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Alternative Strategies for Promoting Renewable Energy in EU Electricity Markets By Christoph Bo¨hringer*, Tim Hoffmann**, and Thomas F. Rutherford***

Abstract We investigate the economic impacts of promoting electricity produced from renewable energy sources within the EU. We focus on two central regulatory instruments: Feed-in tariffs, i.e., direct subsidies to electricity production from renewable energy, and quota obligation systems with tradable green certificates. Based on a large-scale partial equilibrium model of the EU electricity market calibrated to empirical data, we find that differentiated feed-in tariffs incur substantial excess cost compared to an EU-wide tradable green quota.

1. Introduction Political support for renewable energy technologies has a history of over 30 years within the EU. Key motives as well as favored policies and measures to promote the market penetration of electricity from renewable energy sources have changed over time. The first major impetus for the promotion of renewable energies can be traced back to the oil crises in the early 70ies and 80ies: Renewable energy from EUinternal sources was seen as a long-term substitute for exhaustible and mainly imported fossil fuels in order to secure EU-wide energy supply. A second central push is linked to the negative environmental externalities associated with the combustion of fossil fuels. In the mid-80ies environmental concerns were related to local and regional problems of air quality and acidification. These problems were handled largely through end-of-pipe technologies for electricity production from coal but also provided political support to renewable energies. Much more substantial had been and still are the implications of anthropogenic carbon emissions from * University of Oldenburg and Centre for European Economic Research (ZEW), Mannheim, Germany; [email protected]. ** Centre for European Economic Research (ZEW), Mannheim, Germany; hoffmann@ zew.de. *** Ann Arbor, MI, U.S.A.; [email protected].

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Christoph Bo¨hringer, Tim Hoffmann, and Thomas F. Rutherford

fossil fuel combustion for global warming: Carbon-free energy supply technologies are considered as the central response to cope with the problem of global warming in the long run. More recently – and complementary to energy security as well as environmental objectives – “green” policy makers push renewable energy in order to create new jobs and strengthen competitiveness of the EU economy in terms of lead technologies that can be exported to world markets. As to policy measures for the promotion of renewable energies there had been a shift from command-and-control policies to market-based instruments such as taxes, subsidies, and tradable quotas: Energy taxation in many EU countries meanwhile comes along with tax breaks or tax exemptions to renewable energy working as implicit subsidies to correct relative prices with respect to concerns on energy security and environmental quality. In addition, direct subsidies for renewable energy are warranted – typically differentiated by the type of green energy, i.e., hydropower, wind, biomass, solar, etc. A relatively new strand of policy regulation is the use of tradable green quotas where energy suppliers are required to produce a certain share of energy services from renewable energy but are flexible to trade these shares between each other in order to exploit differences in marginal compliance costs. Against this background, we investigate the economic impacts of promoting electricity produced from renewable energy sources within the EU. Strategies for “greening” electricity production have been examined in several previous papers. Menanteau et al. (2003) highlight the potential efficiency gains of tradable green certificates vis-a`-vis feed-in tariffs or tendering systems (see also Finon and Menanteau 2003 and Ku¨hn 2000). Voogt et al. (2000) and Uyterlinde et al. (2003) discuss the cost-effectiveness of tradable green certificates with a focus on risk and transaction cost. Jensen and Skytte (2002) point out difficulties in the manageability of quota obligation schemes when a regulator has additional policy targets than just greening electricity. Morthorst (2000a and 2001) as well as Madlener and Stangl (2000) address the issue of regulatory overlap between renewable promotion schemes and emission allowance trading. In our applied analysis, we focus on the cross-comparison of two alternative policy instruments which are central to the contemporary EU strategy for the promotion of renewable energy in electricity production: Feed-in tariffs, i.e. direct subsidies to electricity production from renewable energy, and quota obligation systems with tradable green certificates (TGC). Based on a large-scale partial equilibrium model of the oligopolistic EU electricity market calibrated to empirical data, we find that differentiated feed-in tariffs incur substantial excess cost as compared to an EU-wide tradable green quota. In general terms, these excess cost can be interpreted as the price tag that policy makers have to attach to other objectives than the pure greening of electricity. Such objectives might include pursuits to reduce additional market failures associated with market barriers to specific infant renewable technologies, knowledge spillovers from private R&D, or strategic industrial policies.

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The remainder of this paper is as follows: Section 2 provides a brief summary of the EU policy initiatives for the promotion of renewable energy in electricity production. Section 3 describes the numerical framework and the database underlying our quantitative analysis. Section 4 presents illustrative policy scenarios and discusses the results. Section 5 concludes.

2. Policy Background: Promoting Renewables in Europe The Directive on the “promotion of electricity produced from renewable energy sources in the electricity market” (RES-E) is the main legislation for supporting renewable energy at the EU level (European Commission 2001). The objective of the Directive is a doubling of the share of renewable energy in Europe’s gross energy consumption from approximately 6 % in 1997 to 12 % in 2010. The latter has been translated into a specific share of 22.1 % renewable energy in final EU electricity consumption in 2010 (as compared to 14 % in 1997). This target has been already set in the 1997 White Paper on renewable energy sources (European Commission 1997) and endorsed by the Energy Council in May 1998. Beyond an aggregate policy target, the RES-E Directive specifies indicative targets for the penetration of RES-E for each EU Member State (see column “RES-E target” in Table 1). To date, EU Member States employ a myriad of support schemes (see Figure 1). Some of them directly stimulate the supply side of renewable electricity, while others directly affect the demand side. Promotion schemes can be furthermore distinguished according to the supported activity, i.e., either capacity installation or the generation of green electricity. A recent survey published by the European Commission (European Commission 2005c) reveals that feed-in tariffs are the most common promotion measure (in seven out of the EU-15 Member States) followed by quota obligation systems with tradable green certificates, so-called TGC (in four out of the EU-15 Member States). In contrast, tender schemes, investment subsidies, and fiscal measures only play a minor role (see also Table 1). Under pure economic efficiency considerations, the promotion of RES-E – alike other regulatory measures – has to be justified by market failures, i.e. the inability of markets to internalize all the social benefits and social costs associated with economic activities. For efficient internalization, each market failure typically goes along with one specific regulatory instrument (e.g. emission taxes, R&D subsidies, definition of property rights, or product liability rules). Regarding policy support for renewable energy, however, there is not a single clear-cut justification: Promotion of renewable energies may contribute to ameliorate simultaneously various externalities (such as market barriers to infant renewable technologies, undersupply of public knowledge spillovers from private R&D, or environmental externalities) while – at the same time – serving strategic interests (such as industry or competition policies).

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Christoph Bo¨hringer, Tim Hoffmann, and Thomas F. Rutherford Table 1 Indicative RES-E Targets in 2010 and National Support Schemes to Achieve them RES-E target [in %]

Feed-in tariffs

Austria Belgium Denmark Finland France Germany Greece Ireland Italy Luxembourg Netherlands Portugal Spain Sweden United Kingdom

78.1 yes 6.0 29.0 yes 31.3 21.0 yes 12.5 yes 20.1 yes 13.2 (announced) 25.0 yes (for PV) 5.7 yes 9.0 yes 39.0 yes 29.4 yes 60.0 10.0

European Union

21.7

National support schemes Quota obligaOther tions / TGC yes

Minimum price for renewables Tender schemes for offshore wind Tax exemptions and investment incentives

Investment incentives Tender schemes yes

Investment incentives yes yes

Source: EU 2005.

Source: Uytelinde et al. 2003.

Figure 1: Classification of RES-E Policy Support Mechanisms

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Given exogenous RES-E targets, a tradable quota system will in principle assure cost-efficiency and effectiveness without the need for central planner information. A feed-in tariff system, on the other hand, would require perfect information on all technologies, their costs and potentials, price developments on the electricity market, consumer preferences, etc.1 However, feed-in tariffs allow for a differentiated treatment of alternative renewable technologies taking into account other objectives than just the “greening” of electricity production. As a matter of fact, feed-in tariff systems in policy practice stand out for a pronounced discrimination across different green technologies: Usually, more costly technologies such as solar or geothermic energy receive higher subsidies than more competitive renewables such as hydro or wind power.2 If the policy objective was simply the greening of electricity production, such a differentiated feed-in tariff system is likely to create substantial excess costs.3 In contrast, quota obligation systems with tradable green certificates (TGCs) can meet overall national or supra-national targets in an efficient way. The quota system creates an explicit market for the “greenness” of electricity with an associated market price (or “green value”). The market will then sort out which type and quantity of renewable energy will serve most efficiently the RES-E targets. At a supra-national level, an EU-wide market for TGCs allows for “where”-flexibility in complying with national targets from an aggregate perspective, i.e. cost-efficiency across domestic borders.

3. Numerical Framework 3.1 Model Summary

Our quantitative assessment of different RES-E promotion strategies is based on a static large-scale partial equilibrium model of an oligopolistic European electricity market where firms compete strategically for market shares on regional electricity markets. Let R be the set of all regions (with index r 2 R), F the set of all firms (with index f 2 F), and Ithe set of all generation technologies (with index i 2 I). Within a region r a firm f disposes of a fixed generation capacity composed of specific generation technologies. Electricity is supplied to regional electricity markets which are distinguished by residential and industrial consumers. Industrial consumers face differentiated pricing over their load curve. In contrast, residential 1 Against this background it is not surprising, that – according to recent studies (e.g. Uyterlinde et al. 2003) most of the Member States who employ feed-in tariff systems will not reach their indicative targets until 2010. 2 For example, the German Renewable Energy Sources Act stes a feed-in premium for solar electricity which is roughly four times higher than for electricity produced from biomass (Deutscher Bundestag 2001). 3 Again, the excess costs may be interpreted as an additional premium that policy makers have to attach to other objectives than the pure greening of electricity.

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consumers – who are usually supplied on the basis of long-term power purchase contracts – pay a flat fee for electricity delivered at any point of their load-curve. For the sake of simplicity, we only distinguish two load segments l – one for demand in base-load (l = base) and one for peak-load (l = peak) demand – in our present application; sInd f ;r;l then denotes supply of firm f in load segment l to industrial consumers in region r and sRes f ;r denotes the supply to residential consumers respecRes for the electricity prices to the industrial tively. Adopting notations pInd r;l and pr Res and residential markets and notationsDInd for the associated (iso-elastic) r;l and Dr demand functions, each firm f maximizes its profits f : max

sInd ; sRes f ;r;l f ;r

f ˆ

  XXh
Res Ind Res
sf ;r pInd DRes
sInd r;l Dr;l f ;r;l ‡ pr r r

 i Res Cf ;r;l sInd : f ;r;l ; sf ;r

l

Res Differentiating for sInd f ;r;l and sf ;r , we obtain the usual first-order conditions for a Cournot oligopoly where marginal values of supply to industrial and residential customers …wf ;r;l † equal marginal revenues:

wf ;r;l ˆ X l

pInd r;l

Ind f ;r;l


1

Ll
wf ;r;l ˆ pRes r


! 8f ; r; l

Ind r;l

1

Res f ;r


P

Res r

L l l

! 8f ; r

Res where Ind denote the price elasticities of the demand segments, Ind r;l and r f ;r;l Ind Ind Res Res L (ˆ sf ;r;l =Dr;l ) and f ;r (ˆ sRes f ;r =Dr ) are the associated market shares, and l indicates the shares of base- and peak-load demand in total electricity demand (with Lbase ‡ Lpeak ˆ 1).

Domestic demand can be met by domestic electricity generation or by electricity imports from other regions. Transmission and distribution of electricity is priced with (exogenous) grid charges. Cross-border electricity trade is limited by capacity constraints of inter-regional exchange points. Costs for inter-regional electricity exchange thus account for the scarcity of exchange capacities on top of transmission and distribution margins. Plant-specific capacity limits impose an upper bound on the feasible amount of electricity production by each firm. Furthermore, suppliers are obliged to keep back a certain level of reserve capacity (determined as a fraction of total electricity supply in each region). With respect to our policy analysis, electricity producers face minimum targets for the deployment of RES-E capacities which are implemented by alternative regulatory regimes: Countries can promote RES-E production by subsidizing RES-E production on a per-unit basis (feed-in tariffs). RES-E subsidies are then paid by consumers through a tax on electricity consumption. Alternatively, regulatory authorities may impose specify domestic quotas for RES-E production with or without the option of inter-regional tradability.

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Numerically, our model is formulated as a mixed complementarity problem (MCP). The algebraic formulation is implemented in GAMS (Brooke, Kendrick and Meeraus 1987) using PATH (Dirkse and Ferris 1995) as a solver. A comprehensive algebraic model description is provided in the Appendix.

3.2 Parameterization

The model analysis in this paper is based on a parameterization of 15 EU regions.4 Benchmark electricity demand for each region is obtained from recent UCTE (2005), NORDEL (2005) and IEA (2005) statistics. The disaggregation of aggregate regional demands into residential and industrial demands is based on detailed energy balance data from IEA / OECD (2004). In addition, we employ detailed statistics on hourly load values provided by international associations (UCTE, NORDEL) and national grid operators in order to determine the load-specific demand for both demand segments in each region. Regional electricity prices stem from the 4th Benchmarking Report of the European Commission (European Commission 2005a). The supply side of the model covers more than 1100 conventional thermal power plants. Each plant is owned by one of more than 220 explicit firms. Information on the installed capacity of each plant and on the ownership structure is taken from a comprehensive power plant database that covers all EU model regions (Meller, Milojcic, Reichel, and Scho¨ning 2005). Technical as well as economic information on the power plants comes from the IKARUS data base (KFA 1994) providing detailed data on installation costs, operating and maintenance costs, and thermal efficiencies. We map the technologies described by Meller et al. to a set of 11 selected IKARUS technologies (covering fossil fuel-fired and nuclear power plants) and then apply dynamic investment calculus in order to obtain technology-specific electricity production costs. Fuel prices and data on labor costs for this calculation are obtained from recent EU statistics (European Commission 2005b, European Commission 2005c, European Commission 200d, Eurostat 2005). Technology-specific carbon emission coefficients are again based on IKARUS. Our characterization of 16 RES-E technologies builds upon ADMIRE-REBUS data for renewable energy in Europe (Uyterlinde et al. 2004).5 We distribute the derived cost-potential curves for renewable energy technologies in each region across firms according to their shares of conventional capacity in regions’ total generation capacity. Information on inter-regional electricity trade and exchange capacities is based on recent statistics of system operators and associations (European Transmission 4 Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Portugal, Spain, Sweden, the Netherlands, and the United Kingdom. 5 Each renewable energy technology is thereby sub-divided into “technology-segments” to account for different site qualities (e.g., differences in wind speed) and availability of specific renewable fuels (e.g., wood or other biomass).

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System Operators – ETSO 2001a, European Transmission System Operators – ETSO 2001b, NORDEL 2005a, NORDEL 2005b, UCTE 2005).

4. Policy Scenarios and Results 4.1 Policy Scenarios

We compare the economic impacts of promoting renewable energy in EU electricity production against a business-as-usual situation (scenario BaU) without political support to RES-E production. Regulation to foster electricity production from renewable energy sources is captured by four illustrative policy scenarios FEED_D, FEED_H, QUOTA_R and QUOTA_EU. Scenario FEED_D mimics the situation where Member States adopt technology-specific feed-in tariffs for RES-E at a level which assures compliance with the national RES-E targets. The feed-in tariffs are financed by an ad-valorem tax on the electricity sales to all consumers in the respective regions. This scenario reflects the present situation in most of the EU-15 Member States. Scenario FEED_H describes a regulation where Member States employ harmonized feed-in tariffs in their region, i.e., each renewables technology receives the same premium. As in scenario FEED_D, the feed-in tariff is endogenously determined to assure compliance with the national RES-E targets and gets financed by an electricity sales tax. In scenario QUOTA_R, EU Member States achieve their indicative RES-E targets through a national quota system imposed on electricity producers. This scenario implies a uniform national certificate price. The economic impacts under QUOTA_R can be expected to be rather similar to those of scenario FEED_H as the latter mainly differs with respect to the explicit cross-financing of feed-in tariffs. Scenario QUOTA_EU represents a completely harmonized situation where green quotas are traded across EU Member States. Regional targets can either be met by domestic production of RES-E or by importing TGCs. Likewise, TGCs may be sold to the international market if domestic costs for RES-E are lower than the international price. Hence, this scenario warrants a single EU-wide value for green certificates to meet the overall RES-E target of approximately 22 % in a cost-efficient way. Table 2 provides a brief summary of the four alternative green promotion schemes under consideration in our quantitative analysis.

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Table 2 Summary of Policy Scenarios Feed-in tariff schemes FEED_D FEED_H Promotion scheme

Financing of promotion

Harmonized green value Trade in TGC’s

Quota systems QUOTA_R QUOTA_EU

Regional and technologyspecific feed-in tariffs Through electricity tax

Harmonized feed-in tariff in all regions

Regional quota

Regional quotas and trade in TGCs

Through electricity tax

Through the electricity market

No

Yes (national / regional) No

Yes (national / regional) No

Through the electricity market and the TGC market Yes (EU-wide) Yes

No

4.2 Simulation Results

Figure 2 displays the technology mix in EU-wide electricity production for the four alternative RES-E promotion schemes as well as the reference situation (BaU). Administered additional RES-E production mainly displaces the use of coal: The share of coal (hard coal, soft coal and lignite) in total production of EU-15 countries decreases by approximately 10 % as compared to BaU. Yet, nuclear and coal-fired power plants still provide more than 50 % of the total electricity supplied to consumers. The differential impacts of the alternative promotion schemes are clearly visible in the deployment of RES-E technologies. Figure 3 shows the shares of green technologies in total green electricity production. In the BaU scenario, hydropower accounts for over 85 % of total RES-E production; only a small fraction of electricity is produced from wind, the remaining 13 % stem from biomass and waste. When technology-specific feed-in tariffs are adopted (scenario FEED_D), hydropower still accounts for the major share of green production (45 %); however, the RES-E mix exhibits much more technological diversity: Electricity from biomass and waste incineration now constitutes roughly 36 % of green production; even rather costly solar potentials are utilized (approximately 3 %). Under FEED_H and QUOTA_R the technological diversity prevails, but especially (onshore) wind power benefits from uniform regional green values at the expense of waste and biomass. Solar potentials are no longer exploited since regional green values are not high enough for solar electricity production to break even. Scenario QUOTA_EU implies an equalization of marginal costs of RES-E production across EU Member States thereby ensuring that the most profitable RES-E potentials are used: Compared to scenarios FEED_H and QUOTA_R wind potentials in France, Greece (onshore) and the Nordic region (onshore and offshore) will be used in addition – mostly at the expense of electricity production from waste incineration.

Christoph Bo¨hringer, Tim Hoffmann, and Thomas F. Rutherford

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Share in total production [in %]

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% BaU

FEED_D

FEED_H

QUOTA_R

QUOTA_EU

Figure 2: Technology Mix of European Electricity Supply Share in total RES-E production

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% FEED_D

FEED_H

QUOTA_R

QUOTA_EU

Figure 3: Technology Mix of European Green Electricity Supply

The administered increase of green production leads to higher electricity prices: Initially unprofitable capacities are phased-in, thereby substituting initially more profitable technologies. The increase in electricity depresses electricity demand. In the case of differentiated feed-in tariffs (scenario FEED_D) EU-wide electricity

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consumption decreases by 7.4 % as compared to the BaU level. The switch to uniform feed-in tariffs (scenario FEED_H) slightly ameliorates the increase in electricity prices and the associated decrease in electricity consumption at the EU level (–6. % from BaU levels). The upper part of Table 3 reports minimum and maximum values across EU Member States for the per-unit support level (green value), the direct costs of RES-E promotion (indicating the total support level as the product of the green value and the subsidized RES-E production), and the efficiency costs (measured as the loss in consumer and producer surplus from BaU levels). The lower part of Table 3 provides the EU-wide aggregate of direct costs and efficiency costs. Table 3 Green Values and Induced Costs FEED_D

Green Values Direct costs (Variance)

A / MWh mill. A

Efficiency costs (Variance) mill. A

FEED_H

QUOTA_R

Min

Max

Min

Max

Min

37.1

108.4

28.9

104.0

28.9

Max 99.3

QUOTA_EU Min 44.5

Max 44.5

403.6 6,385.8 296.9 6,122.0 298.5 5,728.0 154.1 3,050.7 330.4 4,993.7

15.5 5,027.8

15.0 4,421.5

26.5 3,016.0

Total Direct costs EU-15

mill. A

19,537.9

16,936.4

16,487.1

14,057.0

Efficiency costs EU-15 mill. A

17,855.5

15,099.0

14,687.9

13,816.3

Obviously, green values differ across regions whenever inter-regional TGC trade is not possible. In scenario FEED_D, regional green values range between 37.1 A / MWh up to 108.4 A / MWh, total direct costs are 19.5 bn.A, and the loss in overall economic surplus amount to 17.9 bn.A vis-a`-vis BaU. With uniform feed-in tariffs (scenario FEED_H) green values decrease at the regional level compared to FEED_D: Green values vary from 28.9 A / MWh up to 104.0 A / MWh across regions. EU-wide direct costs of RES-E promotion decrease by ca. 2.6 bn.A, and efficiency gains of FEED_H vis-a`-vis FEED_D amount to 2.8 bn.A. Implementation of a regional tradable quota system – captured by QUOTA_R – leads to similar results as FEED_H. EU-wide trade in TGCs – facilitated under QUOTA_EU – reduces overall EU compliance costs significantly as the most profitable RES-E potentials are exploited. The direct costs of RES-E promotion are 14.0 bn.A., the loss in economic surplus amounts to 13.8 bn.A vis-a`-vis BaU. Hence, QUOTA_EU reaches the overall EU target at approximately 20 % lower economic costs than FEED_D.

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5. Conclusions The political support for electricity produced from renewable energy sources has a long history within the European Union. At present, EU Member States employ a range of support schemes. Most common are feed-in tariff systems, i.e., direct subsidies to electricity production from renewable energy, and quota obligations with tradable green certificates. In this paper, we have compared the economic consequences of feed-in tariffs and tradable quota systems for the promotion of renewable energy sources in EU electricity production. Our quantitative simulations based on a large-scale partial equilibrium model of the EU electricity market indicates that differentiated feedin tariff schemes may incur substantial excess cost compared to regionally and EU-wide harmonized systems. If the “greening” of electricity was the only political objective, an EU-wide tradable green quota would reach the European RES-E target at 20 % lower costs than national feed-in tariff systems with technologyspecific premia. The higher costs can be interpreted as the price tag that policy makers have to attach to other objectives than the pure greening of electricity. As a consequence, policy makers should clearly lay out the multiple objectives and the respective weights that can justify discriminatory pricing across renewable energies. References Brooke, A. / Kendrick, D. / Meeraus, A. (1996): GAMS: A User’s Guide, GAMS Development Corp. CENTREL (2005): Annual Report 2004. de Noord, M. / Beurskens, L. W. M. / de Vries, H. J. (2004): “Potentials and costs for renewable electricity generation: A data overview,”. Deutscher Bundestag (2001): “Gesetz fu¨r den Vorrang Erneuerbarer Energien,” Bundesgesetzblatt, Jg. 2004 Teil I Nr. 40, pp. 0033 – 0040. Dirkse, S. P. / Ferris, M. C. (1995): “The PATH solver: A non-monotone stabilization scheme for mixed complementarity problems,” Optimization Methods and Software, 5, 123 – 156. European Commission (1997): “Energy for the future: renewable sources of energy – White Paper for a Community strategy and action plan, COM(97) 0599 final,” Communication from the Commission. – (2001): “Directive 2001 / 77 / EC of the European Parliament and of the Council of 27 September 2001 on the promotion of electricity produced from renewable energy sources in the internal electricity market,” Official Journal of the European Communities. – (2003):“Directive 2003 / 54 / EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in electricity and repealing Directive 96 / 92 / EC,” Official Journal of the European Communities.

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– (2005a): “Annual Report on the Implementation of the Gas and Electricity Internal Market, COM(2004) 863 final,” Communication from the Commission. – (2005b): Gas Prices, Price Systems 2004, Luxembourg: Office for Official Publications of the European Communities. – (2005c): “The market for solid fuels in the Community in 2003 and 2004, SEC(2005) 105,” Commission Staff Working Document. – (2005d): “The support for electricity from renewable energy sources – Impact Assessment, Annex to the Communication from the Commission COM(2005) 627 final, SEC(2005) 1571 final,” Communication from the Commission,. – (2005e): “The support of electricity from renewable energy sources, COM(2005) 627 final,” Communication from the Commission. European Transmission System Operators – ETSO (2001a): “Definitions of Transfer Capacities in liberalised Electricity Markets, Final Report April 2001,”. – (2001b): Procedures for Cross-Border Transmission Capacity Assessments, Oktober 2001,”. Eurostat, Online Data 2005: available at: http: // epp.eurostat.cec.eu.int / portal / page?_page id=1996,45323734&_dad=portal&_schema=PORTAL&screen=welcomeref&open= / &product=EU_MAIN_TREE&depth=1. Finon, D. / Menanteau, P. (2003): “The static and dynamic efficiency of instruments of promotion of renewables,” Energy Studies Review, 12(1), 53 – 82. Hoffmann, T. (2004): “Teilbericht: DIOGENES,” in Forum fu¨r Energiemodelle und Energiewirtschaftliche Systemanalysen in Deutschland, ed., Energiemodelle zum Klimaschutz in liberalisierten Energiema¨rkten – Die Rolle erneuerbarer Energietra¨ger, Lit-Verlag Mu¨nster, pp. 340 – 354. IEA / OECD (2002): Energy Balances of OECD Countries, 2002, Paris: OECD Publications. Jensen, S. G. / Skytte, K. (2002): “Interaction between the power and green certificate markets,” Energy Policy, 30, 425 – 435. KFA – Forschungszentrum Ju¨lich (1994): IKARUS-Instrumente fu¨r Klimagas Reduktionsstrategien, Teilprojekt 4: Umwandlungssektor Strom- und Wa¨rmeerzeugende Anlagen auf fossiler und nuklearer Grundlage. Teil 1 u. 2 . Ku¨hn, I. (2000): “Ist die Quotenregelung mit Zertifikatshandel fu¨r Erneuerbare Energien effizient? – Eine Replik,” Zeitschrift fu¨r Energiewirtschaft, 24(4), 214 – 216. Madlener, R. / Drillisch, J. (2002): “Tradable Certificate Schemes for Single Renewable Electricity Techno-logies: The Case of Small-Scale Hydro Power Promotion in Austria,” in “Proceedings of the 25th Annual IAEE International Conference “Innovation and Maturity in Energy Markets: Experience and Prospects” University of California Press Aberdeen, Scotland. Madlener, R. / Stagl, S. (2000): “Promoting Renewable Electricity Generation through Guaranteed Feed-in Tariffs vs Tradable Certificates: an Ecological Economics Perspective,” in “Proceedings of the 3rd Biennial Conference of the European Society for Ecological Economics”.

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Meller, E. / Milojcic, G. / Reichel, W. / Scho¨ning, G. /2005): Jahrbuch der europa¨ischen Energie und Rohstoffwirtschaft 2004, Essen: Verlag Glu¨ckauf. Menanteau, P. / Finon, D. / Lamy, M.-L. (2003): “Prices versus quantities: Environmental policies for promoting the development of renewable energy,” Energy Policy, 31(8), 799 – 812. Morthorst, P. E. (2000): “Scenarios for the use of GHG-reduction instruments – how can policy-instruments as carbon emission trading and tradable green certificates be used simultaneously to reach a common GHG reduction target?,” Energy & Environment, 11(4). – (2000): “The development of a green certificate market,” Energy Policy, 28(15). – (2001): “Interactions of tradable green certificate market with a tradable permits market,” Energy Policy, 29(5). NORDEL (2005): Annual Report 2004, Annual Statistics 2004. UCTE (2005): Oline data (year 2004). Uyterlinde, M. A. / Daniels, B. W. / de Noord, M. / de Vries, H. J. / de Zoeten-Dartenset, C. / Skytte, K. / Meibom, P. / Lescot, D. / Hoffmann, T. / Stronzik, M. / Gual, M. / del Rio, P. / Herna´ndez, F. (2003): “Renewable electricity market developments in the European Union; Final Report of the ADMIRE REBUS project,”. Voogt, M. / Boots, M. G. / Schaeffer, G. J. / Martens, J. W. (2001): “Renewable electricity in a liberalised market – the concept of green certificates,” Energy & Environment, 11(1). Weber, C. (2004): “Auswirkungen energie- und umweltpolitischer Instrumente bei unterschiedlichen Marktstrukturen – Analyse mit dem spieltheoretischen Modell POM,” in Forum fu¨r Energiemodelle und Energiewirtschaftliche Systemanalysen in Deutschland, ed., Energiemodelle zum Klimaschutz in liberalisierten Energiema¨rkten – Die Rolle erneuerbarer Energietra¨ger, Lit-Verlag Mu¨nster, 323 – 339.

Appendix: Algebraic Model Description Our model is formulated as a mixed complementarity problem (MCP). Two classes of conditions characterize the market equilibrium: zero profit conditions and market clearance conditions. The former class determines activity levels (quantities) and the latter determines prices. The economic equilibrium features complementarity between equilibrium variables and equilibrium conditions: activities will be operated as long as they break even, positive market prices imply market clearance otherwise commodities are in excess supply and the respective prices fall to zero. Table 4 depicts the sets, parameters and variables of the model.

Alternative Strategies for Promoting Renewable Energiy in EU Electricity Markets

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Table 4 Sets, Variables and Parameters Sets: R F I IR…R† P

Set of all regions (with index r 2 R where rs 2 R is an electricity exporting and rd 2 R an importing region) Set of all firms (with index f 2 F) Set of all generation technologies (with index i 2 I) Subset of all RES-E technologies (with index i 2 IR) Set of all power plants of technology type i in region r con-trolled by firm r (with index p 2 P)

Parameters: p0Ind r;l p0Res r D0Ind r;l D0Res r;l Ind r;l Res r;l ci;r;l Kp T rs;rd rmr:l gcr tfrs;rd dlrs;rd cci CLr ai rqr

Reference electricity price in region r on the industrial market for electricity demand in load segmet l Reference electricity price in region r on the residential market Reference electricity demand of industrial customers in region r and load segment l Reference electricity demand of residential customers in region r and load segment l Price elasticity of industrial demand in region r and load segment l Price elasticity of residential demand in region r Variable production costs of plant of technology type i in region r and load segment l Generation capacity limit of plant p Capacity limit of all inter-regional exchange points between region rs and region rd Regional reserve requirements in region r and load segment l Regional charges for distribution of electricity in region r Charges for inter-regional electricity transmission from region rs to region rd Fraction of distribution losses of electricity exchange from region rs to region rd Specific carbon coefficient for electricity generation from technology i Upper bound on carbon emissions in region r Adjustment factor for technology-specific feed-in tariff for RES-E technology i 2 IR Minimum shares of renewable electricity in the total supply to region r

Price variables: pInd r;l pRes r wf ;r;l r;l p

r r

Price for electricity in region r on the industrial market in load segment l Price for electricity on the residential market in region r Marginal value of electricity supply by firm f in region r and load segment l Shadow value on reserve capacity constraint in region r and load segment l Shadow price on capacity constraint of plant p in load segment l Shadow value on the emissions constraint in region r Shadow value on the renewables quota in region r

Christoph Bo¨hringer, Tim Hoffmann, and Thomas F. Rutherford

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Continued Table 4: Price variables:  rs;rd;l r

Price of tradable green certificates Shadow price on transmission capacity between adjacent regions rs and rd Electricity tax in region r

Activity levels: SInd f ;r;l SRes f ;r Xp;l Zp;l Ef ;rs;rd;l GEX r GIM r

Supply of firm f in load segment l to industrial customers in region r Supply of firm f to residential customers in region r Electricity production of plant p in load segment l Set-aside capacity provision of plant p in load segment l Electricity trade by firm f from region rs to region rd Green certificates exports of region r to the international market Green certificates imports of region r from the international market

Zero-profit conditions:

  Zero-profit condition for industrial supply ? SInd f ;r;l : wf ;r;l ‡ gcr ‡ rmr;l
r;l  pInd r;l


Ind f ;r;l

1

!

Ind r;l

:

  Zero-profit condition for residential supply ? SRes f ;r : X
 Ll
wf ;r;l ‡ rmr;l
r;l ‡ gcr  pr


P

Res f ;r


1

L l l

!

Res r

l

:


Zero-profit condition for reserve capacity provision ? Zp;l : p  r;l :


Zero-profit condition for inter-regional electricity trade ? Ef ;rs;rd;l : wf ;rs;l ‡ tfrs;rd;l ‡

X

rs;rd;l


rd;rs;l  wf ;rd;l 1


tlrs;rd :

rs;rd

Zero-profit conditions for electricity production in case of a quota obligation
System ? Xp;l : ci;r;l ‡ p;l ‡ cci
r ‡ r
rqr  wf ;l;r ‡ r ci;r;l ‡ p;l ‡ cci
r ‡ r
rqr  wf ;r;l

8i 2 IR ;

8i 2 = IR :

Alternative Strategies for Promoting Renewable Energiy in EU Electricity Markets

17

Zero-profit conditions for electricity production in case of a feed-in tariff system
? xp;l : ci;r;l ‡ p;l ‡ cci
r  wf ;r;l ‡ ai r ci;r;l ‡ p:l ‡ cci
r  wf ;r;l

8i 2 IR ;

8i 2 = IR :

Additional zero-profit conditions for international trade in TGCs:
Zero-profit condition for green certificates imports ? GIM : r   r :


: Zero-profit condition for green certificates exports ?GEX r r   :

Market-clearance conditions:

  Market-clearance condition for industrial supply ? pInd r;l : X

SInd f ;r;l

ˆD0Ind r;l

…1‡ 6 r †
pInd r;l




!Ind r;l :

p0Ind r;l

f

Market-clearance condition for residential supply ? pRr es †: X

SRes f ;r ˆ

f

X

2 4D0Res
r;l

l

…1‡ 6 r †
pRes r p0Res r

3 !Res r;l 5:


Market-clearance condition for electricity trade ? rs;rd;l : T rs;rd 

X

Ef ;rs;rd;l

f ;rs

X

Ef ;rs;rd;l :

f ;rd


Market-clearance condition for reserve capacity ? r;l : X

Zf ;r;i;l  rmr;l


f ;i

 X L Res : SInd f ;r;l ‡ l
Sf ;r f


Market-clearance condition for electricity production ? wf ;r;l : X p

Xp;l ‡

X  rs…rs6ˆr†

1


 dlrs;r
Ef ;rs;r;l

X rd…rd6ˆr†

L Res Ef ;r;rd;l  SInd f ;r;l ‡ l
Sf ;r :

Christoph Bo¨hringer, Tim Hoffmann, and Thomas F. Rutherford

18


Market-clearance condition for electricity production capacity ? p : KP 

X


Xp;l ‡ Zp;l :

l

Market-clearance condition for emission constraint …? r †: CLr 

X


cci
Xp;l :

p;l

Market-clearance condition for renewable quota …? r †: X

Xf ;r;i;l

f ;i2IR;r;l

IM GEX r ‡ Gr  rqr


 X L Res : SInd f ;r;l ‡ l
Sf ;r f ;l

Additional market-clearance condition for ad-valorem electricity tax in case of feed-in tariff systems …? r †: X l

pInd r;l

r


X

! ‡ pRes r


SInd f ;r;l




r

X

f

SRes f ;r 

f

X


Xf ;r;ir;l
ai
r :

f ;ir;l

Additional market-clearance condition for international trade in TGCs …? †: X

GEX r 

X

r

GIM r :

r

Market shares and load share:

  Market shares in industrial markets ? Ind f ;r;l : SInd f ;r;l Ind f ;r;l ˆ P Ind : f Sf ;r;l

  Market shares in residential markets ? Res f ;r;l : SRes f ;r;l res ˆ : P f ;r;l Res f Sf ;r;l

Load shares in residential demand left…? Ll †:  D0Res r;l
Ll ˆ

P

Res l D0r;l

…1‡




Res r †
pr

Res r;l

p0es r …1‡

Res r †
r

p0Res r

: Res r;l