National renewable polices in an international electricity market : a socio-technical study

Abstract

The goal to promote RES-E, in the European context, coexists with goals of ensuring a single internal market for electricity, and security of supply in the European Union, and these simultaneous goals are not always congruent with each other. Today, significant amounts of intermittent RES-E in the energy mix have led to un- intended effects. One of the most important consequences is the so called ‘merit-order effect’, where the spot market electricity price reduces to the extent by which the renewable electricity generation displaces demand along the merit order. There is concern that part of the merit order effect spreads across national borders. Vitally, the implications of the merit order effect on the effectiveness of RES-E support schemes are unclear. Another important effect of the price reduction is that, the lower the average electricity market price, the greater the costs of subsidies, making the phasing out of subsidies for renewable, intermittent sources more difficult. With respect to electricity from renewable sources, this achieving of the triad of objectives took the shape of "making renewable support schemes more market-based", "ensuring renewables are driven by market signals". However, it is not often clear what is meant by such statements. What features of the support scheme are being referred to? What would it mean for renewables solely to be driven by market signals? How would features of support schemes impact for instance, the merit order effect, and vice-versa? These issues are encapsulated in the first problem addressed in the thesis: to unravel the interactions between renewable support scheme design and a single isolated electricity spot market, with a long term perspective. Since countries are now increasingly interconnected, the second major issue tack- led in this thesis concerns cross border effects due to different renewable support schemes between neighbouring countries in a common electricity market. This issue addresses concerns about the merit-order effect spreading across national borders, and the ensuing distributional implications. The final issue addressed in this dissertation relates to the long term economic viability of electricity from renewable sources given the current institutional and physical setting they operate in. The costs of renewable technologies have dropped dramatically and yet effects such as their reducing market value lead to questions about whether it is possible for them to attain economic viability in a decarbonised power sector. The central question addressed in this thesis is How do national renewable electricity support schemes interact with the electricity market over the long term (20-30 years) as the European Union transitions to a decarbonized energy system? Using an approach based on theoretical foundations of institutional analysis, design theory, in this dissertation RES-E support schemes are broken down into their ‘design-elements’ from a welfare economics perspective. A framework is then introduced, using the modelling paradigm of agent-based modelling, by which RES- E schemes are modelled in EMLab Generation. EMLab Generation mainly comprises an electricity market clearing and an endogenous investment module, enabling the researcher to study long term dynamics of policy designs in the electricity sector. Key results include the following. The model shows that the way electricity prices are taken into account while designing subsidies makes a substantial difference to welfare distributions. When multiple countries are considered, the spreading of the merit order effect from a larger country to a smaller one, would cause the smaller country’s subsidy costs to increase. This indicates that even if RES-E support can be designed to be "market-based" at the operational level, designing them to be "market based" at the investment level is far more complicated. It indicates that RES-E targets of countries should take into account the targets of neighbouring countries, as well as the amount of flexibility in terms of interconnection and storage in the system. In terms of its scientific contribution, the thesis takes a step towards integrating institutional analysis and design theory in order to complement the neo-classical school of thought which arguably dominates energy policy design and analysis in Europe.