The Market Value of Fluctuating Renewables What drives the market - - PowerPoint PPT Presentation

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The Market Value of Fluctuating Renewables What drives the market - - PowerPoint PPT Presentation

Mar 19, 2024 121 likes •270 views

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,

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The Market Value of Fluctuating Renewables

Lion Hirth, Vattenfall* 2011-10-04 Infraday, Berlin

What drives the market value of electricity from fluctuating renewables sources (fRES) such as wind and solar power?

*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.

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Motivation

When will wind and solar power be competitive on the (wholesale) market?

  • cost development
  • revenue development
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Two properties of fRES matter for market income

to understand competitiveness of fRES, it is not sufficient to compare levelized costs of electricity to the average electricity price (base price) Fixed Generation Profile

  • electricity price is different in every

hour

  • whenever it is windy / sunny

electricity price is lowered Profile Costs

  • costs of fixed generation profile
  • ~ 10% of spot market revenues

(today) Uncertainty

  • when day-ahead markets close,

uncertainty about generation remains

  • imbalances have to be closed at

intraday or imbalance markets Imbalance Costs

  • costs of forecast errors
  • ~ 10% of spot market revenues

(today) fRES depend on fluctuating primary energy sources (non-dispatchable)

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The Mechanics of Price Setting

Stylized merit-order of Germany 2010 at 20 €/t CO2; bidding price including run-through discount; only dispatchable technologies; weighted with average availability

25 50 75 100 GW €/MWh Nuclear Lignite Hard Coal CCGT OCGT CHP

76

17 GW fRES 29 €/MWh

load residual load

Merit-order Curve and Price-reducing Effect of Wind

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)
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Market Data: Status Quo

.91 42 47 Average .94 42 44 2010 .91 35 39 2009 .90 59 66 2008 .88 33 38 2007 Value factor (1) Ave Revenue (€/MWh) Base price (€/MWh) Onshore Wind in Germany 1.25 82 66 2008 1.14 44 39 2009 1.11 49 44 2010 1.17 58 50 Average

  • Value factor

(1) Ave Revenue (€/MWh) Base price (€/MWh) Solar in Germany Wind earned 9% less than the average electricity price. Solar earned 17% more.

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Future development

  • 1. Value factor curve
  • from market data value factors for the current

state of the electricity system can be calculated

  • we are interested in the future development of

profile costs

  • particularly, we are interested in the relationship

between profile costs and installed capacity

  • 2. Understand Drivers
  • many parameters potentially influence profile

costs (by influencing the shape of the merit-order curve and intertemporal flexibility)

  • we want to identify and quantify drivers
  • CO2 price, fuel prices, power plant stack,

interconnector development, capacity markets, electricity storage, generation flexibility, nuclear phase-out

  • time series are too short for econometrics

model

1 Installed Wind Capacity Value Factor Wind value factor 1 Installed Wind Capacity Value Factor

status quo

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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
  • hourly time steps for a full year
  • existing plant stack, storage and interconnectors
  • endogenous (dis-)investments in generation
  • investments in storage and interconnectors
  • parameterization of key inflexibilities
  • CHP must-run
  • start-up costs
  • ancillary services
  • back-tested to market prices

0.94 0.94 2010 0.91 0.95 2009 0.90 0.93 2008 market model Wind Value factors in Germany

Germany 30 60 08 09 10 08 09 10 08 09 10 base price peak price

  • ff-peak price

€/MWh market model

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Results

  • Main run
  • installed wind capacity is increased from zero to

100 GW (equivalent to 41% of consumption)

  • all other parameters are at long-term “best

guess” levels and are not changed

  • market value depends strongly on amount of

installed capacity

  • value factor drops from 1.1 to 0.4
  • the value factor curve is (steeply) downward

sloping

  • average revenue drops from 70 €/MWh to 21

€/MWh

  • compare to costs of onshore wind
  • learning rate of 5% per doubling of global

installed capacity

  • assumption: global capacity doubles twice as

quickly as German

  • revenues fall quicker than costs
  • it will be tough for wind power to become

competitive (under these conditions)

Wind Value Factor 0.25 0.50 0.75 1.00 50 100 Installed Wind Capacity in Germany (GW) Average Revenue for Wind Power 20 40 60 50 100 Installed Wind Capacity in Germany (GW) €/MWh Average wind revenues Wind Power LCOE income gap goes up

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Results II

Capacity 50 100 150 1 20 40 60 100 GW pump sola wind shed OCGT CCGT coal lign lCCS nucl GW wind Price Setting Fuel 0% 50% 100% 1 20 40 60 100 shed OCGT CCGT coal lign lCCS nucl zero GW wind

  • Capacity development
  • total dispatchable capacity is reduced

from 94 GW to 79 GW (decommissioning

  • f hard coal and lignite)
  • revenues from pump hydro storage

double, but still too low to trigger investment

  • existing nuclear remain profitable
  • Price setter
  • price drops to zero in 500h (80GW) and

2000h (100GW)

  • curtailment remains limited: 10% of wind

energy at 100GW

there are no negative prices in the model

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The effect of CO2 pricing

  • higher CO2 prices…
  • … increase the base price and thereby

increase wind revenues

  • … but can decrease the value factor

(sometimes)

  • because higher CO2 prices induce

investments in nuclear or CCS, which increases the steepness of the merit-

  • rder curve, leading to low prices in

windy hours

  • effects of parameter changes can

counter-intuitive

  • direct effect: higher CO2 price higher

variable cost higher electricity price and flatter merit-order curve higher revenues for wind power

  • indirect effects triggered by investments

Wind Value Factor 0.25 0.50 0.75 1.00 10 20 30 40 50 Installed Wind Capacity in Germany (GW) 0 €/t 20 €/t 75 €/t Average Revenue for Wind Power 20 40 60 20 40 60 80 100 Installed Wind Capacity in Germany (GW) €/MWh 0 €/t 20 €/t 75 €/t

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The effect of higher fuel prices

  • Do higher prices increase the revenues

for wind power? not necessarily

  • higher coal price
  • direct effect: higher electricity price when

coal is price setter (+)

  • merit-order flatter (+)
  • investments in gas (+)
  • investments in lignite (-)
  • 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

Average Revenue for Wind Power 20 40 60 50 100 Installed Wind Capacity in Germany (GW) €/MWh bench doubleCoal doubleGas

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More effects

Wind Value Factor 0.25 0.50 0.75 1.00 50 100 Installed Wind Capacity in Germany (GW)

↑ (+3 €/MWh at 150 €/MWh cut-

  • ff price)

Capacity markets ↑ (up to +14 €/MWh with entirely flexible CHP) More flexible CHP plants ↓ (up to -13 €/MWh if all wind power was in Ger) Spatial distribution of wind capacity ↑ / → (+1 €/MWh at double IC capacity) More storage capacity ↓ / → (-1 €/MWh at double IC capacity) More interconnector capacity ↑ (up to +8 €/MWh at double coal price) Higher coal price ↓(-2 €/MWh at double gas price) Higher gas price ↑ (+10 €/MWh at increase of 55 €/t CO2) Higher CO2 price Effect on wind revenues Parameter change What affects wind revenues?

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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, …)

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lion.hirth@vattenfall.com