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Inaugural Conference: The Future of Electricity Markets between Liberalization and Regulation

In September, the Center for Energy and the Environment hosted its inaugural conference on the future of electricity markets. In plenary sessions and parallel workshops, international experts discussed their views and questions on the relevant support strategies for renewable energies, the necessity and design of capacity mechanisms, and the challenges of Swiss hydropower.

By Regina Betz

Panel discussion: Urs Meister (BKW), Regina Betz (ZHAW) and Iain MacGill (UNSW Sydney)

Panel discussion: Urs Meister (BKW), Regina Betz (ZHAW) and Iain MacGill (UNSW Sydney)

Over the last two decades, many electricity markets have been liberalized worldwide. At the same time, various forms of regulation are still in place, and the ideal level and form of public intervention is being widely debated. Much of the discussion focuses on adequacy and reliability issues as well as on support schemes for renewables. Against this background, the newly established Center for Energy and the Environment (CEE) at the ZHAW School of Management and Law, in association with SCCER-CREST and the Commission for Technology and Innovation (CTI), hosted their inaugural conference, which brought together experts from academia, industry, and government.

The conference started with a formal analysis by Prof. Reto Schleiniger, PhD, on the questions as to whether free markets can deliver an adequate level of production capacity and why renewables should be supported. Participants learned that inelastic demand is a major flaw of electricity markets and requires some kind of regulation, by either a price or a quantity approach. Regarding the support of renewables, Reto Schleiniger argued that, given a cap and price scheme to control CO2 emissions, there is little economic justification for a direct financial support of power production from renewable energy sources.

Has Electricity Market Restructuring Delivered in Australia?
In his subsequent keynote speech, Associate Prof. Iain MacGill from the Center for Energy and Environmental Markets (CEEM) at UNSW Sydney gave an update on the electricity market situation in Australia, a country with one of the highest household photovoltaic penetration rates worldwide (15% overall and more than 25% in South Australia). Participants learned that electricity restructuring – the term used for liberalization in Australia – may well have led to higher electricity prices in recent years and lower levels of security of supply, even while the electricity sector’s emissions intensity remains amongst the highest in the world. As a result, its success is questionable. From the speaker’s point of view, the focus may need to be less on efficiency aspects (efficient investments and operation) and more on equity, reliability, and security of supply issues in the broader context of low-carbon electricity industry transformation. It is not at all clear that current market arrangements are “fit for purpose” in delivering these objectives.

The Future of Hydropower in Switzerland
The second keynote speaker, Dr. Silvia Banfi Frost of the Zurich Municipal Electric Utility gave an overview of the regulatory needs concerning hydropower in Switzerland. She highlighted the difficult market environment with falling electricity prices and lower spreads between peak and off-peak since 2008, which makes it difficult for many hydro power plants to cover their fixed costs. The revised Swiss Energy Act, to be effective from 1 January 2018, includes some support policies to cover operational deficits and investments in new plants and extensions. However, funds are limited and measures are restricted for the time being. According to Silvia Banfi Frost, given that no significant changes for fossil fuel and CO2 prices can be expected, new regulatory approaches are needed to support the necessary investments in hydropower. As a possible way forward, she mentioned capacity mechanisms and flexible water fees.

Three Interactive Workshops
The plenary session was followed by three interactive workshops to discuss the hydropower situation in Switzerland as well as renewable support policies and capacity markets.

In the hydropower workshop, the discussion focused on what would happen if a utility in Switzerland went bankrupt or if its concession ran out. Participants learned that in both cases, the ownership of the plant would revert to the local community. However, reinvestment problems cannot be solved by bankruptcy, since local communities are less likely to find the necessary capital. Reducing costs through flexible water fees or generating income through capacity mechanisms therefore seem to be better solutions for making hydropower plants more profitable.

In the workshop on renewable energies, there was considerable debate, but also some measure of consensus that renewables deserve, and require, some level of explicit policy support. This is particularly important given current market arrangements that do not take sufficient account of the price of environmental externalities or spillovers from energy technology innovation. However, it was found to be essential to plan for a transition towards electricity market arrangements that require no such policy support, especially as the penetration of renewables continues to climb. There was general agreement that a range of policy support mechanisms were potentially useful, but that the details of their implementation were critical, and that policy development processes needed to be flexible, in terms of both specific mechanism settings as well as the choice of instruments, as technology and market arrangements evolved. It was widely agreed that technology neutrality might be possible at a particular policy level, but not more generally, given the implications of renewable energy integration and wider policy settings. Finally, participants also agreed that policy support should seek to “value” renewable energy costs and benefits in a broader sense, including location but also temporal characteristics and technology capabilities. Part of the challenge is that, typically, electricity market arrangements do not properly assign such costs and benefits appropriately, regardless if the market is based on fossil fuel or renewable generation. Tradeoffs between different policies in terms of technology costs and integration costs were quite possible, and great care was required in policy design, particularly given the uncertainties involved.

The workshop on capacity mechanisms started with three input presentations. Florian Zimmermann of the Karlsruhe Institute of Technology explained how the German capacity reserve scheme works. Yingqi Liu from the Environmental Change Institute at the University of Oxford discussed the newly established capacity market in Great Britain and Urs Meister, Head of Regulation and Market Analysis at BKW group, proposed a specific capacity market for Switzerland based on the British model and including a special auction for reliability options.

The ensuing discussion focused on making the three presented schemes work. Interestingly, the majority of the participants believed that some kind of capacity mechanism is needed to maintain an adequate level of production capacity in the future.

Final Panel
A final panel moderated by Dr. Bernd Kiefer summarized the main workshop findings, which led to a lively debate on capacity markets. While the panelists did not disputed the fact that seasonal fluctuations in consumption and production cause an import dependency for Switzerland, they could not agree on how big a problem this dependency really is. Since the risk of future import disruptions cannot be quantified, it was argued that it was reasonable in a situation of uncertainty to aim for robustness and that a national capacity mechanism could help to attain such an objective.

Contact persons: Prof. Regina Betz, PhD, and Prof. Reto Schleiniger, PhD

Questions from the audience to the Panel.

Questions from the audience to the Panel.

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