1. Redistribution Effects of Energy and Climate Policy
Lion Hirth, Falko Ueckerdt
International Energy Workshop
University of Cape Town

2. Goal: explain and quantify the redistribution flows induced by climate and energy policy
RES support
CO2 pricing
Producers
Government
Producers
Consumers
Government
Consumers
Redistribution: changes in economic surpluses of 3 sectors.
Three sectors: Producers (existing generators), Consumers, Government
Two policies:
Renewable support CO2 pricing
The same methodological framework is applied in two models
Analytical model: understand chain of causality, derive qualitative findings
Numerical model (North-Western Europe): quantify, assess ambiguous results

3. Conclusions RES support CO2 pricing
Producers
Government
Producers
Consumers
Government
Consumers
Redistribution large relative to welfare effects
RES support:
electricity price decreases  producers lose, consumers win
RES support  State pays
CO2 pricing:
electricity price increases  effect on producers depends on technology mix, consumers lose
auction / tax revenues  government net income increases
Opposite flows  policy mix allows CO2 mitigation without changing profits

4. Conclusions RES support + CO2 pricing
Producers
Government
Consumers
Redistribution large relative to welfare effects
RES support:
electricity price decreases  producers lose, consumers win
RES support  State pays
CO2 pricing:
electricity price increases  effect on producers depends on technology mix, consumers lose
auction / tax revenues  government net income increases
Opposite flows  policy mix allows CO2 mitigation without changing profits

5. Connecting two branches of the literature Merit-order literature
How much does subsidized wind generation reduce the electricity price?
Do consumers gain, even if they pay the subsidy?
Sensfuss (2007), Sensfuß et al. (2008), Sáenz de Miera et al. (2008), Munksgaard & Morthorst (2008), MacCormack et al. (2010), Rathmann (2007), O’Mahoney & Denny (2011), Gil et al. (2012)
CO2 pricing literature
How do producer profits change when carbon trading is introduced (depending on different allocation rules for emissions allowances)?
To what extend can CO2 costs be passed through to consumers?
Martinez & Neuhoff (2005), Chen et al. (2008), Burtraw et al. (2002), Bode (2006), Sijm et al. (2006) 5

6. methodological framewok
Long-term equilibrium (LTE) without policies
capital stock endogenous (“green field approach”)
scarcity prices
 long-term profits zero (free market entry, perfect competition)
investments sunk
Short-term equilibrium (STE) prior to policy
capital stock is given (investment is possible)
no scarcity prices
 short-term profits positive (used to pay back capital cost)
Effect of a policy (def.):
compare profits before and after policy is introduced
methodological framewok
policy introduced
New STE with RES support
 short-term profits changed
CO2
pricing
Both
policies
capital stock endogenous
Difference between policies (def.):
compare profits between two new STEs
New LTE with RES support
LTE changed
 zero LT profits … …
This framework is applied in an analytical and a numerical model 6

7. Two generation technologies: coal and gas Methodology
Analytical model
Two generation technologies: coal and gas
Methodology
“classical approach” to investment planning:
screening curve
load duration curve (LDC)
price duration curve (PDC)
assumptions: inelastic demand, no externalities, perfect competition, perfect foresight, no intertemporal constraints, no trade, no storage, energy-only markets
Long-term equilibrium (derived in the paper)
market equilibrium is cost-minimum
long-term profits of all technologies are zero
scarcity prices assure that there is no “missing money”
Long-term screening curves C
total costs
(€/MW-year) q
Load
(MW)
Gas
Coal T
(hours per year) T1
(Residual) load duration curve p
(€/MWh) T1 Δ ps T
(hours per year)
Price duration curve 7 7

8. The short-term equilibrium investments are sunk  no capital cost
capacity is constrained
no scarcity prices
Results
base-load technology makes ST profits
Short-term screening curves
Long-term screening curves C
total costs
(€/MW-year) q
Load
(MW)
Gas
Coal
Coal T
(hours per year) T1 T T1
(Residual) load duration curve T p
(€/MWh)
Price duration curve ps Δ T1 T T1 T
(hours per year) 8 8

9. q p C CO2 pricing T1 T RES support T T1 T Short-term screening curves
(€/MW-year)
Short-term screening curves
CO2 pricing
Coal T1 T q
(MW)
RES support T p
(€/MWh) T1 T 9 9

10. strictly reduces producer rents
Without support
With wind support
Wind Support
changes the LDC to RLDC
strictly reduces producer rents C
(€/MW-year)
Short-term screening curves
Short-term screening curves C
(€/MW-year)
Gas
Coal
Coal T1 T T1 T q
(MW) q
(MW)
RES support T T p
(€/MWh) p
(€/MWh) T1 T
T2wind T1 T 10 10

11. Is more complex and shown in paper
CO2 pricing
Is more complex and shown in paper
Effect on producers depends on technology and CO2 price C
(€/MW-year)
Short-term screening curves
CO2 pricing
Coal T1 T q
(MW) T p
(€/MWh) T1 T 11 11

12. Model & scenario setup Numerical model why numerical modelling?
quantitative estimates for North-Western Europe (orders of magnitude)
ten technologies (wind, solar, eight dispatchable, pump hydro)
interconnectors, storage, CHP, ancillary services
Same framework applied
long-term equilibrium
short-term equilibrium
policy shocks
integrated dispatch and investment
hourly time steps for a full year
existing plant stack, storage and interconnectors
endogenous (dis-)investments in generation, storage and interconnectors via annualized investment costs
1M equations, 4M non-zeros, solving time ½ h

13. How big is the redistribution effect of wind support?
70% of Nuclear, 60% of coal, 50% of gas profits are taken away
Externalities ignored
Nuclear: 70% of ST profits; Coal: 60%; Gas: 50%
Redistribution effect is large
Consumers gain even if they pay for subsidies 13

14. Wind support and CO2 pricing induce opposite redistribution flows
Technology dependence
CO2 pricing
Nuclear: 70% of ST profits; Coal: 60%; Gas: 50%
Existing generators’ ST profits increase
Wind support and CO2 pricing induce opposite redistribution flows

15. Questions? Comments? Ideas?

16. Wind support and CO2 pricing induce opposite redistribution flows
How big is the redistribution effect of CO2 pricing?
Technology dependence
Existing generators’ ST profits increase
Wind support and CO2 pricing induce opposite redistribution flows 16

17. CO2 pricing: short-term screening curves pivot
(a) Rents are generated by coal power plants when gas power plants are price-setting. (b) The difference of variable costs decreases, thus the coal rents decrease. The dispatch remains unchanged. (c) No rents occur because variable costs of coal and gas power plants are equal. (65€/t CO2) (d) Now the dispatch changes: Gas power plants now have least variable costs and cover base load. Coal power plants only cover the remaining base, mid and peak load. Gas power plants generate rents when coal power plants are price-setting. (e) The screening curve of coal touches the screening curve of new gas power plants. The rents of gas power plants reach a maximum. (80€/t CO2) (f) Now, new investments in gas power plants lead to decommissioning of existing coal capacity. Old gas power plants are the only plants that generate rents. These rents remain at their maximum value. C
total costs
(€/kW - year) C
Gas
Gas
Coal
Coal T1 T T1 T
(a)
(b) C
total costs
(€/kW - year) C
New Gas
Coal
Gas
Coal
Gas T1 T
T2CO2 T
(c)
(d)
Coal C
total costs
(€/kW - year) C
New Gas
New Gas
Coal
Gas
Gas
T2CO2 T
T2CO2 T
(e)
(f)
Assuming variable costs of 25 €/MWhth (gas) and 12 €/MWhth (coal), efficiencies of 48% (gas) and 39% (coal), carbon intensities of 0,24 t/MWhth (gas) and 0,32 t/MWhth (coal) and investment costs of 100€/kWa (gas).

18. The effect of CO2 pricing
No CO2-Pricing
CO2-Pricing
With high CO2 price: Shift of rents only depends on the initial long-term capacity mix
General results
Total producer profits depend on long-term capacities and CO2 price
Large redistribution within producers depending on technologies
More low-carbon technology  total producer rents tend to increase
Consumers pay
State benefits
Short-term screening curves C
(€/MW-year)
Short-term screening curves C
(€/MW-year)
Coal
New Gas
Gas
𝑅 2 𝑔𝑎𝑠 − 𝑅 1 𝑐𝑜𝑎𝑙 = 𝐼 𝑔𝑎𝑠 𝑞 1 𝑔𝑎𝑠 − 𝑞 1 𝑐𝑜𝑎𝑙
Coal T1 T T1
T2CO2 T q
(MW) q
(MW)
𝑞 𝑔𝑎𝑠
𝑞 𝑐𝑜𝑎𝑙
𝑞 𝑐𝑜𝑎𝑙
replaced
New gas
𝑞 𝑔𝑎𝑠 T T p
(€/MWh)
𝑐 𝑐𝑜𝑎𝑙 𝐶𝑂2
𝑐 𝑔𝑎𝑠
𝑐 𝑔𝑎𝑠 𝐶𝑂2
𝑐 𝑐𝑜𝑎𝑙
North-Western Europe?
 Numerical model T1 T T1
T2CO2 T

19. Policy Mix: redistribution can be minimized

20. This paper brings together two branches of literature
Merit-order literature
Decrease of spot market prices due to renewable electricity generation  savings for the consumer
Sensfuss 2007, 2008, de Miera et al. 2008, Munksgaard & Morthorst 2008
CO2 pricing literature
How do producer profits change (depending on different allocation rules for emissions allowances)?
To what extend CO2 costs can be passed through to consumers?
Martinez & Neuhoff 2005, Chen et al. 2008, Burtraw et al. 2002
Our work adds to the literature in three ways.
effects of both policies in a consistent framework with the long-term equilibrium as benchmark
focus on redistribution effects: evolution of effects at different levels of policy intervention and comprehensive accounting of all flows
analytical model to trace causal mechanisms and numerical model for quantifications
This paper brings together two branches of literature that have discussed redistribution effects of climate and energy policies from quite different angles.

21. CO2 pricing within a nuclear system tends to increase conventional rentsxx T
Coal
Gas
No CO2-Pricing
CO2-Pricing T1
New Gas
Short-term screening curves
𝑞 𝑔𝑎𝑠
𝑞 𝑐𝑜𝑎𝑙
𝑞 𝑐𝑜𝑎𝑙
𝑐 𝑔𝑎𝑠
𝑐 𝑐𝑜𝑎𝑙
𝑐 𝑐𝑜𝑎𝑙 𝐶𝑂2
𝑐 𝑔𝑎𝑠 𝐶𝑂2 C
(€/MW-year) q
(MW) p
(€/MWh)
T2CO2
(c)
(e)
(d)
(b)
(a)
(f)
𝑐 𝑛𝑢𝑐
𝑞 𝑛𝑢𝑐

22. Long-term equilibrium with nuclear
total costs
(€/MW-year) T1 q
Load
(MW) T
(hours per year)
Coal
Gas p
(€/MWh) Δ ps
(c)
(a)
(b)
Long-term screening curves
𝑞 𝑐𝑜𝑎𝑙
𝑞 𝑔𝑎𝑠
𝑐 𝑔𝑎𝑠
𝑐 𝑐𝑜𝑎𝑙
~𝑐 𝑔𝑎𝑠
~𝑐 𝑐𝑜𝑎𝑙
𝐼 𝑔𝑎𝑠
𝐼 𝑐𝑜𝑎𝑙
𝑞 𝑛𝑢𝑐𝑙𝑒𝑎𝑟
Back-up slide

23. Model & scenario setup why numerical modelling? Same framework applied
quantitative estimates for North-Western Europe (orders of magnitude)
ten technologies (wind, solar, eight dispatchable, pump hydro)
interconnectors, storage, CHP, ancillary services
Same framework applied
long-term equilibrium
short-term equilibrium
policy shocks
integrated dispatch and investment
hourly time steps for a full year
existing plant stack, storage and interconnectors
endogenous (dis-)investments in generation, storage and interconnectors via annualized investment costs
stylized electricity market model
total system costs are minimized with respect to investment and dispatch decisions under a large set of technical constraints
no market power, externalities or other market imperfections  cost minimization is equivalent to profit-maximizing firms
electricity price is set by variable cost of marginal plant
no load flow, NTCs between market areas
back-tested and calibrated to market prices
1M equations, 4M non-zeros, solving time ½ h