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Economic Analysis of the German Feed-in Tariff for Renewables

Economic Analysis of the German Feed-in Tariff for Renewables. Seminar “ Environmental Economics: Selected Issues “, Humboldt University, Berlin 05.02.08 Dr. Thure Traber DIW Berlin. The German FIT for RES under ETS.

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Economic Analysis of the German Feed-in Tariff for Renewables

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  1. Economic Analysis of the German Feed-in Tariff for Renewables Seminar “Environmental Economics: Selected Issues“, Humboldt University, Berlin 05.02.08 Dr. Thure Traber DIW Berlin

  2. The German FIT for RES under ETS Germany introduced in 2000 a feed-in tariff (FIT) to promote renewable energy supply (RES) to: Reduce GHGs, Trigger LbD, Improve security of supply Fixed tariff above market price - mainly for wind energy Paid by 1) grid operators and passed through to 2) electricity sellers, and 3) end use customers

  3. The German FIT for RES under ETS EU introduced emission trading system (ETS) in 2005 to cap GHG emissions Electricity, steel, chemical, pulp and paper industries have to hand over emission permits for CO2 each year How do FIT and ETS interact? Do they complement or substitute each other? What is the effect of the FIT on prices? Who gains and who looses? Is market power important for the effects?

  4. Approaches to Analyze Effects of Renewable Energy Support Analytical Models • Amundsen (2001), interaction of the ETS with green certicates, > Trade in el. Matters • Morthorst (2003) analyzes different renewable support schemes, > are questionable climate policy instruments when an ETS is present Numerical Model • Rathmann (2007), FIT can reduce electricity producer prices for certain parameter values • Traber and Kemfert (2007), CPE application (trade, endogenous ETS, imperfect competition)

  5. Applications of Computable Partial Equilibrium (CPE) Models to the Analysisof Energy Markets Especially suited to investigate oligoplistic market structures Amongst others: • GASMOD 2008 (Holz, v. Hirschhausen, Kemfert) • COALMOD 2008 (unpublished conference paper) • OILMOD 2008 (under construction) • EMELIE (Lise et al. 2006, Kemfert 2006, Traber 2008)

  6. EMELIE Features • Focus on electricity market • Link to the rest of the economy: inverse demand /emission market • Technological rich buttom up approach • Profits and strategic behavior • Previous Application NWE Electricity market: • Kemfert (2006) Government and Policy • Lise et al. (2006) Energy Policy

  7. Outline • Simplistic version of the model Algebraic formulation Model data • EMELIE application: The German FIT for RES under ETS Model refinement Results: Prices, Emissions, Profits Impact of market power on FIT effects • Summary

  8. Simplistic version of EMELIE: Two types of behaviour Kuhn-Tucker Lagrangian of the firm FOC of a price taker Foc of an oligopolist

  9. International trade and transmission market Market for transmission service clears at the nonnegative price for transmission capacity such that: for transmission service inside a country

  10. Data supply side: Technologies

  11. Top Ten generators installed capacities [GW]

  12. Germany`s international transmission restrictions [TWh/a]

  13. Structure of the model EMELIE-Model RES at given FIT Renewable energy industry Electricity market Price Supply Conventional electricity industry Permit price Permit demand GTAP-E: non-electricity ETS sectors ETS Permit demand curve

  14. EMELIE application: Algebraic representation

  15. The effect of German FIT under ETSOligopolistic competition FIT (2006): 53 TWh at 10.3 cent/kWh Scenario choice for a decomposition of the FIT effects in an permit price effect and a substitiution effect. : Scenario A: Model run without FIT Scenario B: Model run with FIT Scenario C: Model run without FIT but at permit prices fixed at scenario B level.

  16. Results for electricity prices and emissions(Traber and Kemfert 2007) • Producer prices goes down (0.4 cent/kWh) • Permit prices go down (3.1 €/ton of CO2) • Total supply decreases (3 TWh) • Emissions of the German electricity sector decreases (33 Mt) • Emissions of the European electricity sector decreases (5 Mt) • Emission reduction of FIT offset by Nely sector

  17. The effect of the FIT on German producer prices

  18. The effect of the FIT on German electricity emissions

  19. Introduction of FIT: Effect on Profits • Substitution Effect negative or zero (Spain, Portugal) • Permit price effect depends on emission intensity: • Comparatively CO2 lean companies loose (EdF, EnBW, Eon ) • Total Effect is ambiguous • German oligopolists are largely negatively affected • Comparatively CO2 intensive companies with no substitution effect gain

  20. Introduction of FIT: Effect on prices under oligopolistic competitionTraber (2008)

  21. Introduction of FIT: Effect on prices under perfect competition Traber ( 2008) Drop in permit prices induces larger expansionistic effect (A to C) Contraction effect due to substitution by RES is smaller (C to B) Impact on consumers significantly smaller (A to B’) Market power shifts the burden of the RES support from producers to consumers!

  22. Summary • ETS dampens FIT effect on prices • ETS reduces emission reduction of FIT • FIT shifts ETS induced emission reduction into the electricity sector • FIT supports companies which are not well connected to the German el. market but to the ETS • Carbon lean companies in Germany most negatively impacted • Oligopoly shifts the burden of the FIT from producers to consumers

  23. Outlook Other applications Effect of mergers and demergers (Lise et al. 2006) Impact of market power on diffusion of technology under emission prices (Kemfert and Traber 2007) Impact of market power on diffusion of technology under emission trading

  24. Literature • Amundsen, E. S., and J.B. Mortensen (2001). "The Danish Green Certicate System: Some Simple Analytical Results", Energy Economics, 23(5): 489-509. • Holz, F. , von Hirschhausen, C. , Kemfert, C. (2008) :'A Strategic Model of European Gas Supply (GASMOD) ‘, Energy Economics 30 3, 766-788 • Kemfert, C. (2007): 'The European electricitys and climate policy – complement or substitute?', Environment and Planning, C Government and Policy 25, 1, pp. 115-130. • Lise, W., Linderhof, V., Kuik, O., Kemfert, C., Oestling, R., Heinzow, T. (2006): 'A game theoretic model of the Northwestern European electricity market — market power and the environment', Energy Policy, 34, pp. 2123-2136. • Morthorst, P. (2003). "National environmental targets and international emission reduction instruments", Energy Policy, 31: 73-83. • Rathmann, M. (2007). "Do support systems for RES-E reduce EU-ETS-driven electricity prices?", Energy Policy, 35: 342-349. • Traber, T. , Kemfert, C. (2007), “Impacts of the German Support for Renewable Energy on Electricity Prices, Emissions and Profits: An Analysis based on a European Electricity Market Model”, submitted to The Energy Journal. • Truong, T. P., Kemfert, C. (2007): 'GTAP-E: An Energy-Environmental Version of the GTAP Model with Emission Trading', Discussion Paper 668, German Institute for Economic Research, Berlin

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