“Cross-country electricity trade, renewable energy and European transmission infrastructure policy” by Jan Arbell and Sebastian Rausch
Grishma Manandhar
This Photo by Unknown Author is licensed under CC BY
Outline
• Background
• Introduction
• Conceptual Framework
• Empirical Determinants of Cross-Country
Electricity Trade in Europe
• Description of Model and Data
• Simulation Results
• Conclusions
Background
• Cross country electricity trade and transmission infrastructure
• Climate policy
• renewable energy sources
• Intermittency
• Non-dispatchable
• Surprisingly, little is known about the interactions between TI, RE
and environmental outcomes.
Introduction
Research Objectives
• Develops a multi-country, multi-sector general equilibrium framework
• Integration high-frequency electricity dispatch and trade decisions,
• To study the effects of transmission infrastructure expansion and renewable energy
penetration in Europe for the regional distribution of gains from trade and Co2
emissions from electricity production.
Literature contribution
• Most prior studies have assessed the gains from TI policy by relying on partial
welfare measures focusing in either
• Cost differentials (Rogers and Rausch, 1989), (Newberry et al., 2013)
• Impacts in terms of cross-country price differentials (Bessembinder and Lemmon,
2006); (Newberry et al.,2013), (Bahar and Sauvage, 2012)
• Consumer and producer surplus (von der Fehr and Sandsbraten, 1997)
• First to study the role of infrastructure for cross country electricity trade in a general
equilibrium framework.
Conceptual Framework
Electricity production, demand and cross-country trade
• Difference in the step wise supply curves reflect that both countries differ with respect to the technology mix of installed capacity
• low cost technology is comparativelycheaper in country A
• With No transmission, the countries will be forced to use their high cost technology
• With transmission, country B becomes the exporter
Fig: Cross Border electricity trade, MC, installed Capacities, and asynchronous demand
Empirical Determinants of cross-country trade in Europe
Production capacities, marginal technologies, and demand
• Hourly equilibrium prices are
determined by the least cost technology
available in each country to meet
demand in this hour “price-setting” or
“marginal technology”
• Cross-country differences in marginal
generation costs
• Cross-country differentials in marginal
costs along with significant excess
capacities indicate large potential for
trade.
Production capacities, marginal technologies, and demand
• Empirically observed frequency
distribution of hourly electricity demand
alongside with the marginal technology
• France is shown to have a cumulative
capacity of almost 80GW. (55GW would
be met with nuclear as marginal
technology, coal if demand is 60MW
(installed coal-fired capacity is 5GW)
Residual demand
Demand
Cross country transfer capacities
• Unlike other commodities, electricity
trade is restricted and is grid bound by
the existing TI.
• NTCs shows the maximum amount of
electricity that can be transported
between geographically contiguous
countries for the current EU grid.
• North-south pattern of electricity trade
Scope for cross-country trade
• Price differentials- how large are the
economic incentives for international
electricity trade between EU countries.
• In more than half hours in 2012, CC price
differentials was 2Euro/MWh, and 35%
and 10% price differentials exceeded 10
and 30 Euros/MWh
• For majority of hours in Germany, it
could import electricity from Norway,
while it can also export relatively export
electricity to Switzerland.
Description of Model and Data
Complementarity based formulation of equilibrium conditions
• Incorporates the drivers and assess the emissions impacts of enhanced
TI
• Mixed complementarity problem: a square system of non-linear
(weak) inequalities that represent the economic equilibrium through
zero profit and market clearing conditions.
• Unifying framework for combining technological details from bottom-up
approach and economic richness of top-down approach
Electricity generation and storage
- Firms are assumed to operate
under perfect competition
- Generation units are
represented at the technology
level
- Total production (𝑋𝑝𝑟𝑡)
- p denotes technology ( ∊P)
- t ∊ {1,..T} T=8760
- r ∊ {1….R}
Electricity generation and storage
• Production at any point in time cannot exceed given (and fixed) installed capacity
Where 𝑃𝑋𝑝𝑟𝑡 is the shadow price of capacity of firm p in region r at point t
• Increase in input, i.e. the load gradient or ramping amount is given by
• Increase in generation cannot exceed the maximum increase per hour, 𝐼𝑝
Electricity generation and storage
• Amount of generation increase is positive if sum of unit ramping cost and the shadow price on the
max ramping constraint, is equal to (larger) than the shadow value of generation ramping
• Zero profit condition: by using the marginal generation costs, shadow prices for capacity and
ramping, and the price for electricity in region r at time t
International Electricity Trade
• Trade from r to 𝑟 is restricted by the fixed and given net transfer capacity (𝑛𝑡𝑐෦𝑟𝑟) and the concept of
line losses in electricity network models (e)
• Net transfer capacities ensures that the transmission line capacity between regions is sufficient to
cover the trade flows (𝑇𝑟 𝑟𝑡)
• Trade flows from region r to 𝑟 is positive
• Hourly electricity market demand and curtailment: supply given by sum of generation, storage and
net imports equal residual demand
Production, consumption and trade in commodities other than electricity
• consistent profit and utility maximizing decisions by firms and households for non-electricity commodities that are consistent with market balance conditions.
• Consumer preference and production technologies are characterized are represented by nested constant-elasticity-of-substitution (CES) functions
• Government collects revenues from income and commodity taxation and international trade taxes
Linking electricity supply and economy-wide activities
• Reconciling the different time scales in which we treat electricity generation and economy wide activities
• Using benchmark data on hourly electricity demand (β𝑟𝑡) and denoting yearly (quantity weighted)
average electricity demand price as 𝑃𝐴𝐸𝐿𝐸
• On the cost side, electricity firms' decisions depend on marginal costs for generation and ramping which
are functions of process for capital, labor, fuel and materials inputs
Data and empirical specification
• Specification of economy wide activities
• comprehensive energy economy dataset
• GTAP9 dataset ( aggregated to 20 regions)
• Electricity technologies, demand and cross-border transmission
• Model the year 2012 with hourly resolution
• Hourly demand data from ENTSO-E
• Generation facilities are aggregated on a fuel basis according to technologies
Computational Strategy
• System of nonlinear inequalities, GAMS (General Algebraic Modeling system) using
PATH solver
• Compute the vector of price and quantities that solves the system of
simultaneous equations
• Decomposition method: block decomposition algorithm developed by B ሷ𝑜hringer
and Rutherford (2009)
• Combination of top down and bottom up approach for comprehensive energy
policy analysis
Simulation Results
Counter-factual Scenarios
Scope of cross-country electricity trade?
01Welfare gains?
02Dependency on assumed levels of RE production across countries?
03
Counter-Factual Scenarios
• Cross-country net transfer
transmission capacities
(𝑛𝑡𝑐𝑟 𝑟)
1. Current- existing in 2012
2. TYNDP- increase of 41%
3. Full Integration – no binding
restriction for cross country
transmission between
countries Fig: Increases in cross-border transmission capacities (red, GW) and annual renewable electricity production for wind and solar (black, TWh).Figures for NTC increases are shown next to arrows, figures for RE production increases are shown in center of each country.
Counter-Factual Scenarios
• RE production (𝑟𝑒𝑛𝑟𝑡)
1. RE Base- assumes the 2012level of RE production
2. RE 2020- official target and forward calibration
3. RE 2030- official target and forward calibration
• Annual electricity production increases by a factor of 2.5(3.9), share of RE increases from 8.3% to 20.4%(31%).
Equilibrium price and quantity impacts for electricity
• Aggregate European
Impacts:
• Increased NTCs induce
higher volume of
electricity traded
• Substitution from
natural gas to coal
• Congestion is reduced
Equilibrium price and quantity impacts for electricity
• Regional Electricity price
impacts:
• Identified price zone
continues to exist
• Prices fall in all countries
• Cross country price
differentials increase
Current RE2020 RE2030
Current TI
Equilibrium price and quantity impacts for electricity
• Regional Electricity price
impacts:
• Induces price change
up to 5.5Euros/MWh
• Higher the level of RE,
smaller are the price
impacts Current RE2020 RE2030
TYNDP
Equilibrium price and quantity impacts for electricity
• Regional Electricity price
impacts:
• Substantial price decrease
in southern Europe
• Large price increase in
Scandinavian countries
• Central Europe exhibit
intermediate price increase
Current RE2020 RE2030
Full Integration
CO2 emissions impacts
• Rationale of TIP – to reduce
emissions by using more
“clean” energy
• It depends on the level of RE
• Current and RE2020,
increase in emissions ( more
incentives to produce and
export cheap electricity)
• RE2030, reduces emissions
(RE can replace coal)
Aggregate welfare impacts
• Gains from trade due to
TYNDP increases by 62%
(104%) for RE2020(2030)
respectively
• Profits in the electricity sector
increases substantially
Country level welfare impacts
• Most countries gain, some countries ( Germany, Denmark, and Switzerland) experience welfare losses from TYNP
• New transmission line from Norway to Germany, Norway obtains at the expense of Denmark
• Germany (net exporter) experiences welfare loss despite revenues from international trade
• Higher electricity prices now negatively impacts welfare due to large negative economy wideadjustments.
TYNDP
Current RE2020 RE2030
Country level welfare impacts
• Roughly like TYNDP scenario
• Welfare loss for “wheeling”
countries are larger
• Gains for importing (Italy and
Spain) and net exporting (
Scandinavian countries and
Eastern Europe) increase
RE2030RE2020Current
Full Integration
Conclusions
• First step toward analyzing the interactions between TI, RE penetration, and
environmental outcomes.
• “environmentally friendly” but spatially uncoordinated RE policies bear the risk of
unintended outcomes
• Enhanced TI has the potential to bring about sizeable gains from trade (1.6-2.6
billion 2011$ per year)
Future Research
• Investment incentives by an enhanced
• Technological change
• Stochastic intermittency issues
• Local costs
• Centralized system