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Renewable Energy 68 (2014) 801e813

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Renewable Energy

journal homepage: www.elsevier .com/locate/renene

Renewable electricity support system: Design of a variable premiumsystem based on the Spanish experience

Julieta Schallenberg-Rodriguez*

Universidad de Las Palmas de Gran Canaria, Campus Universitario de Tafira, Edificio de Ingenierías Industriales y Civiles, Spain

a r t i c l e i n f o

Article history:Received 18 September 2013Accepted 3 March 2014Available online

Keywords:RES-E support systemCap & floorVariable premium systemSpainFeed-in tariff

* Tel.: þ34 928451936.E-mail addresses: jschallenberg@dip.ulpgc.es, julie

http://dx.doi.org/10.1016/j.renene.2014.03.0090960-1481/� 2014 Elsevier Ltd. All rights reserved.

a b s t r a c t

The most widespread support system for renewable-energy-sourced electricity (RES-E) is the feed-intariff (FIT). FITs can be divided into fixed-FIT and premium systems. The latter type may also include acap and floor option, turning it into a variable premium system. The cap value (upper limit) aims to avoidwindfall profits for the RES-E investor if the electricity price rises quickly, while the floor value (lowerlimit) ensures minimum revenue, reducing the risk caused by low electricity prices. This paper examinesthe performance of the variable premium system as established in Spain (hourly-based) and investigatesthe possibility of alternative novel designs. For this purpose, an analysis was undertaken of the cap &floor system established in Spain based on real market data over a three year period and its performancecompared to the fixed premium system (no cap & floor limitations) and two novel cap & floor designs(monthly- and yearly-based). Two other novel alternatives were also considered: daily- and weekly-based. It is shown that the hourly-based cap & floor system did not result in a reduction of the overallRES-E revenue compared to the fixed premium system over the three year period, though revenue wasmore evenly distributed from year-to-year. The paper concludes that variable premium systems shouldbe based on monthly or yearly cap & floor mechanism as opposed to an hourly one.

� 2014 Elsevier Ltd. All rights reserved.

1. Introduction

Nowadays, there are three main instruments to promote elec-tricity produced from renewable energy sources (RES-E). Theseinstruments are: feed-in systems, quota systems and tenderingsystems. Besides these three main instruments, there are othercomplementary mechanisms, like investment subsidies and taxincentives.

Themost commonmethod to categorise RES-E support schemesis the one that distinguishes between price-based and quantity-based systems.

Price-based instruments

a) Feed-in systems: including fixed feed-in tariffs and variablefeed-in tariffs also know as premium systems

b) Investment subsidiesc) Fiscal incentives

ta.schallenberg@gmail.com.

Quantity-based instruments

a) Quota systemsb) Tendering or bidding systems

These two sets of instruments are mainly distinguished by theway they stimulate demand: by setting a price for RES-E or bysetting a percentage of RES-E production. While price-based in-struments set the price of RES-E unit and thus leave the determi-nation of RES-E quantity to the market, quantity-based instrumentsset an obligation upon consumers or utilities to consume/generatea certain amount of RES-E while the price is set by the market.

Fixed feed-in tariff systems set the tariff (price) in advance andthe RES-E production (quantity) depends on the marginal cost.However, in the premium system, since the final price (premiumplus electricity spot market price) is variable (the electricity spotmarket price depends on themarket and it fluctuates hourly as wellas in longer periods), both the price paid for RES-E production andthe quantity produced are variable. Thus, one can expect that whenprices are higher, RES-E production will increase (following themarginal cost curve). Premium systemswith cap & floor options actin a similar way, except that pricesmust be located between the cap

J. Schallenberg-Rodriguez / Renewable Energy 68 (2014) 801e813802

and the floor values, limiting the price range and, therefore, theRES-E production range: the lowest RES-E production should be thequantity corresponding to the floor value in themarginal cost curveand the highest RES-E production should be the quantity corre-sponding to the cap value in the marginal cost curve.

Feed-in systems are more likely to promote different RES-Etechnologies than quota systems, since they provide differentsupport levels per technology, while quota systems prioritise thecheapest technology. However, FITs have to deal with anotherproblem which is setting the “appropriate support level” to reachRES-E targets. This task is difficult since policy makers should haveaccurate RES-E marginal cost knowledge. Thus, there is the risk ofsetting the FIT at levels that are either too low (ineffective) or toohigh (leading to extra costs for consumers) [1].

Nowadays, feed-in tariff (FIT) is the most widespread supportsystem in Europe and indeed worldwide [1e4]. FITs are effective interms of RES-E deployment [1]; lead to low transaction costs[1,5,6]; have high dynamic efficiency, promote technology diversity[1,5,7,8] and provide high security for investors [1,4,7,9e12]. On theother hand, fixed-FITs have often been criticized for low compati-bility with liberalization of the electricity market and for distortingfree competition [5,13e15].

The premium system seems to maintain most of the advantagesattributable to the fixed-FIT system while it integrates into theelectricity market. The Spanish system in particular has hadextensive experience of the premium market and the various FIToptions.

Promotion of renewable energy in Spain began in the 1980s. In1998, the Spanish Government established two alternative supportsystems: fixed feed-in tariff (fixed-FIT) and premium. Both systemsare technologically dependent. Since 1998, several Royal Decreeshavemodified various characteristics of the support system, but thetwo options have been retained. Under the premium option, thegovernment has to anticipate the electricity market price, some-thing which is very difficult, particularly in times of volatile fuelprices. One alternative is to implement a price cap and floor [3]. Thecap prevents overall remuneration exceeding a certain limit andthereby avoids windfall profits, while the floor guarantees a mini-mum level of revenue for RES-E generators and thereby increasestheir security. In 2007, Spain introduced such a cap & floor mech-anism (Royal Decree 661/2007 e [17]) which meant the premiumbecame variable. RD 661/2007 regulated the support level for RES-Eand, consequently, the reference premium (the reference premiumvalue is the same as the fixed premium value) and the cap and floorvalues (see Ref. [16] for premium, cap and floor values for each RES-E technology). The premium is adjusted each hour according to thespot market price and the cap and floor values [16]. The SpanishGovernment suspended the support system for RES-E in January2012.

It is not within the scope of this paper to provide a generaldescription of the Spanish system. This information can be found invarious other publications: for a description of the performance ofthe dual system (fixed-FIT versus premium system) in Spain seeRef. [16] and for a description of the evolution of RES-E supportregulation in Spain see, for example, see Refs. [1,18].

Spain is a particularly interesting country to perform an analysisof cap and floor systems as a premium option given the many yearsof data of market prices and incentive values and since it is, to ourknowledge, the only country where it has been implemented on anhourly basis. This paper analyses the first three years of operation ofthis cap and floor system, from July 1, 2007 to June 30, 2010.

The aim of this paper is to examine the performance of thevariable premium system as established in Spain (hourly-based)and investigate the possibility of alternative designs. For this pur-pose this paper proposes novel designs of the variable premium

system, based on cap and floor systems applied over longer periods,namely daily, weekly, monthly and yearly periods.

Section 2 describes the methodology used in this article. Section3, the core of the paper, presents the results and the discussion,including a detailed description of the cap and floor system and itsbehaviour when electricity prices were high and low in Spain(Section 3.1). Section 3.2 analyses the performance of the cap andfloor system for three years and compares it to the fixed premiumsystem. Section 3.3 studies the performance of two novel alterna-tive cap and floor designs over the same period of time. Section 4provides various conclusions.

2. Methods

An analysis was undertaken of the cap & floor system estab-lished in Spain (hourly-based) based on real market data over athree year period (July 2007eJune 2010) and its performancecompared to the fixed premium system (no cap & floor limitations)and four alternative novel cap & floor designs (daily- weekly-monthly- and yearly-based). Due to the novelty of these options,the functioning of these systems is explained in detail including theflowcharts of the monthly- and yearly-based options.

On an hourly-based system, support levels were calculated byadding the reference premium to the hourly market electricityprice for the three-year study period. Cap and floor values wereapplied on an hourly basis. If the resulting support level was higherthan the cap value, then the support level was reduced down to thecap value. If the support level was lower than the floor, then thesupport level was increased up to the floor value. These adjust-ments were made each hour.

On a yearly-based system, support levels were firstly calcu-lated by adding the reference premium to the hourly marketelectricity price for the three-year study period. Cap and floorvalues were applied on a yearly basis. If the average yearly sup-port level was higher than the cap value, then the support levelwas reduced down to the cap value, calculating a new premiumvalue for the whole year. If the average yearly support level waslower than the floor, then the support level was increased up tothe floor value, calculating also a new premium value. Theseadjustments led to a new premium value each year that averageyearly supports levels were higher than the cap value or lowerthan the floor value.

In this case, cap & floor values are applied to the yearly supportaverage. The system follows the steps outlined below:

Step 1: the reference premium systemworks as a fixed premiumsystem for the whole year.Step 2: at the end of each year, a revision of the average supportlevel (reference premium þ market price) is performed.

After Step 2, three alternatives arise: if the yearly supportaverage is higher than the cap value, the premium is accordinglyreduced; if the yearly support average is lower than the floor value,the premium is accordingly increased. If the yearly support averageis located between the floor and the cap values, no changes have tobe made.

Fig. 1 shows the flowchart for the whole process.On a monthly-based system, support levels were firstly calcu-

lated by adding the reference premium to the hourly market elec-tricity price for the three-year study period. Cap and floor valueswere applied on a monthly basis. If the average monthly supportlevel was higher than the cap value, then the support level wasreduced down to the cap value, calculating a new premium valuefor the whole month. If the average monthly support level waslower than the floor, then the support level was increased up to the

Calculation of the hourly and daily support level

without cap & floor (ref-premium + market price)

Calculation of the annual average (AA)

support: arithmetic average of daily values

for the whole year

Does AA lie

between cap & floor

values?

Premium = reference premium

YESNO

END

Is AA higher

than cap?

YES NO

New Premium = Floor –

annual average market price

New Premium = Cap – annual

average market price

Recalculate hourly support levels:

hourly market prices + New Premium

END

Fig. 1. Yearly based cap & floor option: flowchart to calculate the premium.

J. Schallenberg-Rodriguez / Renewable Energy 68 (2014) 801e813 803

floor value, calculating also a new premium value. These adjust-ments led to a new premium value each month that averagemonthly supports levels were higher than the cap value or lowerthan the floor value.

The system follows the steps outlined below:

Step 1: the reference premium systemworks as a fixed premiumsystem for the whole month.Step 2: at the end of each month a revision of the averagesupport level (reference premiumþmarket price) is performed.

After Step 2, three alternatives arise: if the monthly supportaverage is higher than the cap value, the premium is accordinglyreduced; if the monthly support average is lower than the floorvalue, the premium is accordingly increased. If themonthly supportaverage is situated between the floor and cap values, no change hasto be made.

Fig. 2 shows the flowchart for the whole process.On aweekly-based system, support levels were firstly calculated

by adding the reference premium to the hourly market electricityprice. Cap and floor values were applied on a weekly basis. If theaverage weekly support level was higher than the cap value, thenthe support level was reduced down to the cap value, calculating anew premium value for the whole week. If the average weeklysupport level was lower than the floor, then the support level wasincreased up to the floor value, calculating also a new premiumvalue. These adjustments led to a new premium value each weekthat average weekly supports levels were higher than the cap valueor lower than the floor value.

On a daily-based system, support levels were firstly calculatedby adding the reference premium to the hourly market electricityprice. Cap and floor values were applied on a daily basis. If theaverage daily support level was higher than the cap value, then thesupport level was reduced down to the cap value, calculating a new

Calculation of the hourly and daily support level

without cap & floor (ref-premium + market price)

Calculation of the monthly average (MA)

support: arithmetic average of daily values

for the whole month

Does MA lie

between cap & floor

values?

Premium = reference premium

YESNO

END

Is MA higher

than cap?

YES NO

New Premium = Floor –

monthly average market price

New Premium = Cap –

monthly average market price

Recalculate hourly support levels:

hourly market prices + New Premium

END

Fig. 2. Monthly-based cap & floor option: flowchart to calculate the premium.

J. Schallenberg-Rodriguez / Renewable Energy 68 (2014) 801e813804

premium value for the whole day. If the average daily support levelwas lower than the floor, then the support level was increased up tothe floor value, calculating also a new premium value. These ad-justments led to a new premium value each day that average dailysupports levels were higher than the cap value or lower than thefloor value.

Royal Decree 661/2007 regulated the values of the premium, thecap and the floor as well as the formula to update these values eachyear. Therefore, it was the source used to obtain these values. Thehourly market electricity price for the three year study period wereobtained from the website of the Spanish Electricity Market Oper-ator [19].

In order to choose comparable days from different years,thereby ensuring that the demand curves follow the same pattern,the days chosen for comparison were selected based on thefollowing criteria:

a) Days from the same season and same monthb) Same day of the week (ensuring that these days were not a

holiday during the year in question)c) If several comparisons during the year are undertaken, days

from different seasons should be chosen.

3. Results and discussion

3.1. Cap and floor mechanism

3.1.1. Effect on revenueFollowing Spanish regulations, cap and floor values are applied

on an hourly basis.Fig. 3 illustrates the effect of the hourly cap and floor system on

the final support level by plotting wind energy revenue for January

0

1

2

3

4

5

6

7

8

9

10

11

1 3 5 7 9 11 13 15 17 19 21 23

c€/kWh

With cap & floor

Electricity prices Cap value: 9,07

Floor value: 7,61 Support under premium option

0

1

2

3

4

5

6

7

8

9

10

11

1 3 5 7 9 11 13 15 17 19 21 23

Without cap & floor

Fig. 3. Final support level with and without cap & floor system: wind energy, January 8, 2009.

J. Schallenberg-Rodriguez / Renewable Energy 68 (2014) 801e813 805

8, 2009, with and without the cap & floor system. A comparison ofthe two sides of the figure shows that:

a) Less revenue is obtained with than without the cap & floorsystem when electricity prices are high (which usually occursduring peak hours).

b) More revenue is obtained with than without the cap & floorsystem when electricity prices are low (which usually occursduring base load hours).

3.1.2. Effect on premiumThe premium is the difference between the final support level

and the electricity price. When a cap & floor system is imple-mented, the premium becomes variable, changing its value (seeFig. 4). The maximum premium (and, therefore, maximum burdenfor end-consumers) can be determined as the difference betweenthe floor value and the lowest electricity price. The minimumpremium (and, therefore, minimum burden for end-consumers)can be determined as the difference between the cap value andthe highest electricity price.

Fig. 4 showsmaximum andminimum premiums and the overallbehaviour of the premium when employing cap & floor values inSpain. In an hourly-based system like the one in Spain, the floor

0

2

4

6

8

10

1 3 5 7 9 11 13 15 17 19 21 23

c €/kWh

Electricity prices

Cap value: 9,07

Floor value: 7,61

Maximum premium

Minimum premium

M

M

Final support level

Fig. 4. Maximum and minimum premiums: wind energy, January 8, 2009.

value is critical since it leads to the highest premium values and,therefore, to a higher burden for end-consumers.

In an hourly-based system, there are two principal drawbacks ifthe floor value is too high:

a) Higher burden for end-consumers (especially if electricity pricesare low).

b) Distortion from the point of view of compatibility with theelectricity market price pattern. Relatively high floor levelscreate artificial values that jeopardize the compatibility of thesupport system with the electricity market price profile (and,therefore, with the demand pattern).

3.2. Hourly cap & floor versus fixed premium systems

3.2.1. Comparison of cap & floor system with fixed premiumThe final support level under premium systems is directly pro-

portional to the electricity price. In order to evaluate the perfor-mance of the cap & floor system and compare it to the fixedpremium system, support levels should be analysed at a time whenelectricity prices are high and at another point in time when theyare low. With this in mind, the periods chosen were 2008 (whenelectricity prices were the highest since the establishment of theSpanish electricity market in 1997) and 2010 (one of the years withthe lowest electricity prices in the last decade).

For comparison purposes, two days of January were chosen,namely 12.01.2010 and 08.01.2008 (both Tuesdays).

Fig. 5 shows the hourly market electricity price distributionduring the selected days.

Fig. 6 shows the final support under the premium option, withandwithout cap & floor, for different RES-E technologies on January8 of 2008.

When electricity prices are high, like in 2008, final supportlevels are situated most of the time at the cap value for nearly allRES-E technologies. All RES-E technologies defined in the RD 661/2007 were studied, which includes all RES-E technologies exceptfor solar photovoltaic. Figs. 6 and 7 show a selection of the RES-Etechnologies studied. The selection of the technologies includedin the figures was done trying to show examples of RES-E tech-nologies with both common behaviour and with individualbehaviour. The left side of Fig. 6 shows that, on January 8, 2008,final support levels for all RES-E technologies were situated at thecap value almost the whole day except for solar thermal technol-ogy. The exception to this common behaviour is because the floor

0

1

2

3

4

5

6

7

8

9

10

1 3 5 7 9 11 13 15 17 19 21 23

c €/kWh

08.01.2008

0

1

2

3

4

5

6

7

8

9

10

1 3 5 7 9 11 13 15 17 19 21 23

12.01.2010

Fig. 5. Hourly electricity prices distribution: January 8, 2008 and January 12, 2010. Source: Ref. [19].

J. Schallenberg-Rodriguez / Renewable Energy 68 (2014) 801e813806

value for solar thermal is very low, nearly the same value as thepremium level, and the cap value is very high, so high that it willnot be reached.

On January 8, 2008, the average variable premium for windenergy was 1.2 cV/kWh, as opposed to the reference premium of3.03 cV/kWh if the cap & floor mechanism had not been in use. Thereason is that the electricity price plus the reference premium wasequal to or exceeded the cap value between 00:00 and 02:00 andbetween 08:00 and 24:00, thereby lowering the premium value. Itshould also be noted that, for wind and hydro, electricity priceseven exceeded the cap value for some peak hours. In such cases,when electricity prices equal or surpass the cap value, the premiumis zero. During 2008 this happened 3.36% of the time in the case ofwind energy.

The right side of Fig. 6 shows final support levels under the fixedpremium system. In this case, final support levels, and thereforepremiums, were clearly higher than in variable premium systemsfor all RES-E technologies with the exception of solar thermal,whose premium value remained almost the same as in variablepremium systems due to its low floor and high cap values.

Fig. 7 shows the final support levels under the premium option,with and without cap & floor, for different RES-E technologies onJanuary 12, 2010.

When electricity prices are low, final support levels under thevariable premium option for almost all RES-E technologies aresituated mostly at their floor values, except for some peak hours.The left side of Fig. 7 shows some examples of this behaviour. Solarthermal technology behaved differently for the same reasons asexplained above. Dung-biogas also displayed a different behaviour.For this technology, final support levels mostly followed the dailyelectricity price curve, with a few values situated at the floor duringcertain base load hours and a few at the cap during certain peakhours.

On January 12, 2010, the average variable premium for windenergy was 4.68 cV/kWh as opposed to the reference premium of3.1 cV/kWh. The reason for this higher premium lies in the fact thatthat between 00:00 and 18:00 and between 23:00 and 24:00 thetotal support level (electricity price plus reference premium)reached the floor level and, therefore, the premium amount rose.

When electricity prices were low, final support levels under thefixed premium option and, therefore, the premium, were lower forall RES-E technologies except for solar thermal and dung-biogastechnologies, which remained almost the same as in the variablepremium system. Fig. 7 shows this behaviour.

As a final remark, it should be noted from the data in Figs. 6 and7 that the hourly variable premium system shows, in most cases, alow level of compatibility with the electricity market price distri-bution. With an hourly variable premium mechanism, the cap and

floor values are critical and, if they are not chosen carefully, there isa high risk of ending up with a systemwhich, in practice, works likea two-tiered fixed-FIT, with final support levels located mostly atcap or floor values. In order to try to adapt RES-E production to theelectricity demand pattern, the gap between the cap and the floorvalues has to be reasonably large and neither the cap nor the floorshould be very close to the reference premium.

3.2.2. Performance of the hourly cap & floor system over 3 yearsand comparison with the fixed premium system

Hourly electricity prices during 3 years, from July 1, 2007 to June30, 2010, were used to calculate the average daily, monthly andannual premium. Table 1 shows the results for different RES-Etechnologies, the reference premium and the premium as theresult of the hourly cap & floor implementation. The technologiesselected are wind energy, mini-hydro (hydro is not included sincethe behaviour pattern is the same as for mini-hydro) and twocategories under biomass: small bio-crops and dung-biogas. Solarthermal is not included since the introduction of the cap & floorsystem had little influence on the annual average premium value,which was almost the same as the reference premium.

The premium amount increased after the implementation of thecap & floor system for wind energy and mini-hydro (also for hydrosince they have the same behaviour pattern) but not for thebiomass sector (e.g. bio-crops and biogas from dung) where itsimplementation resulted in a lower premium and, therefore, alower burden for end-consumers. Table 1 shows a sample of theseresults.

The main government argument for implementing the cap &floor system, which was to avoid windfall profits which had beenobserved particularly in the wind sector, may in some cases bejustified when the cap and floor system is considered on a dailybasis but not when considered on an annual basis. After 3 years cap& floor implementation, the average premium in the wind sectorwas higher than the reference premium. The main reason can befound in the high floor value, which in the 2 years of low electricityprices (2009 and 2010) led to higher premiums.

For 2008, a year in which electricity prices were high, theaverage yearly wind premium of 2.15 cV/kWh under the cap & floormechanism was nearly 30% lower than the reference premium of3.03 cV/kWh. 3.5% of the time the final support level was located atthe floor value, 65.3% at the cap value and 3.4% of the time thepremiumwas zero. This reduction in the average premium is due tothe number of times that the final support level reached the capvalue. If electricity prices had remained high, the cap & floor systemwould have resulted in an overall premium for the three years ofthe study lower than the reference premium (and therefore a lowerburden for end-consumers). However, in fact electricity prices fell

With cap and floor Without cap and floorWind

Solar thermal

Minihydro

Agricultural-biomass

0

2

4

6

8

10

12

1 3 5 7 9 11 13 15 17 19 21 23

0

2

4

6

8

10

12

1 3 5 7 9 11 13 15 17 19 21 23

c/k

Wh

Electricity prices

Cap value

Floor value

Support under premium option0

2

4

6

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10

12

14

1 3 5 7 9 11 13 15 17 19 21 23

0

4

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1 3 5 7 9 11 13 15 17 19 21 23 0

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1 3 5 7 9 11 13 15 17 19 21 23

0

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1 3 5 7 9 11 13 15 17 19 21 23

Fig. 6. RES-E final support levels with and without cap & floor: 08.01.2008.

J. Schallenberg-Rodriguez / Renewable Energy 68 (2014) 801e813 807

quickly after 2008, resulting in higher premiums (higher than thereference premium) during the following years, 2009 and 2010.

As mentioned before, the cap & floor system implemented inSpain, which was designed on an hourly basis, was meant to avoid

windfall profits and provide stability. When considering theobjective of limiting windfall profits, the cap value served itspurpose (especially in years with high electricity prices). However,the floor value increased the burden for end-consumers,

With cap and floor Without cap and floor

Wind

Solar thermal

Minihydro

Dung-biogas

0

2

4

6

8

10

1 3 5 7 9 11 13 15 17 19 21 23

c/k

Wh

Electricity prices

Cap value

Floor value

Support under premium option

0

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1 3 5 7 9 11 13 15 17 19 21 23

0

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1 3 5 7 9 11 13 15 17 19 21 23 250

2

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1 3 5 7 9 11 13 15 17 19 21 23

Fig. 7. RES-E final support levels with and without cap & floor: 12.01.2010.

J. Schallenberg-Rodriguez / Renewable Energy 68 (2014) 801e813808

increasing the revenue of RES-E generators in years of low elec-tricity prices.

An important question is whether the loss of revenue duringyears with high electricity prices offset the windfall profits during

years of low electricity prices. The answer depends fundamentallyon the RES-E technology involved. In general terms, the imple-mentation of the cap & floor mechanism resulted in an increase inthe premium amount over the three years studied. The

Table 1Performance of the hourly cap & floor system over 3 years for different RES-Etechnologies.

Wind Minihydro

Ref-premium Year Yearlyaveragepremium

Ref-premium Year Yearlyaveragepremium

2929 2007 3269 2504 2007 28073027 2008 2151 2588 2008 19853127 2009 3973 2674 2009 33923046 2010 3492 2,65 2010 39673046 Average 3492 2604 Average 3038

Bio-crops Biogas-dung

Ref-premium Year Yearlyaveragepremium

Ref-premium Year Yearlyaveragepremium

11,529 2007 11,626 3084 2007 285212,38 2008 10,702 3652 2008 212612,789 2009 13,022 3772 2009 373712,672 2010 13,526 3738 2010 389412,343 Average 12,219 3562 Average 3152

J. Schallenberg-Rodriguez / Renewable Energy 68 (2014) 801e813 809

introduction of the cap & floor system means greater revenuestability for RES-E investors in comparison to the fixed-premiumsystem. This means lower revenue during high electricity priceperiods, but higher revenue during low electricity price periods.Such a system leads to higher security for investors and brings thesystem closer to the fixed-FIT where investors’ revenue is the sameregardless of the evolution of electricity prices.

3.3. Cap & floor alternative designs

The cap & floor principles provide more security for investors,due to the floor value, and for the Government, due to the cap value.One of the consequences of implementing an hourly-based cap &floor option is that, in most cases, final support levels do not followthe electricity price curve. Since compatibility with the marketbehaviour is one of the main advantages of the premium system incomparison to the fixed-FIT [16], losing this compatibility can beconsidered a serious disadvantage.

However, alternative cap & floor designs may be morecompatible with market behaviour than the hourly-based option.To investigate whether this is the case, monthly-based and yearly-based cap & floor options were studied for the same three-yearperiod and the results compared with the hourly-based option.

8th of January 2008

0

2

4

6

8

10

12

14

1 3 5 7 9 11 13 15 17 19 21 23

c€/kWh

Electricity

Support unoptioncap value

Floor value

Fig. 8. Monthly-based cap & floor option: final support

Daily-based and weekly-based cap & floor options were alsoanalysed.

3.3.1. Monthly-based cap & floor designA monthly-based cap & floor system means that the cap & floor

is applied to the monthly support average.To illustrate this system, thewind support level for two real days

and two complete months were calculated. The selected days wereJanuary 8, 2008 and January 8, 2010, and the selected monthsJanuary of 2008 and 2010. Firstly, the hourly support level wascalculated without applying the cap & floor mechanism, simplyadding the reference premium (3.03 cV/kWh and 3.1 cV/kWh for2008 and 2010, respectively) to the hourly market price as in a fixedpremium system. Then the daily average was calculated. The samemethod was used for all days of the month. Then the monthlyaveragewas calculated as the arithmetic average of the daily values.

In January 2008, the average support level was 10.05 cV/kWh,which was higher than the cap value (8.78 cV/kWh). The premiumtherefore has to be recalculated based on the cap value giving a newpremium value (cap value minus average monthly electricity price)of 1.76 cV/kWh.

In January 2010, the average support level was 6.005 cV/kWh,which was lower than the floor value (7.54 cV/kWh). The premiumtherefore has to be recalculated based on the floor value giving anew premium value (floor value minus average monthly electricityprice) of 4.36 cV/kWh.

The final support levels, based on the new calculated premiumvalues, for January 8, 2008, and January 8, 2010 are shown on theleft-hand side of Figs. 8 and 9, respectively and the average supportlevel for the whole month of those years on the right-hand side ofthe same figures.

3.3.2. Yearly-based cap & floor designThe yearly-based cap & floor system is very similar to the

scheme explained in the previous section for the monthly option.To illustrate this system, thewind support level for two real days

and two complete months were calculated. The selected days wereJanuary 8, 2008 and January 8, 2010, and the selected monthsJanuary of 2008 and 2010. Firstly, the hourly support level wascalculated without applying the cap & floor mechanism, simplyadding the reference premium (3.03 cV/kWh and 3.1 cV/kWh for2008 and 2010, respectively) to the hourly market price as in a fixedpremium system. Then the daily average was calculated. The samemethod was used for all days of each month for the whole year.Then the yearly average was calculated as the arithmetic average ofthe daily values of the 365 days per year.

January 2008

prices

der premium

0

2

4

6

8

10

12

1 3 5 7 9 11 13 15 17 19 21 23

level distribution for wind energy, January 2008.

8th of January 2010 January 2010

0

2

4

6

8

10

12

14

1 3 5 7 9 11 13 15 17 19 21 23

c€/kWh

Electricity prices

Support under premium optioncap value

Floor value

0

2

4

6

8

10

12

1 3 5 7 9 11 13 15 17 19 21 23

Fig. 9. Monthly-based cap & floor option: final support level distribution for wind energy, January 2010.

J. Schallenberg-Rodriguez / Renewable Energy 68 (2014) 801e813810

In 2008, the average support level for wind energy was 9.47 cV/kWh, which was higher than the cap value (8.78 cV/kWh). Thepremium therefore has to be recalculated based on the cap valuegiving a new premium value (cap value minus average yearlyelectricity price) of 2.34 cV/kWh.

In 2010, the average support level for wind energy was 6.12 cV/kWh, which was lower than the floor value (7.54 cV/kWh). Thepremium therefore has to be recalculated based on the floor valuegiving a new premium value (floor value minus average yearlyelectricity price) of 4.52 cV/kWh.

The final support levels, based on the new calculated premiumvalues, for January 8, 2008, and January 8, 2010 are shown on theleft-hand side of Figs. 10 and 11, respectively, and the averagesupport level for the whole month of those years on the right-handside of the same figures.

3.3.3. Other alternatives designs: daily and weeklyDaily-based and weekly-based cap & floor designs were also

studied.

3.3.3.1. Daily option. Fig. 12 shows the daily support average underthe premium option (without cap and floor) for January 2008. Eachday the average support was higher than the cap value. This meansthat the premium had to be re-calculated each day of the monthand each day of January 2008 would have a different premiumvalue. Fig. 13 shows the daily premium values each day duringJanuary 2008. The daily support average each day that monthwould equal the cap value.

8th of January 2008

0

2

4

6

8

10

12

14

1 3 5 7 9 11 13 15 17 19 21 23

c€/kWh Electric

Final su

Cap val

Floor v

Fig. 10. Yearly-based cap & floor option: final support

In January 2010 the average daily support under the premiumoption (without cap and floor) was each day lower than the floorvalue. This means that the premium had to be re-calculated eachday of the month and each day of January 2010 would have adifferent premium value. The daily support average each day thatmonth would equal the floor value.

This system does not give any change to compensate highelectricity price days with low electricity price days. The systembecomes more complicated, almost every day the premium value isdifferent and this value has to be recalculated on a daily basis.Additionally, daily support averages tend to be located at the cap orat the floor value, suggesting that averages should be made forlonger periods in order to compensate days with different priceintervals.

3.3.3.2. Weekly option. Fig. 12 shows the daily support averageunder the premium option (without cap and floor) for January2008. Each day the average support was higher than the cap valueand, therefore, each week the average weekly support was alsohigher than the cap value. This means that the premium had to bere-calculated each week of the month and each week of January2008 would have a different premium value. Fig. 14 shows the re-calculated weekly premium values for each week in January 2008(last 28 days of January 2008 are shown, exactly four weeks). Theaverageweekly support each week that month would equal the capvalue.

In January 2010 the average weekly support under the premiumoption (without cap and floor) was each week lower than the floorvalue. This means that the premium had to be re-calculated each

January 2008

ity prices

pport level

ue

alue

0

2

4

6

8

10

12

1 3 5 7 9 11 13 15 17 19 21 23

level distribution for wind energy, January 2008.

8th of January 2010 January 2010

0

2

4

6

8

10

12

14

1 3 5 7 9 11 13 15 17 19 21 23

c€/kWh Electricity prices

Final support level

Cap value

Floor value

0

2

4

6

8

10

12

1 3 5 7 9 11 13 15 17 19 21 23

Fig. 11. Yearly-based cap & floor option: final support level distribution for wind energy, January 2010.

J. Schallenberg-Rodriguez / Renewable Energy 68 (2014) 801e813 811

week of this month and each week of January 2010 would have adifferent premium value. The average weekly support each weekduring this month would equal the floor value.

Although this system takes into account longer periods than thedaily one, it still does not give much room for compensating highelectricity price periods with low electricity price periods (over oneweek). The system becomes more complicated, almost each weekthe premium value is different and this value has to be recalculatedon aweekly basis. Additionally, weekly support averages tend to belocated at the cap or at the floor value, suggesting that averagesshould be made for longer periods in order to compensate periodswith different price intervals.

10

3.3.4. Alternative designs: comparisonThe monthly and yearly cap & floor designs, show good

compatibility with the electricity price distribution and, therefore,with the electricity demand pattern (see Figs. 7, 8, 10 and 11),overcoming the main disadvantage of the hourly cap & floor option.

The daily and weekly cap & floor designs overcome this mainhandicap also, but results suggest that averages should be made forlonger periods in order to compensate high electricity price periodswith low electricity price periods. Additionally, the system becomesmore complicated, almost each day/week the premium value isdifferent and this value has to be recalculated at the end of eachday/week. Both options do not seem to add any additional advan-tages in comparison to the monthly option, and they make thesystem more complicated. Therefore, daily- and weekly-based cap& floor options were disregarded since the monthly and yearlyoptions led to improved results.

0

2

4

6

8

10

12

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31

c€/kWh

Electricity prices

Support under premium option

cap value

Floor value

Fig. 12. Average daily support without cap & floor: wind energy, January 2008.

In order to determine which system is more suitable, the cor-responding monthly-based and annual-based premium valueswere determined for the full study period.

3.3.5. Three-year simulationsA simulation of the performance of the monthly-based and

yearly-based systems over three years (same years as in section 3.2)was performed for all renewable technologies, except for solarphotovoltaic, using real market electricity prices. Table 2 shows theannual average premium resulting from the different options for asample of these technologies. The row called “reference premium”

shows the fixed premium value and the other three rows show theannual average premium for the three studied cap & floor options:hourly basis (Spanish system), monthly basis and yearly basis.

The yearly-based cap & floor option led to a slightly loweraverage premium than the other cap & floor options, except for thecase of biogas-dung. For almost all cases, the cap & floor system ledto higher premiums than the fixed premium (the reference-premium). Table 2 shows a sample of technologies illustratingthese results.

However, these higher premiums were the result of the rela-tively low electricity prices in the studied period. In 2008 (whenelectricity prices were high), the fixed premium option led tohigher premium values, but during 2009 and 2010 (years with lowelectricity prices) the fixed premium option led to lower premium

0

2

4

6

8

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31

Electricity prices daily premium value

Fig. 13. Daily-based cap & floor option: daily premium value for wind energy, January2008.

0

2

4

6

8

10

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31

Electricity prices Premium values

Fig. 14. Weekly-based cap & floor option: weekly premiumwind energy, January 2008.

J. Schallenberg-Rodriguez / Renewable Energy 68 (2014) 801e813812

values. At the time the study was concluded (2013), electricityprices had remained relatively low since 2010. However, if elec-tricity prices rise once more, the fixed-premium option will againbe a more expensive option.

3.3.6. Administrative aspectsIn Spain, as in most countries, tariff and premium payments for

RES-E generators are calculated by the end of eachmonth, based onthe amount of RES-E production that month and the tariff or pre-mium value that particular month. Once calculations are finished,payments are usually transferred within the next month.

In this sense, within the hourly-, daily-, weekly and monthly-based cap & floor systems, the monthly payments are calculatedby the end of each month and they are then transferred. No furthersteps are needed.

Within the yearly-based cap & floor system, by the end of eachyear the premium is re-calculated. If the payment system ismonthly, as it usually is, and RES-E generators have been paid usingthe reference-premium as calculation basis, by the end of each yearthe payments have to be re-calculated. If the yearly premium is thesame as the reference-premium, no re-calculation has to be done;but this is unlikely. If the yearly premium is higher than thereference-premium, RES-E generators will get an extra payment.But if the yearly premium is lower than the reference-premium,RES-E generators have to pay back part of their income. This situ-ation does notmean that the yearly-option is impracticable but that

Table 2Annual average premium for the different cap & floor options.

Year Wind

Reference premium Yearly premium (average)

Yearly basis Monthly basis Hourly bas

2007 2929 2929 3225 32692008 3027 2339 2,31 21512009 3127 3,91 3955 39732010 3046 4521 4521 3492Average 3046 3425 3503 3492

Year Industrial bio-agriculture

Reference premium Yearly premium (average)

Yearly basis Monthly basis Hourly bas

2007 6191 6191 6386 6,422008 6863 5125 5,09 50922009 7,09 7381 7463 75132010 7025 7961 8008 8086Average 6792 6665 6737 6778

the payment administrative issues have to be reconsidered care-fully before implementing such a system.

3.4. Discussion

Premium systems follow the electricity market price distribu-tion and fixed-FITs do not. Therefore, under premium systemsproducers have an incentive to shift their generation in response tomarket price signals (e.g. to programme maintenance, to storageenergy, for demand response, to reduce production, etc.). Thisconstitutes the main advantage of premium systems over fixed-FITsystems. A cap & floor system should not counteract this advantageand should therefore be designed in such a way that electricitymarket price distribution is relevant to the resulting final supportlevels [16].

Therefore, the option considered by the authors to be the mostsuitable are the monthly- and the yearly-based cap & floor systems,since both provide security for both investors and Government(due to the floor and cap values, respectively) while maintaining asupport level profile that follows the same pattern as electricityprices (and consequently as the electricity demand curve) andmaking the system not unnecessarily complicated.

The yearly-based cap & floor system has two additional advan-tages in comparison to the other cap & floor options in that it makesthe premium value more stable (in this case the premium value isone for thewhole year, it does not change eachmonth, day, week oreach hour, as in the other options), thereby providing more stabilityto investors, and also leads to a lower burden for end-consumersdue to the slightly lower yearly average premium value.

However, the yearly-option has the handicap that it can becomemore complicated to handle from the payments point of view. Themonthly option does not have this handicap. Therefore, if admin-istrative issues are difficult to overcome, the monthly option shouldbe considered an alternative to the yearly-option.

It should also be noted that, when a premium system isimplemented, the transition to market integration without in-centives should be easier. In a few years, the number of which willdepend on the corresponding RES-E technology, the premium willfall if the incentives are adapted in a consistent way, proving thatRES-E technologies can be competitive even without incentives.The transition to a fully integrated market system without in-centives should therefore be easier, since investors will already beaware that these technologies are competitive without incentives.To date, the premium system has been a support option designed to

Minihydro

Reference premium Yearly premium (average)

is Yearly basis Monthly basis Hourly basis

2504 2504 2719 28072588 2365 2162 19852674 3261 3322 33922,65 3879 3878 39672604 3002 3021 3038

Biogas-dung

Reference premium Yearly premium (average)

is Yearly basis Monthly basis Hourly basis

3084 3084 2,99 28523652 2169 2165 21263772 3772 3772 37373738 3738 3738 38943562 3191 3166 3152

J. Schallenberg-Rodriguez / Renewable Energy 68 (2014) 801e813 813

prepare RES-E technologies for their timely transition, withoutdramatically changing the conditions, to a system withoutincentives.

4. Conclusions

Variable premium (cap & floor) systems have two advantagesover fixed premium ones: they increase investor security due to thefloor value and reduce government risk due to the cap limit. Thismechanism improves stability and predictability while allowingRES-E generators margin to participate in the market.

An analysis of the performance of the hourly-based variablepremium mechanism implemented in Spain shows that the cap &floor system did not result in an overall reduction in RES-E revenuecompared to the fixed premium system over the three year studyperiod, though revenue was more evenly distributed from year-to-year. Introduction of this cap & floor system successfully led togreater revenue stability for RES-E investors, namely lower revenueduring high electricity price periods and higher revenue during lowelectricity price periods. This ensures greater security for investorsand brings the system closer to the fixed-FIT, where investors’revenue is always the same regardless of the evolution of the priceof electricity. In most cases, the hourly-based cap & floor mecha-nism displayed low compatibility with the electricity market pricedistribution, often functioning like a two-tiered fixed-FIT, with finalsupport levels mostly situated at cap or floor values.

Simulation of the performance of alternative novel designs,namely daily-, weekly, monthly- and yearly-based cap & floorshowed good compatibility with the electricity price distributionand, therefore, with the electricity demand pattern, overcoming themain disadvantage of the hourly-based option.While maintaining alow risk perception for both promoters and society, these optionslead to a final support distribution that follows the same pattern aselectricity prices (and, therefore, as electricity demand curve)providing higher market compatibility. Best performances wereobtained from variable premium systems based on monthly- andyearly cap & floor option. Both options have one additionaladvantage: they make the premium value more stable in compar-ison to the other cap & floor designs, offering more security to in-vestors. This is especially the case in the yearly-based option, wherethere is only one premium value for the whole year. This last optionled also to slightly lower burden for end-consumers, making the

yearly-option more attractive. Nevertheless, the yearly-option canbecome more complicated than the monthly-option from thepayments’ administration point of view. If this is the case, one couldchoose the monthly-option over the yearly one to overcome thishandicap.

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