsidies are eliminated. Thus, carbon emissions increase in the short run and the climate externality worsens. Likewise, a "Fiscal paradox" arises because government outlays rise in the short run when more extraction occurs. I show that these intertemporal effects reduce the relative benefits from eliminating the existing subsidies and may actually make a fossil fuel subsidy reform counterproductive.

Different Cost Perspectives for Renewable Energy Support: Assessment of Technology-neutral and Discriminatory Auctions

Jan Kreiss, Karl-Martin Ehrhart, Marie-Christin Haufe, and Emilie Rosenlund Soysal

DOI: 10.5547/2160-5890.10.1.jkre
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Auctions are the prevalent instrument for promoting renewable energy sources worldwide, especially in the European Union and in Latin America. Auctions enable the controlled deployment of renewable energy sources while reducing costs. However, there are different views on relevant costs, auction targets, and their implications on the auction design. Here, the application of technology-neutral auctions is an essential topic of discussion. We show that technology-neutral auctions are not a panacea. We analyze two types of discriminatory design elements that improve the expected auction outcome with respect to specific auction targets. By applying theoretical concepts to auctions for renewable energy support, we highlight how discriminatory auctions can prevent windfall profits and how to include an overall economic perspective in the auction design. We illustrate our results with real-world examples.

Towards Electricity Markets’ Integration and Investment in Transmission Capacity: East African Community Power Markets

Geoffrey A. Mabea and Rafael Emmanuel Macatangay

DOI: 10.5547/2160-5890.10.1.gmab
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This research examines the impact of transmission expansion on a future East Africa’s electricity market, to enable the five examined countries (Kenya, Uganda, Tanzania, Rwanda, and Burundi) to adequately couple. As a pioneering move, we introduce nodal pricing and investigate the economic welfare arising from the planned transmission upgrade. This simulation is then compared to our simulated scenarios to propose a transmission capacity that could yield a robust integrated market. In analysing the impact of transmission infrastructure investment on the prospective electricity market, we examine the transmission investment that could yield the highest economic welfare. We argue that electricity market coupling increases efficiency in electricity trade and allow power flow amongst the countries as well as permitting high penetration of abundant electricity from renewable energy sources. The study brings a new dimension in which the five electricity markets, currently unintegrated, could benefit from cross-border trade. We base our analyses on the economic dispatch simulated through an optimal power flow model. Thus, we argue that the aggregate welfare loss arising from inadequate transmission capacity could be $0.3 million/hour while the transmission capacity of at least 200MW for all the lines yields adequate economic welfare.

Comparing Regulatory Designs for the Transmission of Offshore Wind Energy

Yann Girard, Claudia Kemfert, and Julius Stoll

DOI: 10.5547/2160-5890.10.1.ygir
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Offshore wind plays an ever-increasing role for the global transition to renewable energy. For offshore wind energy to be successful, cost-effective transport of the produced electricity to shore is necessary. The development and operation of the offshore transmission asset is costly and regulated differently across the globe. In most countries, the TSO is responsible for the transmission and develops and operates the asset separately from the offshore wind farm. Other countries have established a competitive tender with integrated development of the offshore wind farm and the transmission asset. However, there is so far no empirical analysis of the economic benefits of different regulatory designs regarding the offshore transmission assets. In this paper, we collect a unique data set on offshore transmission assets that compares empirical cost and quality of offshore transmission assets in two countries with different regulatory regimes for the first time. With project level data we can control for geographical as well as technical difference to assess which regulatory design might lead to lower economic costs for the offshore transmission asset. Comparing the cost in the two leading countries for offshore wind energy, we find that a competitive regime leads to lower transmission cost and similar transmission availability.

Eyes on the Price: Which Power Generation Technologies Set the Market Price?

Eike Blume-Werry, Thomas Faber, Lion Hirth, Claus Huber, and Martin Everts

DOI: 10.5547/2160-5890.10.1.eblu
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Upon discussion of price setting on electricity wholesale markets, many refer to the so-called merit order model. Conventional belief holds that during most hours of the year, coal- or natural gas-fired power plants set the price on European markets. In this context, this paper analyses price setting on European power markets. We use a fundamental electricity market model of interconnected bidding zones to determine hourly price-setting technologies for 2020. We find a price-setting pattern that is more complex and nuanced than the conventional belief suggests: across all researched countries, coal- and natural gas-fired power plants set the price for only 40 per cent of all hours. On some markets, the price setting is characterised by a high level of interconnectivity—as illustrated by the example of the Netherlands. During some 75 per cent of hours, foreign power plants set the price on the Dutch market.


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