Doctoral Program in Sustainable Energy Systems 2009 NOV 17 Ricardo Bessa Wind Energy, Support Schemes and Deregulated Electrical Market Energy Economics

09 European Union Policy Background 2Wind Energy, Support Schemes and Deregulated Electrical Market 1997 White Paper Community strategy & Action Plan Community overall RE target of 12% by 2010 Community RE target of 22.1% by 2010 National indicative RE targets EC evaluate (in 2005) the application of direct and indirect support schemes Directive 2001/77/EC Proposal for a new legislative framework for RE Proposal for mandatory overall RE target of 20% gross consumption by Renewable Energy Road Map 20% from RES by 2020 and a 10% share of RES in the transport sector Mandatory national targets (e.g. 31% Portugal) National Action Plans before March 2010 Directive 2009/28/EC

09 Support Schemes for RES Established to correct markets failure for account the full cost to society of electricity generation (externalities) Two groups: investment support; operating support 3Wind Energy, Support Schemes and Deregulated Electrical Market Fixed Feed-in Tariff Market Price + FI premium Market Price + bounded FI premium Market Price + TGC revenues Price based Quantity based Tendering

09 Support Schemes Comparison (1/2) 4Wind Energy, Support Schemes and Deregulated Electrical Market Viewpoint A) Fixed Feed-in Tariff B) Market Price + Premiums C) Market Price + TGC D) Tendering Government Consumers (+) technology- specific (+) attractive to investors (-) no contribution to decrease market prices (-) not certain how much RE is promoted (-) no encouragement of RE consumption (-) difficult operation of the power system (-) no incentive to cost reductions (-) windfall profits with decrease of operational costs (+) technology- specific (+) forecasting tools (+) incentive to efficient operation and cost reduction (+) contribution to decrease market price (-) premium is paid by consumers (-) no encouragement of RES consumption Like B) (+) stimulate RES consumption (+) reduce the costs of expanding RES capacity (+) possible extension to other countries (-) windfall profits (+) competition between investors (+) no need to guess the tariff (+) optimal location of RES (-) high administrative costs and a complex procedure (-) intentional delays in the project

09 Support Schemes Comparison (2/2) 5Wind Energy, Support Schemes and Deregulated Electrical Market Viewpoint A) Fixed Feed-in Tariff B) Market Price + Premiums C) Market Price + TGC D) Tendering Investors (+) long-term stability and low risk (--/+) only windfall profits for low-cost technologies (+) no planned maintenance with market prices (-) the support could become negative (+) windfall profits (+) possibility of planned maintenance (+) low risk associated to the premium (+) chance of rising prices (-) price is less predictable (-) penalizations due to forecast errors (-) risk of failing prices (-) reduced windfall profits if premium is bounded Like B) (-) additional risk of TGC prices Like A) Conclusion for introduction phase developed markets with higher penetration like B) and with mature RE technologies introduction phase

09 Effectiveness Against Expected Profit 6Wind Energy, Support Schemes and Deregulated Electrical Market Source: OPTRES, 2007

09 Portuguese Support Scheme for Wind Energy 7Wind Energy, Support Schemes and Deregulated Electrical Market Before DL 33A/2005After DL 33A/2005 Wind farms licensed until Feb. 2006Wind farms licensed after Feb and 95 /MWh depending on the load factor. Updated according to the CPI 73 and 74 /MWh depending on the load factor. Updated after the park start operation 15 years since the publication33 GWh of production or 15 years The new regulation is less rewarding Prices are not subject to market volatility (only to nature volatility) Future: green certificates + market prices Installed capacity increased 41.2% from 2005 to 2006 Fixed feed-in tariff

09 Spanish Support Scheme for Wind Energy 8Wind Energy, Support Schemes and Deregulated Electrical Market RD 436/2004RD 661/2007 Wind farms in operation before 2008Wind farms in operation after 2008 Two options: 1. Fixed tariff: 68.9 /MWh 2. Market price + premium (38.3 /MWh) + incentive Two options: 1. Fixed tariff: 75.6 /MWh (20 years) and 63.2 thereafter 2. Market price + variable premium, cap at and floor at /MWh 1. fixed for the whole life 2. automatically transferred to the new regime in fixed for the whole life 2.Wait to see... The new regulation is less rewarding, due to price cap –many producers will only change after 2012 The former regulation has an higher risk (no price floor) 2007 was a special year with a growth of 3515 MW

09 Why the wind farms started to sell in the market? 9 Source: OMEL&AEE, 2009 Source: CNE&AEE, 2008 Source: AEE, 2007 Wind Energy, Support Schemes and Deregulated Electrical Market

09 Wind Power and Electricity Prices 10 Price reduction of 2 /MWh for each additional 1000 MW in 2007 (AEE, 2008) The reduction in the market price ( ) subtracted from the wind energy support scheme does not entail an additional cost for consumers (Miera, 2008) The correlation between the market prices and the wind generation is negative (maximum in 2008 with -0.24) (Bludszuweit, 2009) The 64% increase in the market price from 2007 to 2008 was due to natural gas and CO 2 allowances prices (AEE, 2009) Wind Energy, Support Schemes and Deregulated Electrical Market

09 Wind Power Bidding Periods They make a bid for the DM and update it in the ID markets 11 WPF 36 hrs ahead are required Premium [/MWh] Wind Energy, Support Schemes and Deregulated Electrical Market Total Income: E*: produced energy E b : energy of the bid

09 The Economic Value of Wind Power Forecast 12 Three months participation of a wind farm in MIBEL (Angarita, 2007) –A) Daily Market –B) Daily Market + Intraday Small producers need to invest in forecasting (or buy forecasting services) and IT tools For smaller wind farms (<30 MW) the benefits depend on the cost of purchasing forecasts and accuracy of the forecast (Barthelmiea, 2008) PersistenceAdvanced Model Income [k] % Imbalance Penalties Cost/Income9.5%4.5%5% PersistenceAdvanced Model Income [k] % Imbalance Penalties Cost/Income4.3%3%1.3% Wind Energy, Support Schemes and Deregulated Electrical Market

09 Is Spain a Good Example? 4h-7h wind generation covered 53% of the load (max of MW) The average over the whole day was 45 % of the load (max of MW) 1000 MW were disconnected due to a short-circuit and no consequences were verified for the consumers 13Wind Energy, Support Schemes and Deregulated Electrical Market 8 of November of 2009

09 Conclusions There is no perfect support schemes (each country is a special case) Lower risk and stability (associated to the feed-in tariffs) is the main criterion for investors Maybe the green certificates + market price will appear more early in Portugal to achieve EU targets Spain offers an attractive remuneration and with low risk Wind power in the market removes market power, smooth the price peaks during peak hours, gives transparency and decreases financial burden Market rules should be adapted to include wind power –the decrease of gate closures will decrease system deviations and increase wind power income and the system security As more wind power is installed, wind power forecast will become more and more important for both sides 14Wind Energy, Support Schemes and Deregulated Electrical Market

09 Some references… P.E. Morthorst et al., Support schemes for renewable energy. A comparative analysis of payment mechanisms in the EU, Technical Report, May 2005 Council of European Energy Regulators, Status review of renewable and energy efficiency support schemes in EU, Technical Report, Dec M. Ragwitz et al., Assessment and optimization of renewable energy support schemes in the European electricity market, Technical Report, Karlsruhe, Feb G.S. de Miera, P.R. González, and I. Vizcaíno, Analysing the impact of renewable electricity support schemes on power prices: The case of wind electricity in Spain, Energy Policy, vol. 36(9), pp , Sept J. Usaola, J. Angarita, Benefits of short term wind power prediction programs for the integration of wind energy in electricity markets, In Proc. of the European Wind Energy Conference, Athens, Greece, 2006 R. J. Barthelmiea, F. Murraya, and S.C. Pryor, The economic benefit of short-term forecasting for wind energy in the UK electricity market, Energy Policy, vol. 36, pp , 2008 AEE Wind Power Anuario, Madrid, 2007 AEE Wind Power Anuario, Madrid, 2008 AEE Wind Power Anuario, Madrid, Wind Energy, Support Schemes and Deregulated Electrical Market

09 State-of-the-art WPF Errors 16 Important for daily market (~11-15% of rated power) Important for intraday market (~7-12% of rated power) Source: Pinson, 2006 Wind Energy, Support Schemes and Deregulated Electrical Market