(Energy Systems - From Design To Management) Bianco, Vincenzo-Analysis of Energy Systems - Management, Planning, and policy-CRC Press (2017) PDF
(Energy Systems - From Design To Management) Bianco, Vincenzo-Analysis of Energy Systems - Management, Planning, and policy-CRC Press (2017) PDF
(Energy Systems - From Design To Management) Bianco, Vincenzo-Analysis of Energy Systems - Management, Planning, and policy-CRC Press (2017) PDF
Systems: Management,
Planning, and Policy
Series on
ENERGY SYSTEMS: FROM DESIGN TO MANAGEMENT
SERIES EDITOR
Vincenzo Bianco
Università di Genova, Italy
RECENT TITLES
Analysis of Energy Systems: Management, Planning and Policy
Vincenzo Bianco
Analysis of Energy
Systems: Management,
Planning, and Policy
Edited by
Vincenzo Bianco
CRC Press
Taylor & Francis Group
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Preface..................................................................................................................... vii
Contributors.............................................................................................................ix
5. Are Smart Grids the Holy Grail of Future Grid Mix? Economic,
Environmental, and Regulatory Opportunities for Smart Grid
Development in Northwestern Europe...................................................105
Michele Moretti, Nele Witters, Steven Van Passel, and
Sylvestre Njakou Djomo
v
vi Contents
Index......................................................................................................................299
Preface
vii
viii Preface
ix
x Contributors
Martín Sevilla-Jiménez
Department of Applied Economics
University of Alicante
Alicante, Spain
1
Systemic Interventions to Achieve
a Long-Term Energy Transition
toward Sustainability
CONTENTS
1.1 Multi-Dimensions of Energy System Transition........................................1
1.2 Complex Link between Energy and Development....................................3
1.3 Co-Benefits from the Energy Transition......................................................6
1.4 Integrated Policy Interventions....................................................................8
References................................................................................................................ 11
1
2 Analysis of Energy Systems: Management, Planning, and Policy
Second, in light of concerns with global climate change, clean energy tech-
nologies (in particular renewable energy technologies) need to become more
prominent in energy production and consumption. Economic growth based
on conventional fuels has historically been associated with increasing lev-
els of environmental degradation. While early industrializing countries
have managed to gradually reduce their environmental footprint, develop-
ing and emerging economies face massive challenges to decouple economic
growth from environmental degradation, especially as related to the scale
of investments and know-how. However, opportunities also exist; develop-
ing countries could leapfrog industrial development based on fossil fuels by
expanding their capabilities in renewables, thus paving the way to a sustain-
able growth pathway. Such a development process would require, however, a
change in the way we produce and consume energy, in the industrial process
itself, and the infrastructure for energy generation and distribution.
Third, as conventional energy systems are locked-in into existing infrastruc-
ture and power structures (Unruh 2000), institutional path dependencies
(e.g., subsidization of fossil fuels) need to be disrupted. The role of the state
in this process, in correcting market and coordination failures (Lütkenhorst
et al. 2014), is critical. By creating incentives for renewable energy deploy-
ment and energy efficiency adoption, a market for low-carbon energy can
be enabled, opening up opportunities for local value creation (through job
creation, knowledge, and research capabilities). A shift to low-carbon technol-
ogies can be, of course, costly in the face of other development requirements
(especially for developing and emerging economies), but the co-benefits that
can be captured in this process could compensate these costs in the medium
and long term.
Fourth, the main question, of course, is how to capture such benefits,
how to lock-out the energy system (and the development trajectory) from a
fossil fuel-based system and achieve a lock-in into a system based on low-
carbon energy technologies. The answer, I argue, lies within an integrated
policy approach and long-term planning, based on systemic learning and
experimentation. Policy integration across sectors leads to cooperation
between stakeholders with different interests and fosters consensus with
regard to the direction and sequencing of reforms. Integration can also
contribute to opening up new markets for renewable energy technologies
with applications in different sectors (e.g., water generation, agriculture, or
housing). Long-term planning needs to be based on a national vision for
sustainable development, which gives direction and purpose for various ini-
tiatives. The narrative framing such a vision should be elaborated by an alli-
ance of diverse stakeholders, representing the civil society, business sector,
and policy makers. Systematic learning and experimentation is an essential
part of this transition process. Such a systemic and deliberate transforma-
tion has almost no precedent in economic development history. Moreover,
policy solutions implemented in one context might not be suitable to another.
The example of the feed-in tariff (FIT) is a case in point; while this policy
Systemic Interventions to Achieve a Long-Term Energy Transition 3
TABLE 1.1
Typology of Market Failures
Imperfect Asymmetric Coordination
Competition Information Failures Public Goods Externalities
Market power Superior Obtainable Goods that are Deviation
resulting from information benefits are not nonexcludable between
nonatomistic of some being reaped and non-rival private and
structures and market actors due to lack of in consumption social costs and
collusive (mostly on coordinated benefits
behavior the supply action
side) Crucial for Most severe in Pervasive in
creating new case of climate environmental
and disrupting change pollution,
old techno- mitigation waste
economic suffering from management,
pathways “free riding” and natural
resource use
Source: Lütkenhorst, W. et al., Green industrial policy: Managing transformation under
uncertainty, DIE Discussion Paper 28/2014, German Development Institute, Bonn,
Germany, 2014.
lock-in, however, can result in political conflicts as vested interests might act
to prevent such transition (Lütkenhorst et al. 2014).
To facilitate the transition toward sustainable energy systems and to
overcome various market failures, governments have a particularly impor-
tant and challenging role to play (Altenburg and Pegels 2012). As opposed
to other sectors where the market would select the promising technologies
given a certain market size, in the case of clean energy technologies, the
government has to set the right incentives (by subsidizing future technolo-
gies and investing actively in R&D) to enable deployment and to attract
investment in this new sector. The government is also expected to identify
new and innovative policies/institutional frameworks that would sup-
port such “shift” in the energy system and to reduce coordination fail-
ures. For example, incentives need to target the systemic nature of the
energy sector, such that investments are made not only in roof-top solar
photovoltaic installations, but also in smart grids, new mobility concepts,
etc. Governments also need to be concerned with harmonizing national
and international policy frameworks (Altenburg and Pegels 2012) so that
national policy actions can benefit from the international governance
regimes that are constantly evolving in this area. As Mazzucato (2013)
argues, the government has always played a critical role in sharing major
transitions and directing investments in future technologies and systems.
The challenge in the case of energy system is that this process is much
more purposive, has a timeline, and is faced with a higher level of com-
plexity and synergies.
6 Analysis of Energy Systems: Management, Planning, and Policy
Socioeconomic effects of
large-scale renewable energy
FIGURE 1.1
Types of socioeconomic effects from large-scale deployment of renewable energy. (Adapted
from IRENA, The socio-economic benefits of solar and wind energy, EconValue, International
Renewable Energy Agency, Abu Dhabi, United Arab Emirates, 2014.)
Not surprisingly, the countries with the largest number of renewable energy
jobs were China, Brazil, the United States, India, Germany, Indonesia,
Japan, France, Bangladesh, and Colombia. Most jobs were generated by
investments in the solar photovoltaics technology (2.5 million), biofu-
els (1.8 million), wind energy (1 million), and biomass and biogas (ibid).
IRENA (2016) finds that doubling the share of renewables would increase
direct and indirect employment in the sector to 24.4 million by 2013. Most
of these jobs will be generated from fuel supply, installations, and equip-
ment manufacturing.
Overall, doubling the share of renewables in the global energy mix by
2030 would increase global GDP by up to 1.1% or $1.3 trillion. Welfare effects
would also increase by 3.7% with regard to economic effects from consump-
tion and investment, social impacts based on expenditure on health and
education, environmental effects measured as greenhouse gases (GHG)
emissions, and materials consumption.
Private and public investments in clean energy technologies (renew-
ables and energy efficiency) are also likely to create new sources of
dynamic competitiveness. As most jobs are likely to be created in installa-
tion and manufacturing of parts and components, developing and emerg-
ing economies could find opportunities for creating new industries and
entering global value chains for renewable energy technologies. Examples
such as China, India, and Brazil, but also lower middle-income countries
currently deploying renewables at large scale, such as Morocco, illustrate
these opportunities.
8 Analysis of Energy Systems: Management, Planning, and Policy
FIGURE 1.2
Types of policy tools available to promote low-carbon transitions. (Adapted from
Whitley, S., At cross purpose: Subsidies and climate compatible investment, Overseas
Development Institute, London, U.K., 2013.)
References
Altenburg, T. and T. Engelmaier (2013). Boosting solar investment with limited
subsidies: Rent management and policy learning in India. Energy Policy, 59:
866–874.
Altenburg, T. and A. Pegels (2012). Sustainability-oriented innovation systems—
Managing the green transformation. Innovation and Development, 2(1): 5–22.
Ayres, R.U. (2009). The Economic Growth Engine: How Energy and Work Drive Material
Prosperity. Edward Elgar, Cheltenham, U.K.
Blinderbacher, R. (2010). The Black Box of Government Learning: The Learning
Spiral—A Concept to Organize Learning in Government. The World Bank,
Washington, DC.
Carbonnier, G. and J. Grinevald (2011). Energy and development. International
Development Policy, Vol. 2, Graduate Institute of International and Development
Studies, Geneva, Switzerland.
Cottrell, F. (1955). Energy and Society: The Relation between Energy, Social Change and
Economic Development. McGraw-Hill Book Company, New York.
Fouquet, R. (2008). Heat, Power and Light: Revolutions in Energy Services. Edward Elgar,
Cheltenham, U.K.
GEA (2012). Global Energy Assessment – Toward a Sustainable Future. Cambridge
University Press, Cambridge, U.K.
Hallsworth, M. (2012). How complexity economics can improve government:
Rethinking policy actors, institutions and structures. In: Kay, J. et al. (eds.)
Complex New World: Translating New Economic Thinking into Public Policy. Institute
for Public Policy Research, London, U.K.
Hogarth, J.R., Haywood, C., and S. Whitley (2015). Low-carbon development in sub-
Saharan Africa: 20 cross-sector transitions. Overseas Development Institute,
London, U.K.
IEA (2010). World Energy Outlook 2010. International Energy Agency (IEA), Paris,
France. Available at: http://www.worldenergyoutlook.org/media/weo2010.
pdf.
IEA (2015). World Energy Outlook 2015. International Energy Agency (IEA), Paris,
France. Available at: http://www.worldenergyoutlook.org/weo2015/.
IIASA (2014). Energy poverty and development. In: Global Energy Assessment.
International Institute for Applied Systems Analysis (IIASA), Chapter 2.
Available at: http://www.iiasa.ac.at/web/home/research/Flagship-Projects/
Global-Energy-Assessment/Chapters_Home.en.html.
IPCC (2007). Fourth Assessment Report: Climate Change (AR4). Intergovernmental
Panel for Climate Change (IPCC). Available at: http://www.ipcc.ch/
publications_and_data/ar4/syr/en/contents.html.
IRENA (2014). The socio-economic benefits of solar and wind energy. EconValue.
International Renewable Energy Agency, Abu Dhabi, United Arab Emirates.
IRENA (2015). Renewable energy and jobs: Annual review 2015. International
Renewable Energy Agency, Abu Dhabi, United Arab Emirates.
IRENA (2016). Renewable energy benefits: Measuring the economics. International
Renewable Energy Agency (IRENA), Abu Dhabi, United Arab Emirates.
12 Analysis of Energy Systems: Management, Planning, and Policy
CONTENTS
2.1 Introduction................................................................................................... 13
2.2 Energy and Climate Planning: The Policy Framework........................... 14
2.3 Energy Awareness and Behavioral Aspects............................................. 16
2.4 Energy Planning Methods and Tools........................................................ 17
2.4.1 Concepts of Energy Planning......................................................... 19
2.4.2 Energy Models.................................................................................. 23
2.4.3 Tools for Local Administrators....................................................... 29
2.5 Citizens Engagement and Local Action Plans:
From Theory to Practice............................................................................... 33
2.5.1 Citizens Engagement........................................................................ 33
2.5.2 The Development of a Local Action Plan...................................... 37
2.6 Conclusive Remarks.....................................................................................42
References................................................................................................................43
2.1 Introduction
The transition toward a sustainable energy future, fostered by the recent
European directives, requires a huge deployment of renewable and energy
efficiency to reduce fossil fuels consumption in both energy production and
end use in order to respond to the urgent energy and climate challenges.
Moreover, energy and climate planning deal with interconnected systems
(energy supply, transport, households, etc.) requiring operational planning
tools capable to take into account multiple needs and constraints. In this
framework, local and regional authorities have a key role in the achievement
of the EU 2020 and 2030 Climate and Energy policy objectives, as they are
responsible for the definition and implementation of energy policies as well
as of infrastructures and services management. However, despite the large
number of decision support tools made available by the scientific community,
13
14 Analysis of Energy Systems: Management, Planning, and Policy
savings, renewable energy sources, and an efficient use of fossil fuels. These
interventions affect different sectors and local/regional competences, from
energy supply (e.g., heat and power generation) to the energy demand sec-
tors (e.g., residential and commercial buildings). This framework underlines
once more the crucial role played by local and regional authorities to achieve
the increasingly tight European targets as they act as “energy consumers and
service providers, planners, developers and regulators, advisors, motivators
and role models, energy producers and suppliers, buyers” (Energy Cities,
2013). To this issue several initiatives have been promoted to engage local
authorities, supporting information sharing and knowledge transfer through
networking, such as Climate Alliance (2016), the Covenant of Mayors (2016),
Energy Cities (2016), and the ManagEnergy Programme (2016), which involve
a large number of EU cities and communities.
In this framework, one of the most significant initiatives is the Covenant of
Mayors (2016), launched by the European Commission after the adoption, in
2008, of the 2020 EU Climate and Energy Package “to endorse and support
the efforts deployed by local authorities in the implementation of sustainable
energy policies” (Covenant of Mayors, 2016). In particular, signatories of the
Covenant of Mayors commit themselves to achieve at least a 20% reduction
of the overall CO2 emission (“absolute reduction” or “per capita reduction”)
in 2020 compared to a baseline year set by the local authority. The great suc-
cess achieved by this initiative has boosted, all around Europe, the devel-
opment of numerous Sustainable Energy Action Plans (SEAPs) inclusive of
energy balances and CO2 inventories covering key target sectors (buildings
and transport, usage of renewable energies, and combined heat and power
[CHP]). In particular, as of mid-May 2016, 5985 local authorities signed the
Covenant of Mayors and 5253 signatories had already submitted their SEAP
(Covenant of Mayors, 2016), bypassing the national level and setting climate
goals at the local level where the action plan is implemented (Kjær, 2012).
As an important follow-up, on March 19, 2014, the Covenant of Mayors
Initiative on Climate Change Adaptation, Mayors Adapt, was set up by the
European Commission in order to engage cities in taking action to adapt to
climate change (Mayors Adapt, 2016). In particular, the Mayor Adapt initia-
tive aims at increasing support for local activities through the provision of
a platform for engagement and networking. Cities signing up to the initia-
tive commit to contributing to the overall aim of the EU Adaptation Strategy
by developing a comprehensive local adaptation strategy or by integrating
adaptation measures to climate change into existing plans.
This framework led to a new integrated Covenant of Mayors for Climate &
Energy, launched by the European Commission on October 15, 2015, based
on three pillars: mitigation, adaptation and secure, and sustainable and
affordable energy (Covenant of Mayors, 2016). Endorsing a shared vision
for 2050, signatories commit themselves to reduce CO2 emissions by at least
40% by 2030 and to adopt an integrated approach to tackling mitigation and
adaptation to climate change. The political commitment of signatories is
16 Analysis of Energy Systems: Management, Planning, and Policy
on habits and routine,” “habits need to be broken down and changed by intro-
ducing new behaviours,” and that to this end “measures such as feedback
displays, better billing and micro-generation can help make people more
aware of their energy consumption.” However, as observed by Hertwich and
Katzmayr (2004) changing energy-consuming practices into energy-saving
behavior is a very slow process because these practices are inserted in every-
day routines. In recent years, there has been growing interest in a range of so-
called “soft policy” initiatives such as information campaigns and advisory
services that can make more attractive alternative choices that may deeply
influence people’s aspirations, motivations, and lifestyles.
A fundamental mean to promote energy awareness and improve energy
habits is thus to foster citizens engagement, making them aware of their con-
sumption and involving them in energy management practices. Educational
centers and public buildings are privileged places to engage people in energy-
saving actions in which they can evaluate energy consumption and energy
savings deriving from more “conscious” behaviors. This allows promoting
co-responsibility and disseminating a sustainability culture that may have a
greater and durable impact on the community.
The importance of consumers’ behaviors in promoting a sustainability
culture and achieving energy and climate targets is widely acknowledged
by the EU that in the framework of the former Intelligent Energy—Europe
(IEE) Programme supported several projects aimed at turning the concept of
“intelligent energy” in practice (IEE Programme, 2016).
The importance of a proactive role of private consumers as a fundamental
mean to unlock the consumption patterns and to speed up the transition
toward a low-carbon economy is also addressed by several calls on energy
efficiency in the current Horizon 2020 EU Programme. This background
underlines the importance of utilizing a scientific approach both to support
a significant change of collective behaviors toward a smart citizenship and to
estimate their impact on energy consumption, environment, and economy.
End-use
Supply Transformation Conversion Distribution
technologies
Oil Transport
Refinery
Pipeline
Coal
Renewables
Industry
FIGURE 2.1
Example of a reference energy system. (CNR-IMAA elaboration)
Energy and Climate Planning 19
a detailed picture of the energy supply and demand within their territories.
This lack of data affects the estimation of energy consumption by fuel (elec-
tricity, natural gas, diesel, etc.), by demand sector (residential, tertiary, trans-
port, agriculture, and industry), and by end-use (heating, cooling, etc.) with
a main concern for the consumption of publicly owned buildings (govern-
mental offices, schools, hospitals, etc.). As pointed out also by ICLEI—Local
Governments for Sustainability et al. (2009) “it is fairly easy to gather supply
information (how much oil, electricity, gas, etc. the city uses), but it is more
difficult to gather information on who uses what energy sources, how they
use these and why.”
To partially fill this gap, the Covenant of Mayors signatories are required to
submit as a first planning document for validation “a typical energy balance
in which the energy production and consumption in the considered munici-
pality are estimated in terms of Megawatt per hour (MWh)” (Lombardi et al.,
2014) together with a baseline emission inventory (BEI) that “quantifies the
amount of CO2 emitted due to energy consumption in the territory of the
local authority (i.e., Covenant Signatory) in the baseline year” (European
Union, 2010). The BEI can include also CH4 and N2O emissions if specific
measures to reduce these greenhouse gases are planned in the SEAP. This
prospect of final energy consumptions and greenhouse gas emissions is of
fundamental importance in order to describe the baseline situation, identify
the key interventions and opportunities to achieve the CO2 reduction target
by 2020 set by the local authorities, and monitor the progress toward this
objective. Based on the BEI, the SEAP describes how the Covenant signatory
will reach its commitment and defines concrete reduction measures, identi-
fying time frames and assigned responsibilities.
The next sections, mainly based on Salvia et al. (2016), will provide some
basic knowledge on energy planning to then focus on the main models and
tools that can support the overall planning process.
4. Scenario analysis
Definition and quantitative
specification of a list of
scenarios of interest
5. Implementation and Analysis of the reference
monitoring of the scenarios
energy plan Analysis of policy scenarios
Comparison of scenarios
results
Derivation of policy
recommendations
FIGURE 2.2
Overview of the main planning phases, according to the ALEP methodology. (Adapted from
Salvia, M. et al., The role of analytical tools in supporting sustainable local and regional
energy and climate policies, in: Proceedings of the International Conference ‘Smart Energy Regions’,
Cardiff, U.K., February 11 and 12, 2016, pp. 242–253, http://smart-er.eu/content/proceedings-
international-conference-smart-energy-regions-11th-and-12th-february-2016, Accessed May
20, 2016.)
Energy and Climate Planning 21
the reference energy system (from energy supply to end-use demands) is in-
depth characterized in terms of infrastructures, availability of present and
future technologies, energy needs by end-use, and environmental impacts.
Then the modeling environment is set up and calibrated on the local case
study. A scenario analysis is carried out to analyze alternative pathways of
development of the energy system in comparison with a reference scenario
(BaU, Business as Usual) in order to devise robust policy strategies. The lat-
est steps of a planning process deal with the implementation of the devised
strategies, identifying policy measures and incentives that allow translating
the model results into concrete actions, and monitoring the achievement of
the planning objectives with possible feedback on the planning strategies,
following an iterative approach.
Similarly, the EASY (Energy Actions and Systems for Mediterranean Local
Communities) methodology proposes a reference model to define Local
Sustainable Energy Strategies with a special focus on Mediterranean cities
(Easy IEE Project, 2009). They propose four macro stages, tightly interwoven
and complementary, all developed via a cross participation process. First, an
assessment stage focused on analyzing the entire energy system in the area
and all the related issues, concerns, and weaknesses (Figure 2.3). Second,
the planning stage in which the Local Action Plan for Sustainable Energy is
developed pointing out strategies, objectives, and priority actions for the local
energy system. Third, an implementation stage dealing with two main steps:
(1) the development of single projects that put in action the contents of the
local action plan and (2) the construction of a beginning scenario (minimal
measures, small investments, short timings, small number of local partici-
pants) to then arrive, through a series of scenarios, at a final one that is more
complex, integrates various projects, has long development times, needs more
financing, and requires many local participants. Finally, an evaluation and
reporting stage based on the use of a sustainability indicator system in order
to monitor the progressive application of the local action plan and evaluate
the results obtained so that local administrators can decide whether to adopt
corrective actions, review objectives, or restart a new energy planning cycle.
In energy planning, it is important to understand and optimize regional
and local energy systems, capturing the dynamics of their interrelated
components and assessing the decentralized and variable contributions of
Evaluation and
Assessment Planning Implementation
reporting
Analysis of the Local action plan Projects
Monitoring
energy system for sustainable Scenarios through indicators
energy
FIGURE 2.3
Conceptual framework for the assessment phase, according to the EASY approach.
22 Analysis of Energy Systems: Management, Planning, and Policy
Constraints:
Resource
availability
Policies
Calibration: Demand
Energy balance projection:
Emission Assumptions
inventories
Trends
Demand trend
Energy
system
model
Resources:
Scenarios:
Mining
Business as
usual Import
Policy Export
Technologies:
Repository
FIGURE 2.4
Main fields of data analysis in energy system modeling. (Adapted from Remme, U., Capacity
building through energy modelling and systems analysis, IEA Experts’ Group on R&D Priority-
Setting and Evaluation. Developments in Energy Education: Reducing Boundaries, Copenhagen,
Denmark, May 9–10, 2012.)
Energy and Climate Planning 23
2.4.2 Energy Models
In the latest decades, energy system analysis has become increasingly
important in policy-making (DeCarolis et al., 2012). International bodies
and research institutions have developed a wide range of energy models
properly designed to help decision-makers in deriving short-term energy
and climate strategies within long-term sustainable pathways. In particular,
model-based scenario analysis can be very effective in setting up an energy
system baseline and to explore “possible future technology deployment
pathways” (OECD/IEA, 2013).
Energy system models are typically designed to achieve a balance between
accuracy and manageability, their complexity varying from simulation-
based spreadsheet models to more elaborate cost optimization models
(DeCarolis et al., 2012). Although computer-based models to perform energy
system analysis “are being produced at an accelerated pace” (DeCarolis et al.,
2012), most of the available models are still unknown to municipalities and
local governments that rarely use them to support and assess their policy on
energy and climate.
In order to foster the adoption analytical decision support tools for energy
and climate planning by public administration, a classification of the wide-
spread available models that highlight their main features can be useful to
facilitate the selection of the best suited to the purpose (Van Beeck, 1999).
In the following, a non-exhaustive list of models is presented. Taking into
account the many examples of model classification that can be found in the
literature (e.g., Allegrini et al., 2015; Connolly et al., 2010; Keirstead et al., 2012;
Van Beeck, 1999), the scheme here proposed is based on the following eight
key features:
1.
Sectoral coverage: A first division can be made between comprehen-
sive models (that analyze the whole energy system from resources
supply to end uses, including all energy transformation processes
and taking into account the inter-sectoral relationships) and sectoral
models (analyzing a single energy sector, e.g., renewable energy
generation, district heating/cooling, transport, building energy sys-
tems) for a detailed look at the issue.
2.
Geographical coverage: Depending on the territorial scale of the anal-
ysis, the models can be defined as global (for world scale analysis)
regional (for sovra-national level of territorial government analysis,
e.g., Europe and North America); national (for country analysis), and
local (for local level analysis, e.g., country regions and more in gen-
eral provincial and territorial governments) (Van Beeck, 1999).
3.
Time horizon: That is, the time scale of the analysis: short term up to
5 years, medium term (3–15 years), and long term (50–100 years) (Van
Beeck, 1999).
24 Analysis of Energy Systems: Management, Planning, and Policy
4.
Traditional vs. open source code models.
5.
Data availability: Availability of a standard set of data input or a
model template.
6.
Routine: The mathematical background of the modeling approach
(e.g., simulation vs. optimization).
7.
Target users: The level of expertise required to set up and run the
model.
8.
Environmental issues: Modeling of environmental and/or climate
issues (e.g., by environmental indicators, emission caps, CO2 taxes,
and external costs).
Free download from www. national, and long term set of input data consultancies, and
energyplan.eu local (Startdata) policy-makers
Global Calculator Global Long term Yes Yes Simulation Researchers, NGO, Yes
Online tool available here: policy-makers,
http://uncached-site. and students
globalcalculator.org/
LEAP Global, Medium to No Yes. It provides a Simulation Government Yes
Free for developing world regional, long term “starter” data agencies,
and students worldwide national, and set at national academics,
Commercial for OECD local level nongovernmental
countries: http://www. organizations,
sei-us.org/leap consulting
companies, and
energy utilities
Markal/ TIMES Global, Medium to No Yes. It provides a Optimization Experienced energy Yes
Commercial: http://www. regional, long term test energy system modelers
iea-etsap.org national, and system (Utopia/
local TIMES DEMO)
(Continued)
25
26
DESSTINEE Entire energy Regional Medium to Yes Yes Simulation Experienced Yes
Free download from system with a (Europe) long term energy system
http://tinyurl. focus on the modelers
com/desstinee electricity
system
DIETER Power system National Annual, with Yes Yes Optimization Experienced No
Free download from a long-term energy system
www.diw.de/de/ perspective modelers
diw_01.c.508843.
de/forschung_
beratung/projekte/
projekt_homepages/
dieter/dieter.html
EMPS Power systems Regional Short to long No Yes Simulation Experienced Yes
Commercial: with a focus on (e.g., Nordic term Optimization energy system
https://www. hydro power countries) modelers
sintef.no/en/
software/emps-
multi-area-power-
market-simulator/
(Continued)
27
28
TABLE 2.3
Overview of the Main Decision Support Tools for Energy and Climate Planning
GHG and
Analyzed Geographical Time Open Air
Model Name Sectors Coverage Horizon Source Database Routine Target Users Emissions
2050 Calculator Entire energy Global, and Medium to No Yes Simulation Researchers, Yes
1. Web-tool version system national long term policy-makers,
2. Simplified My2050 citizens, and
simulation students
3. Full Excel version
Free download from
www.decc.gov.
uk/2050
E2 tool Residential and Local Medium to No Yes Simulation Policy-makers Yes
Can be required to commercial long term
Ramona Mattix— buildings,
[email protected] personal vehicle
or Ron and commercial
Macdonald—ron. transportation,
macdonald@ solid waste and
stantec.com agriculture
(Continued)
Analysis of Energy Systems: Management, Planning, and Policy
TABLE 2.3 (Continued)
Overview of the Main Decision Support Tools for Energy and Climate Planning
GHG and
Analyzed Geographical Time Open Air
Model Name Sectors Coverage Horizon Source Database Routine Target Users Emissions
ICLEI tool Municipal Local Annual No Yes (average Simulation Consultancies Yes
Download after the buildings, (municipal) national data and
approval of the vehicle fleet, and emission policy-makers
ICLEI from www. public lighting, factors)
iclei-europe.org/ residential,
Energy and Climate Planning
ccp/ commercial,
basic-climate-toolkit industry,
transport,
community
waste, and
agriculture
Swiss-Energyscope Entire energy National Medium to No Yes Simulation Policy-makers, Yes
Free download from system long term citizens and
www.energyscope. (Switzerland) students
ch/calculateur-
energetique/
TRACE Interventions of Local Short No Yes— Simulation Policy-makers No
Free download from energy (municipal) “Playbook”
www.esmap.org/ efficiency in of tried and
node/add/ transport, tested EE
tool-download buildings, water measures
and wastewater,
public lighting,
power and heat,
and solid waste
31
32 Analysis of Energy Systems: Management, Planning, and Policy
to avoid the use of specialized data sets. Key data requirements for building
the base scenario include statistics on population and dwellings, energy bal-
ances, emissions inventories, and population growth forecasts.
The ICLEI Europe Basic Climate toolkit (ICLEI, 2016) allows collecting and
systematizing the main energy data and provides GHG emission inventories
as final output. These inventories can help local governments to understand
the emission paths and to individuate the key priority areas and the achieve-
ments of different reduction actions. This tool is utilized by many of the sig-
natories of the Covenant of Mayors to support the elaboration of Sustainable
Energy Action Plans. It is made up by Excel spreadsheets that are filled in
with two categories of data: local government operations and community
inventory. The first category takes into account energy consumption of
municipal buildings, vehicle fleet, public lighting, water and sewage, and
waste and local energy production, while the other category considers the
energy consumption in residential, commercial, industry, transport, com-
munity waste, and agriculture sectors. An ICLEI add-in tool was also devel-
oped in the frameworks of the South East Europe Project REE RE-SEEties
(SEE Programme) (2016) to support local administrations in the calculation
of the missing input parameters utilizing proxy variables and information
made available by regional or national statistics (Salvia et al., 2014, 2015).
The Swiss-Energyscope (Moret et al., 2014) is an online platform developed
by the Energy Center of EPFL (Ecole Politecnique Federale de Lausanne)
with the aim to support Swiss decision-makers by improving their under-
standing of the energy system (Gironès et al., 2015). The online platform
mainly consists of an energy calculator, enabling users to evaluate the effect
of a list of possible choices on the energy future of the country. In particular,
it shows the effect of the policy and investment decisions on final energy
consumption, total cost, and environmental impact. The modeling approach
is currently implemented within an online energy calculator for the case of
Switzerland; nevertheless, it can be easily adapted to any large-scale energy
system. An online wiki and a MOOC (Massive Open Online Course) allow
interested users to acquire a basic knowledge on the energy system and to
be guided through the learning process and the use of the calculator itself.
The Tool for Rapid Assessment of City Energy—TRACE (TRACE, 2016) is a
decision-support system implemented to assist local administrators in iden-
tifying opportunities to increase energy efficiency. TRACE was developed by
the Energy Sector Management Assistance Program (ESMAP), a global tech-
nical assistance program administered by the World Bank, and was designed
to involve city decision-makers in the deployment of energy efficiency (EE)
measures. TRACE focuses on the municipal sectors with the highest energy
use: passenger transport, municipal buildings, water and wastewater, public
lighting, power and heat, and solid waste. It targets under-performing sec-
tors, evaluates improvement and cost-saving potential, and helps prioritiz-
ing actions for EE interventions. It has been used by 27 cities in Africa, Asia,
Europe, Central Asia, and Latin America.
Energy and Climate Planning 33
(Continued)
36
TABLE 2.4 (Continued)
Stakeholder Overview by Category
Stakeholder Category Interests Involvement Instruments Envisaged Outcomes
Financial Institutions Economic development Support to overcome the market barriers New business models
Business, industries, trade Networking Thematic interviews Capacity building
organizations (category Consultation events (surveys, World Café, etc.)
associations, consortia, Web-based tools for information/participation
chamber of commerce,
etc.)
Utility suppliers (i.e., Ensure reliable, affordable, Support to overcome the market barriers Collective purchasing
electricity, heat, other and clean energy supply Smart meter campaigns Optimal resource
energy services) Networking Certification schemes management
Energy labeling Capacity building
Thematic workshops
Thematic interviews
Consultation events (surveys, World Café, etc.)
Dissemination events (e.g., conferences, fairs, energy labs)
Web-based tools for information/participation
NGOs/environmental/ Civic engagement Smart meter campaigns Learning-by-doing
consumer associations Energy-environmental Information campaigns Smart community
awareness Thematic workshops Capacity building
Networking Thematic interviews
Consultation events (surveys, World Café, etc.)
Dissemination events (e.g., conferences, fairs, energy labs)
Web-based tools for information/dissemination/participation
Private citizens Cost-effective energy services Smart meter campaigns Learning-by-doing
Improving quality of life Information campaigns Increased awareness
Health and environmental Dissemination events (e.g., conferences, fairs, energy labs) Prosumers vs.
concern Living labs consumers
Consultation events (surveys, World Café, etc.) Smart citizenship
Web-based tools for interactive participation
Analysis of Energy Systems: Management, Planning, and Policy
Energy and Climate Planning 37
Action lines
Communication
FIGURE 2.5
Reference structure of the planning process, according to the RENERGY methodology.
TABLE 2.5
Main Steps of Strategic Planning
Planning Steps Objectives Expected Outcomes Examples
Vision and Define overarching objectives and Identification of Promote the adhesion of the community to the covenant of
objectives future vision both at community • Aspirations and role of the mayors.
level and in a wider context. community in EE and RES Be renowned as a thriving, low-carbon community by 2020
deployment. Boost EE and RES in order to contribute to climate
• Achievable overall mitigation.
objectives at different time Provide a healthy and vibrant environment for citizens
scales. and businesses.
Energy and Climate Planning
Self-assessment Characterize the study area. Self-assessment reports SWOT Commit the community to go beyond the 2020 objectives
analysis and PEST analysis. of the COM set by the EU.
Identify strategic objectives and Definition of feasible targets Reduce carbon emissions by 40% within 2015 and by 40%
targets for EE and RES increase. according to the initial within 2020.
conditions.
Strategic Set clear aims and objectives in List and prioritization of aims Aim 1: Demonstrate the relevance of a holistic, integrative,
overview order to address the challenges and corresponding objectives. bottom-up process to take local community needs,
faced in achieving the vision. demands, cultural, and infrastructural characteristics into
account.
Objective 1: Engage key organizations with measurable
carbon saving potential and active community networks
to create local community exemplars.
Aim 2: Emphasize the crucial role of the energy business
sector in RES uptake and EE management.
Objective 2: Assist local business to reduce energy costs,
reduce carbon emissions, and safeguard employment.
Key Address: List and prioritization of Support public and private investment in low-carbon
interventions • The strategic and territorial interventions. growth
challenges. Enhance stakeholder participation and cooperation
• The vision, aims, and Promote networking in order to promote energy and
objectives of the community. carbon saving and encourage investment in RES.
39
40
TABLE 2.6
Main Steps of Implementation and Monitoring
Planning Steps Objectives Expected Outcomes Examples
Action lines Translate strategy, aims, and List and prioritization of strategic lines and SL1 Policy and governance
objectives into results. corresponding actions. A1.1: Undertake a study to identify
energy demands and the best-
suited renewable technologies for
energy generation in the local area.
A1.2: Create a repository of
comparative data.
SL2 Market uptake
A2.1 Support businesses/households
to reduce their energy requirements
A2.3 Develop public/community/
private partnerships to enable a
wider uptake of RES and EE.
SL3 Community engagement
A3.1 Engage communities to act as
exemplars of bottom-up
engagement using existing active
networks.
A3.2 Engage schools to play a central
role in community-led RES schemes.
Financial analysis Assess the feasibility and cost Identification of the financial constraints. • Grants to climate protection and
effectiveness of the proposed Identification of the potential funding energy projects in strategic areas.
interventions. streams and links with ERDF programs. • Economic regeneration
Identification of interventions, which programs.
address able to pay, private sector potential,
as well as energy poverty challenges.
(Continued)
Analysis of Energy Systems: Management, Planning, and Policy
TABLE 2.6 (Continued)
Main Steps of Implementation and Monitoring
Planning Steps Objectives Expected Outcomes Examples
Policy recommendations Provide a policy framework to Critical analysis of existing policies to • Thematic action plans
Energy and Climate Planning
accommodate the vision, strategy, review and/or extend them • Implementation of National
aims, and objectives and to Reference best practice guide on policy. Renewable Energy Action Plan
support specific actions. (NREAP) on the local level.
Communication Inform and engage actively the • Identification of the methodology and • Networks for SME.
community. the key elements for community • Information campaigns for
Publicize the benefits. engagement. householders.
• Local action plans owned and • Energy labs.
implemented by communities.
Monitoring Verify the effectiveness of actions • Improved understanding of the Development and approval of a
through benchmarking, political planning strategy impacts climate change strategy.
scrutiny, and community reporting. • Review and remedial actions
Provide feedbacks for a redefinition
of aims and objectives and an
improvement of actions.
41
42 Analysis of Energy Systems: Management, Planning, and Policy
2.6 Conclusive Remarks
Local and regional authorities are undoubtedly assuming a more and more
strategic role in the achievement of national and international energy and
climate commitments that call for strategic decision-making. In this frame-
work, it should be underlined that improving the performances of energy
systems is a key issue to ensure a future energy and environmental sustain-
ability. In particular, the “development and demonstration of holistic system
optimization at local/urban level (Smart Cities and Communities)” repre-
sents one of the key themes of the European Commission’s strategic energy
plan (C 6317 final, 2015).
Decision-makers are thus asked to define policies and roadmaps to face
both the energy and environmental challenges and to deploy huge infra-
structure investments in a scenario of large future uncertainty (DeCarolis
et al., 2012).
This requires a systematic use of analytical tools and procedures in pol-
icy design and implementation to provide a benchmarking scenario on
which the effectiveness of policies and measures can be assessed and the
investments can be carefully planned, according to a backcasting planning
approach.
Nevertheless, a multilayer and often not integrated decision-making pro-
cess, the lack of common protocols, the general complexity of energy models,
the lack of data about sectoral consumption, and energy flows across the sup-
ply and end-use demand sectors prevent the use of validated methodologies
and tools in municipal and regional energy planning. In addition to that, it
is important to underline that the key role of stakeholders in responding to
the sustainable development challenges cannot be fulfilled by adopting only
a top-down policy, unable to seize their needs and aspirations.
A structured community engagement is thus required since the begin-
ning of any process and across all its crucial phases to identify and address
social issues and concerns as well as to generate shared innovative solutions.
The key issue is, therefore, to foster a transition toward local and regional
sustainable energy systems in which “soft measures are an essential lever
for the implementation of hard measures” (Energy Cities, 2012) in perfect
agreement with the smart cities and communities paradigm. A strategic
vision of energy-environmental planning should therefore counterbalance
a top-down policy approach with a bottom-up methodology for stakeholder
engagement supporting networking and knowledge exchange between all
the actors involved in the planning processes. This results in a stronger col-
laboration between the research community and local authorities that boost
the opportunities to participate in inter-regional and transnational coopera-
tion initiatives triggering collective behavioral changes through the sharing
of experiences and good practices.
Energy and Climate Planning 43
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Energy and Climate Planning 47
CONTENTS
3.1 Introduction................................................................................................... 49
3.2 Research on Energy Service........................................................................ 50
3.3 Role of Oilfield Service Companies in Russia.......................................... 52
3.4 Discussion......................................................................................................65
3.5 Conclusion..................................................................................................... 67
Acknowledgment................................................................................................... 68
References................................................................................................................ 68
3.1 Introduction
There is a double interplay of the innovation potential of a company, its busi-
ness model, and the structure of the market that is rarely caught in research-
ers’ focus. This interrelation is of importance to companies working in
various segments of the energy sector. In this chapter, we review multiple
activities launched by the Russian authorities to foster innovation in tech-
nological sectors of the Russian economy. The activities centered on merg-
ers and acquisitions are a major part of this framework in both public and
private organizations.
This chapter shows that mergers and acquisitions per se have little influ-
ence on the organization’s innovation potential. At the same time, a proper
strategy based on the clear-cut competitive advantage and the related spe-
cialization is a more productive path to foster innovation in an energy com-
pany. Such a specialization may be later followed by a series of mergers and
acquisitions. However, if the initial step was ignored or neglected, the subse-
quent mergers cannot trigger corporate innovation. This thesis is illustrated
with three cases (Eurasia Drilling Company or EDC, TGT, and Rosgeologiya)
described in the following text.
49
50 Analysis of Energy Systems: Management, Planning, and Policy
services and production, industrial goods, and residential sector for the
performance contractors). The energy sector covers only a part of activities
related to energy transportation, conversion, and consumption. Negative
environmental externalities resulting from these processes depend on orga-
nizations having no competence in energy technology and often attributing
low priority to energy efficiency and conservation (Fais et al., 2016). Energy
service companies are expected to bring professionalism, efficiency, and
rigor to the field where energy efficiency would have been paid much less
attention otherwise.
providers, and independent Russian service companies. All three differ from
energy performance contractors in several important aspects. Oilfield ser-
vice companies work generally in the same area as their clients, and the divi-
sion of labor between petroleum companies and oilfield service companies
depends on the competition between the independent service contractors
and in-house service centers.
Oil and gas industry is the most significant sector of the Russian economy.
It accounts for the largest share of the Russian budget and the income of
the Russian economy in general. Therefore, it is of interest to investigate the
mechanisms, problems, barriers, and opportunity windows within this field.
Twenty-five years ago, the Russian oil and gas industry inherited a giant but
outdated and inefficient Soviet petroleum industry that required restructur-
ing and modernization, which proved to be a long and painful process. The
Russian oilfield services inherited many features from the petroleum indus-
try and its history. Just as the petroleum industry in general, the oilfield
service market in Russia is highly monopolized. For instance, in Russia’s
onshore drilling three service companies dominate the market: EDC (22.3%),
SurgutNG (21%), and RN-Burenie (17%).
The landscape of Russian oilfield services depends on the state of the
Russian oil and gas business in general. As major oil and gas producing
provinces have long entered into their maturity stage, the production has
decline. Infill drilling aimed to sustain the production on the depleted fields
results in similarly declining production per meter drilled in Russia. The
currently popular technology of hydraulic fracturing cannot change this
trend.
One could expect a gradual shift of field service activities toward green-
field regions, but the glut in the international oil market and the price gulp
of 2014 and 2015 slowed down this trend. Until 2014, oilfield service market
analysts expected that after a decade of growth, when the Russian onshore
market had risen from 10 to more than 20 million m drilled, the growth
would slow down but continue. However, the situation in 2016 is much more
uncertain. The oil market glut persists, the price did not return to the level
of 2013 (as the Russian service companies were expecting), and the major
Russian oil and gas companies have cut down their investment programs.
Finally, given the federal budget constraints, there is a persistent risk that tax
load on the petroleum industry will increase. These factors affect the expec-
tations of the oilfield service companies.
The characteristics of drilling operations in Russia show that onshore
well construction and workover was at the level of 15.5 bln in 2015 and was
expected to grow to 27.6 bln by 2020. Drilling volumes in Russia are also
expected to grow from 22.6 mln m in 2015 to 30.6 mln m in 2020. The aver-
age depth of wells in Russia has increased from 2410 to 3185 m over a decade
(2005–2014) (Eurasia Drilling Company Ltd., 2015b). These figures testify
to the increasing complexity of oilfield services and the advanced compe-
tences required from service companies. The aging Russian fleet of drilling
54 Analysis of Energy Systems: Management, Planning, and Policy
($22 bln). The subsequent devaluation of the Russian currency did not change
its ruble volume but sharply cut the volume in U.S. dollars. It became a prob-
lem for the clients of international oilfield service providers, while petro-
leum companies could benefit from the ruble devaluation and only enjoyed
11% in ruble revenues (Deloitte, 2015). In 2015 it shrank by 10%, and in 2016
one can expect a further decline.
In the long run, the international oilfield service market is expected to
grow because hydrocarbon motor fuels will be consumed in comparable
quantities, but simply structured deposits will be largely depleted. Thus, oil-
field services will generally become more and more in demand. In Russia, on
the contrary, a reversal of the described market trends seems highly unlikely
in the short run and, therefore, oilfield services may become a bottleneck
hindering the development of the Russian petroleum industry. On the other
hand, it is highly likely that the crisis will cause restructuring of the Russian
oilfield service market. Generally, one can expect weakening the positions
of small independent oilfield service providers, whose market share will
be taken by the in-house service providers. The Russian petroleum giants
will try to acquire international oilfield service assets, the takeover of which
started approximately a year ago with Rosneft acquiring Weatherford sub-
sidiaries. The number of such takeovers will be rather limited because of
exhausted financial resources of the Russian petroleum companies.
The problem of externalities is another substantial difference between
energy performance contractors and oilfield service companies. The former
generally increase energy efficiency and promote energy saving, while the
latter only intensify extraction of hydrocarbons that are later processed and
used with certain degree of efficiency. In some cases, extraction may become
more energy efficient. For example, a steam for SAGD (steam-assisted gravity
drainage) (Banerjee, 2012) may be produced using a heat recovery steam gen-
erator of a local combined heat and power source. But generally speaking,
extraction of hydrocarbons affects the environment. Thus, while energy ser-
vice is aimed at developing energy conversion and transport processes that
generally benefits the environment, oilfield operations may be performed
more effectively, but it does not necessarily make them less harmful. This
interference has been acknowledged in research (Reis, 1996).
* The growth of service companies may be explained not by increasing specialization, but by
the rise of national oil companies. National oil companies possess petroleum reserves but
lack access to modern E&P Technologies and, therefore, have demand for oilfield service free
from property rights. Oilfield service companies met this demand.
58 Analysis of Energy Systems: Management, Planning, and Policy
and the merger and acquisition activity continued. After the 2-year-long
slump of 2008 and 2009 caused by the economic crisis, the growth contin-
ued: the company’s share of the market neared one-third, while the total
annual length drilled exceeded 6,000,000 m.
Given its close business relations with Lukoil, it was a challenge for
the company to diversify its clients in order to avoid a large bargaining
power of Lukoil as the major consumer of oilfield services provided by
the company. In 2008, EDC started to work with Rosneft in Vankor field,
which was followed by a deal with TNK-BP (in 2010) and GazpromNeft
(in 2014). Despite its long-term efforts aimed at the diversification of
the client pool, Lukoil still remains EDC’s major client. In 2015, Lukoil
accounted for 56% of the total length drilled by EDC, and a year earlier its
share was close to two-thirds of the total length drilled. In fact, it is only
recently that the diversification strategy has yielded noticeable results,
as GazpromNeft’s share has risen to one-third, and it has become EDC’s
second largest client. At the same time, Rosneft’s share even decreased
slightly, so the general trend is still mixed. As a result, a drop in drilling
activity of Lukoil in 2015, as compared with 2014, still influenced the total
length drilled of EDC, which also dropped by 13% (first half of 2015 to
first half of 2014). Therefore, the diversification was a forced move and is
far from being achieved.
There are several conclusions concerning the growth strategy of EDC.
First, the oilfield service market in Russia has been stagnating recently,
and given the present oil price trends it will likely stagnate in the near
future or longer. There are also high chances that the oilfield market in
Russia will shrink, and this decline will hit small oilfield companies in
the first place. EDC’s growth strategy will also likely be affected by the
harsh market conditions.
At present, the potential for any further extension has been largely
exhausted. Unlike many smaller companies, EDC has the capacity to
increase its efficiency, including efficiency of engineering operations and
management efficiency. One of the problems the company is facing is the
age of the rig fleet: EDC accumulated a considerable amount of old rigs as
a result of its acquisition strategy. The dip in the distribution at the range
of middle-age rigs shows that only a few dozen rigs were added to the
fleet during the “Lukoil period” of the company’s history, which may be
explained by the unfavorable market situation (Figure 3.1).
According to the corporate strategy, EDC has lately been paying con-
siderable attention to the development of its offshore division specializ-
ing in shallow water drilling. Shallow water reserves account for about
15% of the world oil production. Their average CAPEX per barrel is equal
to the CAPEX of expensive traditional onshore reserves, which presently
makes these deposits more attractive than deepwater and especially tight
oilfields. The cost of tight oil and deepwater projects is a strong incentive
Energy Innovation Policy: Fostering Energy Service Companies 59
26%
Less than 5
43% 5–10 years
10–15 years
15–20 years
More than 20 years
17%
7% 7%
FIGURE 3.1
Age of EDC’s rig fleet. (From Eurasia Drilling Company Ltd., EDC land drilling fleet, 2014,
available at: http://www.eurasiadrilling.com/operations/rig-fleet/edc-land-drilling-fleet/, last
accessed June 7, 2016.)
Summary by category
100
Category Saudi Arabia Russia USA
Production, MMbpd 11.4 10.9 11.7
Wells drilled, ×1000 0.399 8.688 35.699
Total length drilled, mln m 0.914 25.30 90.52
75
50
25
0
Production, MMbpd Wells drilled, ×1000 Total length drilled, mln m
FIGURE 3.2
Drilling volumes that provided the market share of hydrocarbons in 2014 (the number of
wells includes sidetracks). (From Kibsgaard, P., Scotia Howard Weil 2015 Energy Conference,
New Orleans, LA, Schlumberger, March 23, 2015, available at: http://www.slb.com/news/
present at ion s/2015/~/med ia/Fi les/news/present at ion s/2015/K ibsgaa rd _ S cot ia _
Weil_03232015.ashx, last accessed June 7, 2016).
This logic may not work for Russian technological start-ups. In the
generally hostile Russian business environment, where start-ups have to
break through multiple financial, administrative, and market barriers,
establishing a totally new technological company working for foreign
clients may be as difficult as establishing business relationships with
residents. At the same time, a company can benefit from the devaluated
national currency and lower HR costs.
TGT is an example of such a company. It offers services based on the
proprietary logging solutions. The company was founded in 1998, and
thus, unlike many other Russian oilfield services and petroleum com-
panies, it did not inherit shabby assets of the Soviet petroleum industry.
The company did not have to invest in the renovation or modernization
of old equipment and instead can build its organizational structure and
technological processes based on best available solutions. Afterward,
having established business abroad, such start-ups may shift their focus
back to the Russian market and leverage their operational practices based
on the acquired understanding of both modern technology and Russian
specifics.
The strategy of TGT (predetermined by its specialization) was success-
ful for several reasons: its area did not involve considerable investments in
industrial production and depended more on R&D-intensive analysis and
computer modeling. This specialization could leverage the high qualifica-
tion of R&D engineers in Kazan (the hometown) and avoid the problems
related to industrial production and operation of heavy E&P machinery,
such as drilling rigs. The logging-based business model of the company
somewhat resembles a highly mobile IT business: it is not attached to capital-
intensive infrastructure (pipelines and refineries) or equipment (rigs), and a
significant part of its capitalization is associated with the accumulated engi-
neering background and know-how of the staff. The fact that the company
could relocate to United Arab Emirates (UAE) demonstrates this trait.
Having established the core logging service, the company contin-
ued R&D activity and presented advanced logging tools, such as high-
precision temperature logging, and a number of adjacent services (leak
detection, corrosion assessment, etc.); the company started to develop
reservoir simulation tools relying on the validation methods based on
the well data acquisition tools offered by the company earlier. It is the
classical expansion strategy of a company leveraging its core compe-
tences to diversify its business.
Having once invested in research, IT infrastructure, and software
design, the company does not have to bear those costs fully in the future
(except for some maintenance and modernization expenditures): with
fully functional software and trained personnel, the marginal cost of
working out an additional hydrodynamic model is close to zero. This
does not entirely protect the company from unpredictable fluctuations
of the oilfield service market inflicted by the unstable trends in the oil
62 Analysis of Energy Systems: Management, Planning, and Policy
business, but it creates a much safer business environment than the one
faced by many drilling contractors of similar size in present Russia.
Despite seeming straightforwardness, mathematical modeling underly-
ing numerical simulations of petroleum reservoirs is a complicated process
that requires both hard and soft skills. The R&D team ought to have suf-
ficient mathematical and computer qualifications necessary to work with
mathematical models, but the set of equations itself is by no means special.
It is the specific relevant properties of a reservoir (physical properties, ini-
tial and boundary conditions, etc.) that make a model unique. The quality
of a computer model, automatic control system, or database resulting from
the mathematical model depend a lot on the skills and competences in
retaining required phenomena (formation damage, fissuring, wetting for
the chemicals used, etc.) while still complying with limited computational
complexity and reasonable validations procedure. Such R&D skills, once
acquired, create an entry barrier protecting the developer from potential
competition. Although the quality of Russian education in natural sciences
has declined over the past decades, the history of TGT shows that there are
still educated and experienced professionals that are able to support the
development of a newly established engineering start-up.
* Bertha Rogers went through sedimentary formations, while Kola Superdeep cut through the
Baltic shield.
64 Analysis of Energy Systems: Management, Planning, and Policy
3.4 Discussion
The three cases described in this chapter (EDC, TGT, and Rosgeologiya)
demonstrate three possible strategies of Russian energy companies:
Of the three mentioned cases, the TGT case seems the most successful from
the point of view of innovation potential. The company developed a number
of high-tech products and services that are currently offered to Russian and
other customers abroad. These products and services are based on the pro-
prietary technology that is undoubtedly innovative.
Merger and acquisition is a popular strategy in Russia, and the energy sec-
tor is not an exception. It has been already shown that it may not be successful
in some cases (Kovalev and Proskuryakova, 2014). The case of Rosgeologiya
testifies to the same thesis. Merging organizations lagging behind in techno-
logical development may streamline business processes and eliminate some
inefficiencies in management or procurement, but merger is not equivalent
to coming up to the modern of technological development. The evidence
from the history of EDC shows that mergers and acquisitions work better if
it starts with a company that has already been optimized and follows mod-
ern standards of efficiency.
The history of TGT points to the importance of specialization, as in the
case of EDC. It is difficult to build a modern industry from scratch and enter
a market that had already been divided by internationally recognized ser-
vice providers. This barrier becomes less demanding in the case of a specific
market niche where a start-up may have a definitive competitive (or com-
parative) advantage. The need of a specific competitive advantage leads to
further specialization within a market niche where capitalizing on a unique
technological advantage opens access to foreign markets and, therefore, an
extended client base.
The filter of competitive market, once passed, guarantees that the com-
pany’s core competence can become a basis for an expansion (if the company
chooses the expansion strategy). Energy performance contracting in Russia
is another example of a competitive market where companies constantly
have to go through reality check.
The history of energy performance contracts in Russia is rather short. The
regulatory environment for these services was established with the adoption
of the Federal Law No. 261 dated November 23, 2009, “On Energy Saving
and Development of Energy Efficiency and Amendments to the Russian
66 Analysis of Energy Systems: Management, Planning, and Policy
future, but at present the EPC market in Russia is still underdeveloped and
competition is limited. The participation of foreign companies in the EPC
market (so important in oilfield services, as shown in the following text) is
moderate. There are Russian branches of international service companies,
such as EDF Fenice, but their presence does not create intense competition.
As a result, energy performance contracting is slowly taking off in Russia.*
3.5 Conclusion
It was shown that mergers and acquisitions work differently depending
on the maturity and efficiency of companies. A merger or acquisition can
potentially provide significant benefits for a cost-efficient business, but it
may also result in a significant decrease of efficiency if the basic level was
suboptimal.
In the Russian oilfield service sector and petroleum exploration, the situa-
tion is far from serene, but companies demonstrate contrasting trends. Those
having chosen to specialize within the sphere of their competitive advantage
naturally become innovative. Companies or organizations that have been
merged instead of optimization get stuck with accumulated inefficiency. In
some cases, uniting patchy assets in a larger company could potentially lead
to an advantageous position (at least in the local market), but it does not spur
innovation. More often the resulting corporations try to create an entry bar-
rier for other companies or call for state support (quotas, tax cuts, etc.).
The reality check of competitive advantage implies that the company faces
competition. The TGT case shows that companies surviving in the com-
petition tend to prioritize innovation. This testifies to the pressing need to
restructure the Russian oil and gas industry. Ideally, the reform should bring
more competition into the industry and incentivize companies to develop
new efficient technologies. This restructuring should ideally have been con-
ducted during a more favorable period when soaring petroleum prices could
attract investors. That opportunity was lost. It is also obvious that various
types of subsidies to the industry do not work toward this cause because
without restructuring they compensate for management inefficiency of
Russian energy companies.
Basic energy research in the interest of the entire sector is necessary
and some of it has been planned by several Russian Technology Platforms
(Proskuryakova et al., 2016), but as in the case with subsidies the effect may be
moderate. Restructuring is a painful process, especially when it is conducted
* Official estimates and forecasts are not always accurate: in 2011 the official forecasts of
the EPC market were RUB 500 bln (Voskresensky, 2011), but the actual volume in 2015 was
around 1% of this amount (RBC, 2015).
68 Analysis of Energy Systems: Management, Planning, and Policy
in harsh market conditions that do not seem to change soon, but it appears
more and more necessary for the Russian energy sector.
Acknowledgment
This chapter was prepared within the framework of the Basic Research
Program at the National Research University Higher School of Economics
(HSE) and supported within the framework of a subsidy by the Russian
Academic Excellence Project “5-100.”
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4
Competitiveness of Distributed
Generation of Heat, Power, and Cooling:
System Design and Policy Overview
Konstantinos C. Kavvadias
CONTENTS
4.1 Introduction................................................................................................... 74
4.1.1 Concept and Definition.................................................................... 74
4.1.2 Centralized versus Distributed Generation of Heat,
Power, and Cooling.......................................................................... 75
4.1.3 Benefits of Distributed Generation................................................. 76
4.1.3.1 Technical.............................................................................. 76
4.1.3.2 Economic.............................................................................77
4.1.3.3 Environmental....................................................................77
4.2 Distributed Generation Technologies........................................................77
4.2.1 Distributed Combined Generation (Autoproducers)...................77
4.2.1.1 System Design.................................................................... 78
4.2.1.2 Selection and Design Considerations of a
Distributed Cogeneration Plant....................................... 81
4.2.1.3 Operation Strategies.......................................................... 82
4.2.1.4 Competitiveness of Distributed Generation.................. 82
4.2.1.5 Theoretical Formulation of Competitiveness.................84
4.2.1.6 Analysis of Spark Spread Sensitivity on Various
Characteristics.................................................................... 87
4.2.2 Renewable Distributed Generation................................................ 93
4.2.2.1 Competitiveness in Photovoltaics.................................... 94
4.3 Overview of Policies, Concerns, and Recommendations....................... 97
4.3.1 Status and Barriers........................................................................... 97
4.3.2 Policy Issues and Recommendations for the Expansion of
Distributed Generation.................................................................... 99
Nomenclature....................................................................................................... 101
References.............................................................................................................. 101
73
74 Analysis of Energy Systems: Management, Planning, and Policy
4.1 Introduction
4.1.1 Concept and Definition
Distributed generation (DG) of energy is not a new concept, but it has been
showing an ever-increasing promise as a cost-effective and energy-efficient
method of energy supply. While there are some attempts for a concrete defi-
nition of DG, there is no universally accepted one. Many definitions focus on
distinguishing them from large centralized generation units. The key concept
lies in its local nature: small-scale energy generation units located at or close
to the place where the energy products are consumed, thus bypassing the
transfer and distribution network. It is part of the distributed energy resources
paradigm, which also contains demand response and distributed storage.
Many definitions that identify distributed energy generation technologies
are based on size (Ackermann et al. 2001). According to these, there is a spe-
cific threshold, usually from 0.5 to 2 MW, under which a technology can be
characterized as DG. Others assume that DG units are placed at or near cus-
tomer sites to meet specific customer needs or to support economic operation
of the grid, or both (Pepermans et al. 2005). However, the size is not the only
criterion that defines the concept. DG also has the following characteristics:
Both concepts emerged from the need for increased energy efficiency. At first
glance, the fact that electricity production is decentralized and heat produc-
tion is getting centralized may seem like a paradox. However, both events
are driven by the need for increased overall energy efficiency. When prop-
erly planned, both can lead to an overall energy efficiency increase of the
energy systems and to a more flexible and diversified energy system with an
increased energy supply.
4.1.3.1 Technical
• Power loss reduction: Generation closer to demand, which prevents
loss of energy in transmission networks.
• Improvement of energy efficiency: The use of combined heating and
power (CHP) units allows the simultaneous generation of heat and
electricity and hence improvement in energy efficiency average of
the system.
• Improvement of security supply: The increasing penetration of DG and
future intelligent networks (smartgrid) can contribute to increasing
security supply, as it will diversify the primary energy supplies and
potentially reduce the dependency for foreign sources.
• Improvement of voltage profiles: Connection of DG to a network enables
normal raise in voltage, which can contribute to an improved volt-
age profile, especially in radial distribution networks in medium
and low voltage.
• Increase of quality power: In areas where voltage levels are low, instal-
lation of DG can improve the quality of supply.
Competitiveness of Distributed Generation of Heat, Power, and Cooling 77
4.1.3.2 Economic
• Reduction of operative cost: Cost reduction in transmission and distri-
bution of energy, hence reduction in losses; and reduction in mainte-
nance costs (failures and lines congestion).
• Reduction of capital costs: DG can delay the need for investments
in new transmission and distribution infrastructures and reduce
depreciation costs of fixed assets in networks.
• Reduction of environmental costs: Reduction of emissions into the
atmosphere helps to reduce associated costs with environmental
penalties.
• Electricity tariff reduction: The increased penetration of DG can open
energy markets to new agents and low prices.
• Liberalization of energy markets: By allowing market agents to install
their own energy generation equipment they can respond to
changing market conditions, increasing the flexibility of the sys-
tem and promoting competitiveness, which can lower the overall
prices.
4.1.3.3 Environmental
• Reduction of fossil fuel consumption: The use of distributed renew-
able sources and the increased efficiency of multigeneration plants
reduce fossil fuel consumption in conventional power plants.
• Reduction in greenhouse gas emission: The reduction of fossil fuel con-
sumption implies the reduction of SOx and NOx emissions into the
atmosphere.
4.2.1.1 System Design
System design aims at determining the sizing and operational variables involved
by optimizing a suitable criterion. The proposed design solution must be subject
to the restrictions fixed by the legislation, while it is very sensitive to the coun-
try’s energy policy and to wider geopolitical facts (i.e., abrupt oil price change).
Optimization based on economic criteria from the investor’s point of view has
been studied thoroughly for both cogeneration and trigeneration plants.
The main principle of a multigeneration plant is that it converts fuel energy
directly to mechanical shaft power, which can drive a generator to produce
electricity. Waste heat can be recovered to cover the thermal demand or cool-
ing demand via an absorption chiller. A conceptual energy flow diagram of
a trigeneration plant is presented in Figure 4.1.
Two prime mover types that are most popular for DG applications are
described in the following subsections.
Grid
Grid
Elec
CHP
Compression
chiller
Fuel Cool
Absorption
Stor- chiller
Boiler age
Heat
Waste
FIGURE 4.1
Conceptual energy flow diagram of a trigeneration plant.
Competitiveness of Distributed Generation of Heat, Power, and Cooling 79
most commonly used power generation equipment between 100 and 5000 kW,
because they have an almost flat efficiency curve above 30% of the nominal
electrical power (Badami et al. 2008). This implies that they can work success-
fully on part loads and several operation strategies can be applied successfully.
4.2.1.1.2 Micro-Turbines
Micro-turbines (μΤ) are actually an extension of turbine technology on a
smaller scale. They are primarily fueled with natural gas, but they can also
operate with diesel, gasoline, or other similar high-energy fuels. Research on
biogas is ongoing. μΤs have only one moving part; they use air bearings and
they do not need lubricating oil, although they have extremely high rotational
speed, up to 120,000 rpm. Small-scale individual units offer great flexibil-
ity and can be easily combined into large systems of multiple units. During
their operation they have low noise and relatively low NOx emissions. On the
other hand, they usually have low electricity efficiency and high cost.
Other prime movers are also used in CHP such as fuel cells or Stirling
engines, but they are still under development and their economics are not
very favorable for commercial applications.
Following is the description of an ICE-driven trigeneration plant: An inter-
nal combustion engine is fed by air and natural gas as fuel. Through the com-
bustion process, the chemical energy of the fuel is converted into mechanical
shaft power, which drives a generator to produce electricity. ICEs operate
either according to the Otto or diesel cycle and waste heat is generated at two
temperature levels: by a low-temperature flow of coolant (90°C–125°C) and by
a medium-temperature flow of exhaust gas (200°C–400°C). The ICE exhaust
gases can be used either directly in thermal processes or indirectly through a
heat recovery steam generator, which produces superheated steam. Most auto-
producers do not need very high-grade heat, so it is assumed that there is no
need to use the exhaust gases directly. When the thermal output of the prime
mover is not sufficient to cover the demand, a boiler is required to operate.
In a trigeneration plant, cooling energy can be generated in two ways:
either by utilizing waste heat via an absorption chiller or by utilizing electric-
ity via an electric heat pump. Electric chillers use a mechanical compressor
in order to take the refrigerant vapor from the lower evaporation pressure to
the higher condensation pressure. In absorption chillers, this process is real-
ized by means of a solution circuit, which serves as a thermal compressor.
Absorption chiller cycles are based on certain thermodynamic properties
of two fluids: one is the refrigerant and the other is the absorbent. The most
common pairs found in the literature are as follows:
TABLE 4.1
Comparison of Absorption Chillers with Conventional Vapor Compression
Chillers
Vapor Compression Absorption Chiller
Energy source Electricity Heat
Part load behavior Medium Very good
Mechanical moving parts Many Few
Maintenance costs High Low
Investment costs Low Low
Coefficient of performance (COP) High Low
Water consumption in cooling tower Medium High
Unit weight Medium Big
Noise vibration Medium Low
Greenhouse gases in coolant liquid Yes No
Competitiveness of Distributed Generation of Heat, Power, and Cooling 81
affect occupation pattern and thus the energy demand are (Yao and Steemers
2005) (1) the number of residents, (2) the time during which the first resident
stands and goes to sleep, and (3) the time that a house is unoccupied during
the day.
4.2.1.3 Operation Strategies
Operation strategies that are used in DG plants are part of the process con-
trol system, which is dependent on the following factors: demand for each
kind of energy, prime mover nominal power, coefficients of performance,
and conversion factors for all energy conversion devices involved. In the lit-
erature, the most common kinds of cogeneration systems are designed by
either covering a constant part of energy or by following the evolution of the
electrical (or heat) load.
The following operation strategies can be identified for multigeneration
units (Kavvadias et al. 2010):
1.
Continuous operation: The system operates on maximum power. This
strategy can be used in order to cover the base load. An auxiliary
boiler produces thermal energy when needed to cover the heat load.
If a bigger prime mover is utilized, the excess electricity can be sold
to the grid.
2.
Peak saving: The system operates for a limited amount of time to
cover a predefined part of the load during electricity peak condi-
tions. As a result, the peak power bought from the grid is reduced
or the utilization factor is improved resulting in cheaper marginal
electricity prices.
3.
Electricity equivalent demand following: The system operates in order
to cover the electricity load and the electricity needed for the electric
chiller minus the electricity that is conserved by the operation of
the absorber in order to cover the cooling load. Thermal energy is
produced (via an auxiliary boiler) or wasted in order to integrate the
rest of the energy demand or offer, respectively.
4.
Heat equivalent demand following: The system operates in order to
cover the heat load and the heat needed for the absorption chiller
to cover the cooling load. Electricity is bought from or sold to the
grid in order to integrate the rest of the energy demand or offer,
respectively.
The literature review does not conclude with a generic feasibility indica-
tor that correlates the energy prices with specific cogeneration technologies
independent of the energy loads. Such indicators are being used exten-
sively, but as discussed in the previous paragraph, the choice of values is
governed by empiricism having limited applicability. The development
of a theoretical relation between energy prices and the characteristics of
cogeneration and conventional generation equipment is made in the next
subsection.
FCHP
CHP
ThCHP Thd End use Thd F΄b
Boiler
Th1
FIGURE 4.2
Reference energy system for the coverage of specific energy demand by cogeneration and con-
ventional generation. (Adapted from Kavvadias, K.C., Energy, 115(3), 1632–1639, 2016.)
Competitiveness of Distributed Generation of Heat, Power, and Cooling 85
ElCHP ThCHP
ηCHP = + (4.3)
FCHP FCHP
where
Cf (EUR/kWh) is the fuel price
Ce (EUR/kWh) is the electricity price
A necessary assumption to be made is that the electricity and fuel costs for
both conventional and CHP generation of energy are the same. This may
not be the case if special policies and subsidies are applied, but it is useful
to compare the inherent advantages and the true competitiveness of the two
technologies.
As mentioned earlier, the basic investment motivation can be summarized
as follows: when heating and electricity can be locally produced at a smaller
86 Analysis of Energy Systems: Management, Planning, and Policy
cost than the grid electricity and separate heat generation, then and only
then a DG CHP investment can operate with a profit.
For an economically viable operation of a trigeneration installation, the
operating cost of the CHP unit has to be less than or equal to the cost of the
conventional generation part for given energy loads:
where C (EUR) is the operating costs of combined generation (CHP) and con-
ventional generation (SHP), respectively, as defined in Equations 4.6 and 4.7.
Using the expressions (4.6) and (4.7) and replacing FCHP from (4.3), Fb′ from
(4.5), El'1 from (4.4), and Cod from (4.2), Equation 4.8 becomes
For α = 1, that is, when all heat is used for the production of cooling in the
absorption chiller, the equation is simplified as follows:
COPel ( 1 + HPR )
PriceRatio ≥ (4.11)
ηCHP ( COPel + COPab HPR )
whereas for α = 0, that is, for simple cogeneration mode without an absorp-
tion chiller, the equation is simplified as follows:
HPR + 1 HPR
PriceRatio ≥ − (4.12)
ηCHP ηb
This relation covers only the operation feasibility ignoring the investment
costs. Equation 4.8 can be modified so that it calculates operational costs on
an annual basis including an annualized capital costs term:
( CSHP − CCHP ) ⋅ CapF ⋅ 8760 − crf ( l, i ) ⋅ ( Ceq CHP ⋅ Eld + Ceq ab ⋅ Cod ) ≥ 0 (4.13)
Competitiveness of Distributed Generation of Heat, Power, and Cooling 87
where
Ceq CHP is the capital costs of a CHP unit (EUR/kWe)
Ceq ab (EUR/kWc) is the capital costs of an absorption chiller
crf (—) is the capital recovery factor used to convert a present value into a
stream of equal annual payments over a specified time (l), at a specified
discount rate (i) by means of crf = (i(1 + i)n/(1 + i)n − 1)
CapF (%) is the annual capacity factor of the cogeneration unit which is
multiplied by 8760 (hours/year) to express the annual operating hours
of the combined generation installation
4.2.1.6.1 Operational Viability
In the following paragraphs, the effect of the equipment’s technical specifica-
tions on the minimum PriceRatio, for which a combined generation system
can operate profitably, is shown. Table 4.2 presents typical parameters of an
internal combustion engine–based cogeneration unit. This type of unit is
usually the ideal technology for middle-scale cogeneration systems used in
buildings of the tertiary sector. Typical values of the conventional heating
and cooling generation systems are also considered.
88 Analysis of Energy Systems: Management, Planning, and Policy
TABLE 4.2
Typical Values for Parameters of Equation 4.10
Parameters of Equation Variable Central Value
Coefficient of performance of electric chiller COPel 3.5
Coefficient of performance of absorption chiller COPab 0.8
Boiler efficiency ηb 85%
CHP overall efficiency ηCHP 90%
Heat-to-power ratio of prime mover HPR 1.2
2.5
2
Price ratio
1.5
0.5
0
0 0.2 0.4 0.6 0.8 1
Fraction of cooling from heat (α)
FIGURE 4.3
Effect of cooling fraction from recovered heat on the minimum PriceRatio. (Adapted from
Kavvadias, K.C., Energy, 115(3), 1632, 2016.)
Competitiveness of Distributed Generation of Heat, Power, and Cooling 89
4 4
3 3
α=1
Price ratio
α=1
2 2 α = 0.5
α = 0.5
1 1 α=0
α=0
0 0
0 0.2 0.4 0.6 0.8 1 0 1 2 3 4
CHP efficiency (ηCHP) Heat-to-power ratio (HPR)
FIGURE 4.4
Effect of CHP prime mover characteristics on the minimum PriceRatio. (Adapted from
Kavvadias, K.C., Energy, 115(3), 1632, 2016.)
2.5 2.5
α=1 α=1
2 2
α = 0.5 α = 0.5
Price ratio
1.5 1.5
1 α=0 1 α=0
0.5 0.5
0 0
0 0.5 1 1.5 0 2 4 6
COP—absorption chiller (COPab ) COP—electric chiller (COPel)
FIGURE 4.5
Effect of COP on the minimum PriceRatio. (Adapted from Kavvadias, K.C., Energy, 115(3), 1632,
2016.)
and the less efficient the substituted equipment, the smaller is the require-
ment for a high electricity to gas price ratio (Figure 4.4). Prime movers that
produce more heat than electricity (for a given overall efficiency) are more
sensitive to the variations of energy prices. For heating and electricity gen-
eration mode (no cooling), the heat-to-power ratio has a very small effect.
Regarding cooling equipment, as expected, Figure 4.5 illustrates that the
conventional and cogeneration equipment have an inverse relationship; the
bigger the COP of the electric chiller and the lower the COP of the absorption
chiller, the higher the minimum PriceRatio has to be.
The efficiency of the conventional boiler is apparently the most important
variable (Figure 4.6), especially for operating conditions with small α (no
cooling). If the equipment substitutes old nonefficient equipment, then the
profit margin is very large. PriceRatio can even fall below 1, that is, CHP will
be viable even if electricity prices are smaller than natural gas prices. In old
and inefficient boilers, the CHP unit will be able to operate at any gas price,
depending on the cooling fraction from heat as defined by α.
90 Analysis of Energy Systems: Management, Planning, and Policy
2.5
2 α=1
Price ratio
1.5
0.5
α = 0.5 α=0
0
0 0.2 0.4 0.6 0.8 1
Boiler efficiency (ηb)
FIGURE 4.6
Effect of substituted boiler efficiency on the minimum PriceRatio. (Adapted from Kavvadias,
K.C., Energy, 115(3), 1632, 2016.)
4.2.1.6.2 Investment Viability
The previous analysis was done for existing cogeneration devices. For new
investments, the capital cost and the operating time of the equipment have
to be calculated by means of Equation 4.13. In order to clarify the interactions
between the critical variables and economic feasibility of new investments
described in the previous sections, a simple sensitivity analysis is conducted.
The plotted line in Figure 4.7 corresponds to the locus of the points where
total annual costs (including depreciation of investment) of separate produc-
tion are the same as in the cogeneration case (investment break-even line).
In order to better illustrate the difference between the heating (a = 0) and
cooling (a = 1) mode, two break-even charts were plotted. For the combina-
tion of prices that fall within the area above each line, separate production is
more economical. In the area below the line, cogeneration is more economi-
cal. Three different prime movers are compared: internal combustion engine
(ICE), gas turbine (GT), and micro-turbine (μT). The technology parameters
assumed are presented in Table 4.3. Parameters from conventional equip-
ment are adopted from Table 4.2. It has to be noted that a higher capacity
factor applies to the heating and cooling modes (trigeneration) due to the fact
that the coproduced thermal load will be able to be utilized throughout the
year, thus increasing the operation period.
According to Figure 4.7, for a typical ICE system and assuming that now-
adays gas prices fall within the region of 0.05–0.08 EUR/kWh, combined
generation investments will be feasible if electricity prices are over 0.11–0.14
EUR/kWh assuming full heating mode, or over 0.13–0.18 EUR/kWh with
cooling mode. For low electricity prices (<0.06 EUR/kWh), cooling mode can
be profitable even when heating mode is not, due to the fact that a higher
capacity factor, that is, a higher coverage of the loads by the cogeneration
equipment, is assumed. In other words, the added value of CHP is not based
on the inherent increased efficiency—after all, conventional low-temperature
Competitiveness of Distributed Generation of Heat, Power, and Cooling 91
ICE
0.10 GT
ICE
Gas price (EUR/kWh)
0.08
µT
0.06
0.04
GT
0.02
µT
0.00
0.00 0.05 0.10 0.15 0.20 0.00 0.05 0.10 0.15 0.20
Electricity price (EUR/kWh) Electricity price (EUR/kWh)
FIGURE 4.7
Investment break-even point for different prime movers and operation modes. (Adapted from
Kavvadias, K.C., Energy, 115(3), 1632, 2016.)
TABLE 4.3
Cost Assumptions for Technology Comparison
Parameters of Equation Variable ICE GT μΤ
Capital cost of prime mover Ceq CHP (EUR/kWe) 1600 1100 2200
Capital cost of absorption chiller Ceq ab (EUR/kWc) 400 400 400
Overall efficiency ηCHP 90% 82% 85%
Heat-to-power ratio HPR 1.2 2 0.7
Depends on load
(assumed 35%
Capacity factor CapF (%) for heat only and
60% for heat and
cooling)
Discount rate i (%) 10
Investment lifetime n (years) 20
0.35
AL AT BA BE BG CY CZ DE DK EA EE EL ES FI FR HR HU IE IS IT LI LT LU LV MD MT NL NO PL PT RO RS SE SI SK TR UK
Price (Euro/kWh)
0.30
0.25
0.20
0.15
0.10
0.05
0.00
Year (2007–2015)/country
FIGURE 4.8
Time series of natural gas prices (top dark line) and electricity prices (bottom light line).
(The prices shown belong to the high consumption band of the nonindustrial pricelist, which
refers to autoproducers of the tertiary sector: heat > 200 GJ and electricity > 15,000 kWh.)
5
AT BA BE BG CZ DE DK EA EE EL ES FR HR HU IE IT LI LT LU LV MD NL NO PL PT RO RS SE SI SK TR UK
Electricity to gas price ratio
0
Year (2007–2015)/country
FIGURE 4.9
Historical data of PriceRatio. The bottom and top vertical dotted lines show the operational
viability limit of a typical ICE-based CHP unit based on results of Equation 4.10 for full heating
or cooling mode, respectively.
1.0
0.5
Correlation index
0.0
–0.5
–1.0
AT
BA
BE
BG
CZ
DE
DK
EA
EE
EL
ES
FR
HR
HU
IE
IT
LI
LT
LU
MD
NL
PL
PT
RO
RS
SE
SI
SK
TR
UK
LV
Country
FIGURE 4.10
Correlation of historical data (2007–2015) for EU-28 electricity and gas prices.
Competitiveness of Distributed Generation of Heat, Power, and Cooling 93
2015-B2
ICE
heating ICE
0.12 mode
SE cooling
mode
0.10 PT
Gas price (EUR/kWh)
LI IT
ES
0.08 FR
NL EA DK
AT IE
EL UK DE
SI BE
0.06 CZ
BA PL SK LV LU
HR
LT
RS BG EE
0.04 HU
MD
TR RO
0.02 i = 5%
i = 10%
0.00
0.00 0.05 0.10 0.15 0.20 0.25 0.30
Electricity price (EUR/kWh)
FIGURE 4.11
Gas and electricity prices for 2015. The black lines represent the investment break-even points
based on Equation 4.13 with or without production of cooling for two discount rates (5%
and 10%).
limits are shown for full heat mode or full cooling mode as presented in
Figure 4.3. Currently, it seems that there are a few countries that are close to
the operational feasibility point. Indeed, countries such as Bulgaria, France,
and Sweden have low market share of CHP autoproducers due to low price
ratios. In most cases, the fluctuation of electricity and gas prices has a posi-
tive correlation (Figure 4.10). In some cases, there is a weaker correlation due
to either an inaccurate pricing mechanism of natural gas or a smaller depen-
dence of electricity production from fossil fuels.
Similarly, the investment driving force for CHP autoproduction is shown
in Figure 4.11 for all countries. For the sake of clarity, only one prime mover
technology is shown for two discount rates and two operation modes. The
further the point from the line, the less attractive an investment is. Countries
like Denmark and Germany have the strongest driving force for investments
in autoproducer CHP technologies. A group of countries that is close to the
break-even line may not have a strong driving force that can justify the risk
of future investments without effective policies.
they have a bigger visual impact and a more complicated installation. For
this reason, only the competitiveness of distributed PV is examined in the
following section.
4.2.2.1 Competitiveness in Photovoltaics
As in most of the renewable energy technologies and contrary to conven-
tional fossil fuel technologies, fuel costs are nonexistent. As a result, the effi-
ciency* does not directly affect the competitiveness of the energy generation.
For an installation of given capacity, an efficiency of 1% will be as economic
as an efficiency of 100% as the fuel has zero cost. Although economics are
not directly affected, other aspects should be taken into account; for exam-
ple, for a photovoltaic panel with double efficiency, you will need half the
footprint, which may consequently reduce the capital costs. The most critical
variables for competitiveness, as in all renewable energy sources, are usu-
ally the capital costs ($/kWp) and an operational performance metric, which
shows the availability of the resource throughout the year. This is captured
by the capacity factor. As a general rule of thumb, the higher the latitude (the
further away we move from the equator), the less is the irradiation and con-
sequently the smaller the capacity factor. Irradiation maps are available for a
more accurate estimation of production (Huld et al. 2012).
In order to assess the comparative competitiveness of solar energy com-
pared to the electricity provided by the grid, the concept of grid parity is
introduced (Yang 2010). According to this, the grid parity price is defined as
the point where the total cost to consumers of one technology is equal to the
retail grid electricity price (Breyer and Gerlach 2012; Yang 2010). It is believed
that consumers will start transitioning to cleaner energy technologies if they
can get cheaper electricity.
Photovoltaic installations have seen a very big decrease in costs during the
last decades. This technology has the highest learning rate of all energy tech-
nologies. For the last 35 years, each time the panel price has dropped by 21%,
the worldwide panel production has doubled (Pillai 2015). One must also
take into account the big growth rate of the PV industry, which has caused
a price drop of more than 45% in the last 15 years. The performance is also
getting better in terms of improvements in lifetime, better high-temperature
or low-light performance, etc.
In Figures 4.12 through 4.14, the dots show the prices for different coun-
tries as reported by Eurostat for the second semester of 2015 for residen-
tial, commercial, and industrial consumers, respectively, versus the average
capacity factor for each country. The curves represent the levelized cost of
* Efficiency here is defined as the ratio of produced energy to primary energy input, for exam-
ple, in the case of photovoltaics, electricity produced divided by the solar irradiation.
Competitiveness of Distributed Generation of Heat, Power, and Cooling 95
0.25 IE IT
PT ES
UK BE
0.20 NL AT CY
LU SW EL $3000/kWp
FI LV SI FR
0.15 PL
LT CZ SK RO HR MT $2000/kWp
EE HU
0.10 BG
$1000/kWp
0.05
$500/kWp
0.00
0.00 0.05 0.10 0.15 0.20
Capacity factor (%)
FIGURE 4.12
Electricity prices of residential sector for various countries in 2014 related to the photovoltaic
generation effectiveness. The black lines represent the investment break-even points for dif-
ferent capital costs.
0.30 DE
Cost of electricity ($/kWh)
SK
0.25 IE
IE EL PT
MT
UK DK CY
NL BE
LV CZ
0.20 PL AT
SI FR $3000/kWp
LTLU SW
0.15 HU RO
EE BG
FI $2000/kWp
0.10
HR
$1000/kWp
0.05
$500/kWp
0.00
0.00 0.05 0.10 0.15 0.20
Capacity factor (%)
FIGURE 4.13
Electricity prices of commercial sector for various countries in 2014 related to the photovoltaic
generation effectiveness. The black lines represent the investment break-even points for dif-
ferent capital costs.
96 Analysis of Energy Systems: Management, Planning, and Policy
0.30
Cost of electricity ($/kWh)
DK
0.25
DE IT
0.20 UK
$3000/kWp
IE CYMT
LV EL PT ES
0.15 SK
LT BEAT FR
NL HU HR $2000/kWp
0.10 EE PL SI RO
CZ
FT LU SW BG
$1000/kWp
0.05
$500/kWp
0.00
0.00 0.05 0.10 0.15 0.20
Capacity factor (%)
FIGURE 4.14
Electricity prices of industrial sector for various countries in 2014 related to the photovoltaic
generation effectiveness. The black lines represent the investment break-even points for dif-
ferent capital costs.
*
Levelized costs were estimated using the BNEF small-scale PV and PV with storage
(SSPVS) economic model with the following parameters: WACC 10%, lifetime 25 years, self-
consumption 45%, PV OPEX 0.01 EUR/kW/annum.
Competitiveness of Distributed Generation of Heat, Power, and Cooling 97
100
Electricity generation share (%)
90 Other (non-CHP)
80 CHP—main activity producers
70 CHP—autoproducers
60
50
40
30
20
10
0
Es ce
th nd
nd
pu l
d
Lu in tria
m om
er rg
G taly
o a
Sp ia
Ir ain
Fi nds
ec or en
te A ark
L ia
Fr nia
un c
Bu onia
Sw ece
ia
m ia
en m
Po ny
ov a
Cr ary
re ga
Sl ati
H bli
Sl atvi
Be lan
n
an
ar
Ro vak
G ou
D giu
an
Cz P ed
a
Li nla
la
h tu
ua
e
g
m
xe gd
re
d us
rla
lg
e
t
b
l
he
K
et
N
ni
U
FIGURE 4.15
Share of electricity generation of CHP autoproducers and main producers. (Data from Eurostat,
Combined heat and power data, 2014, http://ec.europa.eu/eurostat/statistics-explained/index.
php/Electricity_and_heat_statistics. Accessed on August 2015; Adapted from Kavvadias, K.C.,
Energy, 2016, 115(3), 1632.)
3500
Cumulative installed capacity (MW)
2500
FIGURE 4.16
Installed capacity in 2012 of CHP autoproducers per technology for tertiary sector. (Data from
Platts, UDI World electric power plants database, 2015; Adapted from Kavvadias, K.C., Energy,
2016, 115(3), 1632.)
98 Analysis of Energy Systems: Management, Planning, and Policy
1.00
0.90
Electricity generation share
Non-PV production
0.80
Photovoltaic production
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
Es and
Ir and
et us l
d r g
r ia
La d
G ree y
un tia
lg c
M in
ng ce
Po dom
th s
C nia
Po en
m ta
ov ia
en ia
xe yp k
Fi nia
rm ce
p ia
b s
D ven a
Sp m
h lg y
Sw ary
ia
N A uga
Li land
m ru
Be ubli
G tal
te F our
Sl aki
ec Bu an
Lu C ar
an
he tr
Sl an
Re ar
tv
Ro al
a
iu
Ki an
ed
H roa
ua
to
g
m
I
nl
el
rt
o
Cz e
ni
U
FIGURE 4.17
Share of electricity generation of PV autoproducers for 2014.
Competitiveness of Distributed Generation of Heat, Power, and Cooling 99
Nomenclature
C operating costs (EUR)
CC capital costs (EUR)
CHP combined heating and power
Co cooling energy (kW)
COP coefficient of performance (—)
El electricity (kW)
F fuel (kW)
GT gas turbine
HPR heat-to-power ratio (—)
ICE internal combustion engine
PESR primary energy savings ratio (%)
Th thermal energy (kW)
α fraction of cooling from heat (—)
η efficiency (%)
μΤ micro-turbine
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5
Are Smart Grids the Holy Grail of Future
Grid Mix? Economic, Environmental, and
Regulatory Opportunities for Smart Grid
Development in Northwestern Europe
CONTENTS
5.1 State of the Art and Driving Forces for a Smarter Energy System
in Europe......................................................................................................106
5.2 Economic and Environmental Benefits of
Adopting SG Technologies........................................................................106
5.2.1 Literature Review of Existing Impact Assessments...................106
5.2.2 Critical Evaluation of the Outcomes of the Economic and
Environmental Impact Assessment of SGs.................................108
5.2.3 Conclusions......................................................................................121
5.3 Energy Efficiency and CO2 Intensity of a Smarter Energy System:
Case Study of Belgium...............................................................................122
5.3.1 Life Cycle Inventory Construction...............................................124
5.3.2 Life Cycle Impact Assessment......................................................124
5.3.3 Conventional Grid and SGs..........................................................125
5.4 Regulatory Framework and Barriers Regarding SG Applications
for Household and SMEs...........................................................................128
5.4.1 Deployment of SG Technologies...................................................129
5.4.2 Electricity Retail Prices...................................................................130
5.4.2.1 Flanders.............................................................................133
5.4.2.2 United Kingdom..............................................................136
5.4.2.3 Ireland................................................................................136
5.4.2.4 The Netherlands...............................................................137
5.4.3 Demand–Response Services..........................................................137
5.4.3.1 Energy-Market Products.................................................139
5.4.3.2 Ancillary Service and CRM Market Products..............139
5.4.4 Regulatory Practices and Barriers................................................140
5.4.4.1 Market Entry.....................................................................140
5.4.4.2 Market Roles.....................................................................140
105
106 Analysis of Energy Systems: Management, Planning, and Policy
Economic and CBA Yokohama- RET, ICT (a) 6% of energy-use Japan Farzaneh
environmental wide energy reduction. et al. (2014)
system (b) All consumers will
change their
behavior.
(c) Energy-use reduction
of 6%.
(d) Electricity price
$0.21/kWh.
(e) Energy savings of
$100 per barrel.
(Continued)
111
112
(Continued)
Analysis of Energy Systems: Management, Planning, and Policy
TABLE 5.1 (Continued)
List and Main Characteristics of the Examined Publications (N = 12)
Type of System Technology Country/
Analysis Methodology SG Definition Boundary Included Assumptions Region Reference
Environmental LCA and Home ICT Three HEMS systems Netherlands Van Dam
and economic eco-cost electricity (energy monitoring, (EU) et al. (2013)
estimation management multifunctional HEMS,
systems energy management
(HEMS) device).
production, (a) Router, PC, and smart
use, and meter were not
disposal included in the
considering system boundaries.
and average (b) The economic profit
Dutch is calculated as a 10%
household energy savings.
Are Smart Grids the Holy Grail of Future Grid Mix?
(Continued)
Analysis of Energy Systems: Management, Planning, and Policy
TABLE 5.1 (Continued)
List and Main Characteristics of the Examined Publications (N = 12)
Type of System Technology Country/
Analysis Methodology SG Definition Boundary Included Assumptions Region Reference
Economic CBA “Smart Grid” refers to Fully ICT, RET The costs include the United Gellings
a modernization of operational infrastructure to States (2011)
the electricity SG integrate distributed
delivery system so energy resources (DER)
that it monitors, and to achieve full
protects, and customer connectivity
automatically but exclude the cost of
optimizes the generation, the cost of
operation of its transmission expansion
interconnected to add renewables and
elements—from the to meet load growth,
central and and a category of
distributed generator customer costs for
through the smart-grid-ready
high-voltage appliances and devices.
transmission network (a) The deployment of
Are Smart Grids the Holy Grail of Future Grid Mix?
FFT, fossil fuel technology (coal, natural gas, oil); NP, nuclear power; RET, renewable energy technology (solar, wind, biomass, hydropower); ICT, infor-
mation and communication technology (router, sensor, smart meter) Application technology (e.g. electric vehicle); NA, network assets.
a Defined as a set of devices or equipment that allow users to.
117
118 Analysis of Energy Systems: Management, Planning, and Policy
600
500
400
gCO2/kWh
300
200
100
0
Baseline GHG emissions GHG emissions
after SG development
FIGURE 5.1
Distribution of GHG emission outcomes for the studied and baseline scenarios (n = 5).
to 1,054 KWh per 10,000 yuan GDP, whereas the CO2 intensity of electric-
ity production in China would reduce from 0.70 to 0.52 tons per MWh dur-
ing the 2010–2030 periods, as a result of efficiency enhancement and energy
structure improvement. According to the International Energy Agency, con-
sidering direct and indirect emission reductions, SGs provide the possibility
to gain net annual emission reductions of 0.7–2.1 Gt per year of CO2 by 2050
(International Energy Agency, 2013).
The economic assessment of SG usually refers to the whole power sys-
tem at the country or smaller spatial level. The economic costs and bene-
fits of SG development in the EU and the United States were addressed by
Gellings (2011) and Faruqui et al. (2009). Adamec et al. (2011) and Tekiner-
Mogulkoc et al. (2012) targeted their studies to smaller power generation
systems by addressing the economic profitability of SG development in the
Czech Republic and New Jersey. Farzaneh et al. (2014), by accounting for the
forecasted penetration level of advanced metering infrastructure (AMI) and
system performances monitoring devices, used CBA to assess the economic
and environmental impacts (energy savings, GHG, and other air emissions) of
the Yokohama city grid. Zakariazadeh et al. (2014) and Van Dam et al. (2013)
focused on the effects of consumer participation to DR systems. The former
used a multiobjective optimization function to evaluate the costs of consumer
participation to an open electricity market by means of an energy manage-
ment system that behaves as an aggregator of distributed energy resources.
Peterson et al. (2010) used transaction cost analysis to assess consumer par-
ticipation to energy storage capability considering the capability of electric
vehicle owners to offset their own electricity consumption during high-price
periods. Although authors assumed perfect market information (including
degradation costs of battery pack and battery replacement costs), they stated
that “it appears unlikely that these profits alone will provide sufficient incen-
tive to the vehicle owner to use the battery pack for electricity storage and
later off-vehicle use” (Peterson et al., 2010). The comparison of economic
costs and benefits derived from the analyzed studies reveals SG as a nonef-
fective solution for an investment. Estimated costs show a maximum varia-
tion of ~2 order of magnitude across studies (range 0.01–2.55 million euros/
year, median 1.5 million euros/year), whereas estimates of the benefits show
a variation of 1 order of magnitude (range 0.01–0.7 million euro/year, median
0.2 million euros/year). Thus, on average, the gap between cost and benefit
results equals to 0.6 million euros/year (Figure 5.2). Ten times higher eco-
nomic costs (average value of 25 million euros) than the estimated average,
have been estimated by Zakariazadeh et al. (2014). Nevertheless, the assump-
tions related to the time scale (varying from 5 to 20 years), the typologies of
included costs (Faruqui et al., 2010; Tekiner-Mogulkoc et al., 2012), the share
of consumers involved and their responses to DR programs (Adamec et al.,
2011; Faruqui et al., 2011), the assumed level of energy saved (Van Dam et al.,
2013), the energy-market costs (Farzaneh et al., 2014; Gellings, 2011), the costs,
Are Smart Grids the Holy Grail of Future Grid Mix? 121
3.0
2.5
million euro/year
2.0
1.5
1.0
0.5
0.0
Benefit Cost
FIGURE 5.2
Distribution of cost and benefit outcomes from the analyzed references (n = 8).
typologies, and replacement costs of ICT devices (Faruqui et al., 2010, 2011)
strongly affect the outcomes of the reviewed studies.
5.2.3 Conclusions
SG will provide, among many benefits, significant reductions in CO2 and
other air pollutants. Research and development will be needed to provide
suitable modeling techniques/frameworks that are able to provide a mea-
surable environmental benefits of the SG vision. Overall, SGs provide many
benefits to customers (Lewis, 2013):
All the papers and reports reviewed differ, to some extent, in their approach
and the components of the SGs they encompass. Although several studies
claim that SGs are not a profitable investment, because the economic costs
122 Analysis of Energy Systems: Management, Planning, and Policy
exceed the benefits (e.g., Adamec et al., 2011; Gellings, 2011), other studies
claim that SGs can provide productive users, financial benefits, and employ-
ment generation (Faruqui et al., 2010, 2011; Yadoo and Cruickshank, 2012).
Considering the key role of SGs in improving efficiency, reliability, and
security of energy supply, and due to the major investments needed for SG
implementations, the high level of uncertainty about the technological devel-
opment of ICT devices, and the reliability of distributed generation and cus-
tomer responses to changes in energy-market price dynamics, there is a need
for developing a systematic cost–benefit approach to evaluate the potential
benefits of an SG project and justify its application.
To be effective and realistic, the CBA should precisely take into consider-
ation actual data from the available SG pilot projects that have been developed
or are currently under development. Some efforts have already been made
in this direction (Eurelectric, 2012; European Commission, 2012; Livieratos
et al., 2013), but the standardization of the SG impact assessment framework
is far from complete. The huge variability in ICTs, the level of penetration of
renewable resources (PV, wind, etc.), the regulatory barriers, and the uncer-
tainty in consumer participation to demand-response programs make this
process extremely complicated.
CO2, NOX, PM
C-Grid losses PM
NO X,
CO 2,
losses
Industries
Oil, gas Nuclear Wind DT
UT Biomass PV
Business
Homes
Production Transmission (HV) Distribution (MV, LV) End user
(a)
ICT Industries
Sensor
DT CO2, NOX, PM
Reduced losses AMI
UT
Oil, gas Business
Nuclear
Biomass Wind
PV
PHEV AMI
Homes
Production Transmission (HV) Distribution (MV, LV) End user
(b)
FIGURE 5.3
Schematic representation of the (a) conventional grid (C-Grid) and (b) smart grid (S-Grid).
* National renewable energy action plan (pursuant to Directive 2009/28/EC). Prepared by the
Federal-Regional Energy Consultation Group CONCERE-ENOVER. November 2010. www.
buildupeu/pubblications/22818, assessed on the 27th of November 2015.
Are Smart Grids the Holy Grail of Future Grid Mix? 125
TABLE 5.2
Main Assumption in the SG Model
Substation Feeders
Number of Substations and Feeders Units Units Assumption
Base case (2012) 847 5202 6
New substations to handle load growth (2020) 130.05 15%
New substation to handle renewable energy (2020) 8.67 1%
Feeders
Base case (2012) 780.3
New feeders to handle load growth (2020) 52.02
Number of Sensors
Sensors
Units Assumption
Base case (2012) 433.5 50%
Transmission line sensor for handling renewable 130.05 100%
energy (2020)
Transmission line sensor for handling load 8.67 100%
growth (2020)
300
GHG emissions (gCO2 eq./kWh)
250
200
150
100
50
0
Conventional grid Smart grid
FIGURE 5.4
GHG emissions of the electricity generation system.
14
12
Nonrenewable energy (MJ/kWh)
10
0
Conventional grid Smart grid
FIGURE 5.5
Nonrenewable energy consumptions of the electricity generation system.
9
8
GHG emissions (gCO2/kWh)
7
6
5
4
3
2
1
0
Conventional grid Smart grid
FIGURE 5.6
GHG emissions of the Belgian electricity transmission and distribution system.
128 Analysis of Energy Systems: Management, Planning, and Policy
5.4.1 Deployment of SG Technologies
In general, no support mechanisms are present concerning the SG hardware
that could enable the control of the distributed energy resources, such as
heat pump and photovoltaic installation. However, the roll-out of SG infra-
structure is closely linked with the roll-out of smart metering equipment,
which is closely linked to the regulatory framework and energy-market poli-
cies. The EU aims to replace at least 80% of electricity meters with smart
meters by 2020 wherever it is cost effective. Therefore, all EU member states
were asked to carry out a CBA regarding the roll-out of smart meters by 2012
(Energy Efficiency Directive 2012/27/EC). Table 5.3 provides an overview of
the main aspects of the SG roll-out status in each of the regions. Flanders is
the only region that did not yet decide upon a roll-out of smart metering sys-
tems. The results of the CBAs that were conducted were seen as inconclusive,
TABLE 5.3
Smart Meter Roll-Out Status
Region Flanders Ireland Netherlands United Kingdom
Smart meter No roll-out Ireland aims Full roll-out of The UK government
roll-out status plan as the at a full smart aims to roll out
CBA was not smart meter metering approximately 53
conclusively deployment infrastructure million smart
positive. by 2019. plan over the electricity and gas
Debate to roll next 6 years, meters to domestic
out or not is until 2020 properties and
ongoing. nondomestic sites
in Great Britain by
2020. This will
impact
approximately 30
million premises.
Deployment — Mandatory. Mandatory Mandatory.
strategy (opt-out)
Metering activity Regulated. Regulated. Regulated Competitive.
Responsible DSO. DSO. DSO Supplier.
party for
implementation
and ownership
Responsible for DSO. DSO. DSO Central hub.
third-party
access to
metering data
CBA outcome Inconclusive. Positive. Positive Positive.
Financing of the — Network Network Funded by
roll-out tariffs. tariffs suppliers.
and policy makers still debate on the roll-out plan for Flanders. In contrast,
all other regions reviewed in this study decided upon a full roll-out toward
2020, after positive CBAs. The Netherlands and Ireland will follow a regu-
lated model, where distribution system operators (DSOs) are responsible for
the roll-out, and their operation, and where the costs will be allocated to
the consumers by means of the distribution tariff. In contrast, the United
Kingdom implements a nonregulated model, putting the roll-out responsi-
bility with the suppliers. Both models have advantages and disadvantages,
elaborately discussed in the literature (Reuster et al., 2014).
Figure 5.8 illustrates the national differences in the shares of commodity and
network components. It can be seen that the relative share of network costs
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
Italy
Spain
Malta
Latvia
Serbia
EU-28
France
Poland
Greece
Ireland
Cyprus
Turkey
Iceland
Austria
Estonia
Croatia
Finland
Sweden
Albania
Norway
Slovakia
Belgium
Bulgaria
Slovenia
Portugal
Hungary
Romania
Germany
Denmark
Lithuania
Netherlands
Luxembourg
Montenegroa
Czech Republic
United Kingdom
Are Smart Grids the Holy Grail of Future Grid Mix?
FYR of Macedonia
FIGURE 5.7
Electricity retail prices and their structure in Europe. Note: Annual consumption: 2500 kWh <consumption < 5000 kWh. aTaxes and levies other than VAT
are slightly negative and therefore the overall price is marginally lower than that shown by the bar. (From EUROSTAT, 2015.)
131
132 Analysis of Energy Systems: Management, Planning, and Policy
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
LV CZ DK IS NO SE RS BE RO SK XK EE LU PL SI HU FR FI DE PT AT LT HR NL IE IT TR ES BG EL UK CY MT
FIGURE 5.8
Relative share of energy and network components in EU retail prices. (From EUROSTAT, 2015.)
in the final price is relatively low in Ireland and the United Kingdom and
quite high in Belgium (including Flanders).
In Europe, electricity commodity prices are typically not regulated. Ever
since the generation and supply part of the sector has been liberalized and
unbundled from network activities, policy makers have relied largely on
competitive pressure to keep prices down. However, in many regions, there
are some built-in safety mechanisms in the regulatory framework, allowing
governments to intervene (e.g., by imposing maximum prices).
The vast majority of electricity suppliers in Europe offer products based on
time-of-use (ToU) pricing. These products are usually quite simple and lim-
ited to day and night or seasonal rates. More complex ToU schemes are not
typically applied to small and residential users. Dynamic pricing (i.e., when
the commodity price is subject to changes or indexation during the billing
horizon) is also frequently applied. However, the dynamic contracts can be
restrained by regulation in terms of updating frequency, in order to protect
the consumer against frequent and large price spikes.
With respect to distribution grid tariffs, the allocation of network costs to
small and household consumers generally happens based on the following
tariff drivers/components:
9
16 19
25 24
16
9
7
1
Fixed charge (€) Capacity charge Energy Energy reactive Other
(€/kW) charge(€/kWh) (€/kvarh)
FIGURE 5.9
Household distribution grid tariff components in EU member states. (From European
Commission, Study on tariff design for distribution systems, 2015b.)
Several countries have ToU distribution grid tariffs in place, but these are
typically not applicable to residential users and are limited to day and night
or seasonal rates. Tariffs based on electricity usage during system peak
times are not being applied to households in any member state (European
Commission, 2015b). Figure 5.9 illustrates the distribution tariff compo-
nents and the frequency of their usage in household consumer groups in
EU member states.
In terms of weight given to the different tariff drivers, there are also large
differences across the member states. This ranges from almost purely energy
based to almost purely capacity-based tariffs. Note that the Netherlands is
the only country in Europe that does not apply any form of energy-based
tariff to residential grid tariffs (European Commission, 2015b).
In what follows, the regulatory aspects of commodity prices and (use-
of-system) network tariffs for households are discussed in more depth for
a number of regions: Flanders, the Netherlands, Ireland, and the United
Kingdom. Table 5.4 provides a summary of the main characteristics.
5.4.2.1 Flanders
In Flanders, electricity commodity prices are not regulated, at least not in the
classical sense of the word. Suppliers are, by principle, free to set their prices.
However, with consumer protection in mind, policy makers have incorpo-
rated a set of rules in the electricity market laws (the Electricity Act of April 29,
1999) that limit the ability of suppliers to choose or change price levels. In
particular, prices in variable contract types (i.e., when the electricity price is
134 Analysis of Energy Systems: Management, Planning, and Policy
TABLE 5.4
Regulatory Aspects of Electricity Commodity Prices and Distribution Grid Tariffs
in Flanders, the United Kingdom, Ireland, and the Netherlands
Energy Distribution (Use of System)
Flanders • Prices are not regulated, but • Regulated by Vlaamse
limitations on dynamic pricing. Reguleringsinstantie voor de
• Net metering allowed for small Elektriciteits-en Gasmarkt
users. (VREG)
• Energy-based + fixed
component
• Injection tariffs (>10 kW)
• Net metering (<10 kW)
• Prosumer tariff (based on
generation capacity, <10 kW)
United • Not directly regulated. • Regulated by Ofgem
Kingdom • Indirect regulations through • Energy-based + fixed
supply license conditions component
(obligation to inform
consumers of their cheapest
rate and potential savings).
Ireland • Not regulated, suppliers can set • Regulated by Commission for
own tariff regimes. Energy Regulation (CER)
• Suppliers will be obliged to • Energy-based + fixed
implement a ToU tariff scheme component
after smart meter roll-out. • ToU tariffs possible (day/night
scheme)
• Separate urban and rural tariffs
The • Suppliers are allowed to offer
• Regulated by ACM
Netherlands dynamic pricing schemes.
• Capacity-based (based on
• The ACM monitors the energy
connection capacity) + fixed
suppliers and energy prices.
component
The energy market is free but
• No ToU tariffs
the ACM is allowed to set
• Uniform for residential
maximum prices if energy
consumers
pricing is set to high, following
• No energy/power injection
the monopolistic character of
tariff
the market.
allowed to change during the course of the contract horizon) are limited, in
the sense that price changes (indexations) are allowed maximum four times
per year, at the start of each trimester (Art 20).
Regulations, as described in the example earlier, put significant limita-
tions on the ability of commercial players (suppliers, aggregators) to develop
active demand products based on dynamic pricing. In principle, it is allowed
to charge different prices for different times of the day. One of the sim-
plest forms of this (day and night pricing) is already being applied regu-
larly in Belgium. However, the updating of these prices to real-time market
Are Smart Grids the Holy Grail of Future Grid Mix? 135
consumption, such that the meter reading, and by extension the bill, drops to
zero. The new prosumer tariff, based on the capacity of the inverter, discour-
ages investment in distributed generation, even where it is beneficial for the
grid due to active management of demand.
5.4.2.2 United Kingdom
The methodology for the calculation of distribution grid tariffs is regulated
by Ofgem. The regulator determines the allowed revenue and the tariff
methodology. A so-called RIIO-ED1 price control is in place, setting the out-
puts that the 21 DSOs must deliver and the associated revenues they are
allowed to collect over an 8-year period. This system replaces the previous
RPI-X approach, and the first period started on April 1, 2015, and lasts until
March 31, 2023. The objective of this price control model is to ensure suffi-
cient investment in the grid at a reasonable price for the consumer.
In the United Kingdom, distribution grid tariffs for residential consumers
are based on active energy off-take and include an additional fixed charge.
Connection charges are predominantly shallow (European Commission,
2015b). Electricity commodity prices are not directly regulated. Suppliers are
regulated indirectly through their license conditions. In August 2013, Ofgem
(the regulator) implemented modifications to the license conditions with the
aim of simplifying supplier switching and comparison by residential con-
sumers. Since April 2014, suppliers are obliged to inform consumers of their
cheapest rates. This means that there are no (known) regulatory objections to
implement alternative pricing schemes.
5.4.2.3 Ireland
The distribution sector in Ireland is characterized by a single, state-owned
DSO (ESB Networks Ltd). An incentive-based model is used, based on a
5-year revenue cap. The regulator (CER) is the sole responsible in establish-
ing a tariff methodology and calculating the rates. Network costs are allo-
cated across different system levels and divided by the number of customers
in each level. For example, a distinction is made between rural and urban
consumers. An urban connection is defined as fed from a three-phase over-
head or underground LV network, while a rural connection is characterized
by a connection to a single-phase overhead network.
The network tariff structure is predominantly based on energy charges
and fixed annual charges (European Commission, 2015b). Capacity-based
charges only apply to larger consumers (larger businesses, car manufactur-
ers, etc.). ToU tariffs do exist but are limited to day and night schemes.
No information is found on regulatory provisions that could limit the pos-
sibility to implement new pricing schemes such as dynamic pricing, or ToU
pricing, concerning the energy commodity component.
Are Smart Grids the Holy Grail of Future Grid Mix? 137
In Ireland, the electricity and gas markets are deregulated. Suppliers can
set their own tariff regimes, but in the absence of smart meters, these are flat
rate tariffs. After the roll-out of smart meters, all suppliers will be obliged
by the regulator to have at least one ToU tariff to offer customers post smart
meter install and must, on a regular basis, alert customers to the fact that
there are ToU tariffs available. There will also be an option for suppliers to
introduce dynamically priced tariffs for customers.
5.4.2.4 The Netherlands
The distribution sector in the Netherlands is characterized by eight DSOs,
who are subject to incentive-based regulation, that is, price cap. The regula-
tor is responsible for deciding on the final allowed revenues and the tariff
structure. The DSO calculates and proposes tariff levels to the regulator for
approval.
The tariff structure is based on capacity charges and fixed charges
(European Commission, 2015b). The capacity charge, for residential consum-
ers, depends on the maximum contracted connection capacity. These charges
include the transport cost of energy, as well as the measuring costs and the
connection cost. A unique feature of the Dutch system is that there are no
active or reactive energy-based network charges. These capacity-based tariffs
are uniform for all residential consumers (meaning that the price in euro/
kW is the same). Consequently, no ToU-based distribution tariffs exist in the
Netherlands. It is however the case that households carry the largest portion
of network costs. This is disproportionate when considering their electricity
consumption compared to larger consumer types (source). Finally, there is no
network tariff based on injection of electric energy or power.
In the Netherlands, suppliers are allowed to offer dynamic pricing schemes.
However, the “Autoriteit Consument en Markt” monitors the energy suppli-
ers and energy prices that are allowed to set maximum prices if energy pric-
ing is set too high, following the monopolistic character of the market. No
information is found on regulatory provisions that could limit the possibility
to implement new pricing schemes such as dynamic pricing, or ToU pricing,
concerning the energy component.
5.4.3 Demand–Response Services
Incentive-based programs trigger demand modification in the occasion of
critical events based on contractual arrangements in return for an incentive
payment (Dupont, 2015). Although participation is voluntary, falling short
on a specific DR usually results in a penalty. In contrast, price-based pro-
grams allow the end user to enroll in a dynamic pricing scheme. Voluntary
load modifications are based on the user’s own economic and rational prefer-
ences. In such programs, no penalties are incurred, although the user can be
138 Analysis of Energy Systems: Management, Planning, and Policy
TABLE 5.5
Incentive-Based Demand-Response Products Accessible for Communities
and SMEs
The United
Type Flanders Ireland Netherlands Kingdom
Energy-market services Yes Yes Yes Yes
Ancillary services R3-DP DSU, STAR, NV STOR and FR
Powersave
Capacity market services SDR — — DSR CMU
These programs can be used by market parties to react to prices in the dif-
ferent electricity markets, that is, (1) energy market in which they can react
upon price volatility in day-ahead, intraday, and real-time market; (2) ancil-
lary service markets, such as operating reserves contracted by the system
operator, where demand modification can cover unexpected system short-
ages or excesses; or (3) capacity markets, where demand is used to provide
firm capacity in order to cover the expected peak demand. Although there
are probably less regulatory provisions for incentive-based DR, the regula-
tory framework remains relevant for what concerns the availability of DR
products, ancillary service and capacity market product requirements which
can allow or exclude alternative technologies, are embedded in a regulatory
framework. Furthermore, the procurement of these services would benefit
from a regulatory framework where actors, roles, and interactions are clearly
identified.
Are Smart Grids the Holy Grail of Future Grid Mix? 139
5.4.3.1 Energy-Market Products
In general, the regulatory framework of the liberalized market allows con-
sumers to engage in incentive-based programs with respect to the energy
market. Although this is rarely observed on a residential level, mainly
explained by economic barriers of installing the required metering equip-
ment and ICT infrastructure, this might be different for SMEs with signifi-
cant electricity consumption. SMEs with flexible demand due to cooling, or
other flexible processes, may sell this flexibility to a third party (supplier,
producer, and aggregator), which is active on the electricity market.
5.4.4.1 Market Entry
In Europe, one of the most prominent regulatory barriers stems from a lack
of market products facilitating participation of demand-side resources,
especially in the LV distribution grid. In wholesale electricity markets, fixed
charges (e.g., participation fees) and high minimum requirements (e.g., mini-
mum trading volume) make it tough for small players to participate. These
requirements are usually embedded in the regulatory framework. The only
way to circumvent them is through aggregation in a portfolio, by a third
party (e.g., a supplier, retailer, or aggregator).
In the ancillary service market, and in CRMs, this barrier is often even
stronger. Operating reserve products, contracted by system operators to
maintain the system security, are usually regulated, with very specific tech-
nical requirements. These products were initially designed for conventional
power plants, and often explicitly exclude DR, or are characterized by tech-
nical requirements that exclude DR indirectly. Today, a trend is observed in
adapting the product requirements, or creating separate products, to allow
the participation of DR, and new flexibility providers.
5.4.4.2 Market Roles
Although most government institutions in Europe take a clear and positive
stance on the development of SGs and active demand, there is still a lack
of a framework regarding the roles and responsibilities necessary for these
Are Smart Grids the Holy Grail of Future Grid Mix? 141
5.4.4.3 Energy Prices
In most European countries, prices of electricity are not directly regulated
or determined by the government or regulator. In a liberalized market, com-
petitive pressure is supposed to keep prices at acceptable levels. ToU pricing,
although not frequently applied in practice, is usually allowed as long as it
can be accurately and objectively measured.
However, at the same time, most countries have rules in place that pro-
tect consumers, by law, against frequent price changes and especially price
increases. In several countries, maximum prices for electricity are in place, or
the government has the authority to set maximum prices whenever there is a
supposed need to. In addition, in the case of variable contract types (meaning
that prices are to some extent dynamic and, e.g., subject to indexation based
on wholesale market prices), some regions prevent suppliers from frequently
changing their prices. In addition, there are transparency requirements (e.g.,
publishing of the methodology to calculate prices and notification of the
regulator). These rules, while established with good intent, sometimes lead
to overprotection of consumers and the inability for them to freely decide
to purchase DR products based on dynamic pricing, simply because these
products are not allowed to exist.
reform the grid tariffs and to give more weight to capacity-based tariff driv-
ers. This is consistent with the idea of development of demand-side flexibil-
ity toward commercial market participants, which is also strongly motivated
by the cost-efficiency argument. So far, the Netherlands is the only country
in Europe to completely abolish energy-based tariffs.
However, in their quest for efficient grid tariffs, many regulators are imple-
menting charges that are based on capacity, but are not truly efficient. For
example, the grid tariffs in the Netherlands are based on the contracted
capacity of the user (i.e., the capacity of their connection). Although related
to the initial cost of connecting the user, this tariff driver does not account
for the actual usage of the grid. Users who have the same connection capac-
ity but widely different consumption profiles (e.g., peak consumption vs.
off-peak consumption) still pay the same rate. A second example is the new
prosumer tariff in Flanders. This tariff is based on the capacity of the PV sys-
tem inverter, and therefore it discourages investment in PV altogether, even
when it is actually beneficial to the grid. It does not provide incentives for
active management of demand and assumes that all systems with the same
size have the same impact on network costs. These examples illustrate how
old and new forms of tariff design still limit the incentive for users to actively
manage their consumption and generation. In some cases, the grid tariffs
even incentivize quite the opposite. As a result, investment in SG solutions
and active demand may slow down.
5.5 Conclusions
The results of this study show that the emission reductions by the deploy-
ment of SG technologies (e.g., ICT hardware) are relatively large. Moreover, a
larger penetration of renewable energy, such as PV and heat pumps, can lead
to additional CO2 emissions. However, the choice of hardware components
should be done thoughtfully, so that the additional benefits at least offset the
added CO2 emissions. However, it should be noted that the emission savings
from smart control are relatively smaller than renewable energy production
and come at the expense of increases in electricity consumption and grid
interaction.
In all countries considered in this study, retail electricity prices are found
to be primarily flat (i.e., fixed over time per unit consumed). Although most
countries have some forms of ToU products in place, these are usually lim-
ited to day and night schemes or seasonal rates, which are communicated
to the user far in advance. In some countries, dynamic pricing is found to
be severely limited, even in cases where consumers voluntarily wish to
participate. In Belgium, for instance, prices in variable contracts can only
Are Smart Grids the Holy Grail of Future Grid Mix? 143
be indexed up to four times per year, at the start of each trimester. In other
countries, such as the Netherlands or the United Kingdom, the regulatory
framework gives more leeway. However, implementation remains limited
due to techno-economic barriers, such as affordable metering and control.
While flat prices do incentivize low consumption (and by extension fewer
emissions), they do not incentivize the shifting of consumption toward times
when generation costs and/or emissions are lowest. As a result, these pricing
schemes do not incentivize the use of SG technologies. It would therefore be
advisable for policy makers to develop a regulatory framework that, at the
very minimum, allows the development of DR products based on dynamic
pricing, providing sufficient transparency and protection mechanisms
against excessive price changes.
With respect to distribution grid tariffs, it is found that these are usually
flat (although day and night schemes do exist) and based on energy off-take,
with an added fixed component related to metering and administrative costs.
The Netherlands is an exception in this regard, being the only country in the
NWE to charge a tariff completely based on the contracted capacity of the
user. In general, flat and energy-based tariffs are not reflective of the under-
lying costs of grid operators, which are more related to capacity. In addition,
they often incentivize a fit-and-forget approach, making investment in SG
infrastructure less attractive.
Despite the fact that some countries have made reform efforts toward
introducing capacity-based tariffs, the proposed solutions do not remove
these shortcomings. Tariffs based on the capacity of the connection (e.g., in
the Netherlands) are not reflective of costs due to actual grid usage. Tariffs
based on the capacity of the PV system (e.g., in Belgium) are not reflective
of the actual costs caused by local generation and discourage PV investment
even when it is beneficial to the grid. In neither of the countries considered
are tariffs based on actual peak usage, or usage during system peaks. Yet,
these types of tariffs may encourage more efficient usage of the grid, which
would be in favor of SG technologies. The roll-out of smart meters plays an
important role in this regard, as it removes a long-standing technical barrier
to improvement of the grid tariffs.
In general, the market design does not yet include an adequate framework
on the procurement of DR services from users connected to the distribution
grid. However, it can be observed that all regions allow participation of DR
in network services, or in CRMs. Some countries developed specific products
that favor DR (e.g., R3-DP as an operating reserve product in Belgium). Other
countries adapted the product requirements in a way that participation of
demand is allowed (e.g., Noodvermogen in the Netherlands). Aggregators
play a key role in encouraging the participation of distributed demand-side
flexibility providers, pooling small pieces of flexibility into marketable prod-
ucts. Note that only SMEs with fairly high electricity consumption are now
participating in these products and that much work is yet to be done in order
to bring this trend to the residential level.
144 Analysis of Energy Systems: Management, Planning, and Policy
At the same time, it can be observed that existing actors in the electricity
market are often not strictly prohibited from developing DR products (e.g.,
when they are based on incentive payments). However, the playing field is
characterized by uncertainty, due to a lack of clear rules and responsibilities.
DR services can have an impact on several market participants, and many
questions on the interactions between the system operators, aggregators, and
suppliers remain unanswered. The introduction of flexibility on the level of
communities and SMEs requires a clear and complete definition of the roles
of existing and new market actors in the development and implementation of
new DR products. More specifically, the current set of tasks attributed to the
TSO, the DSOs, the supplier, the generators, the BRPs, and the balancing ser-
vice providers (BSPs) should be reviewed. Clear and fair contractual and com-
munication requirements need to be developed, both for existing and new
parties. This is especially needed in the relationship between the BRP (often
a generator and supplier) and the aggregator or BSP. In addition to bilateral
flexibility services, centralized trading platforms can be developed for the
provision and procurement of flexibility in the form of standardized products.
Because SG technologies and their control algorithms heavily depend on
data (e.g., data related to day-to-day consumption), smart meters, or at least
the data provided by them, play a key role in facilitating their deployment.
The advantages of smart meters include frequent and accurate data col-
lection of bidirectional electricity flows, as well as remote communication
with other appliances. In order to fully exploit their potential, well-defined
measurement and verification protocols are needed, as well as standards for
interoperability.
All countries considered in this survey have either decided to roll out smart
meters or are still in the process of developing a roll-out strategy. In Flanders,
for instance, the minister of energy confirmed her intentions to proceed with
a roll-out from 2019 onward, but a definite political decision will be made by
the end of 2015. The other regions have already made specific plans for roll-
out within the next 5 years. There is, however, a difference in the approach:
whereas most regions choose a regulated market model, with the DSO as the
owner and operator of the meter and its data, the United Kingdom has cho-
sen for a commercial model, in which the supplier is responsible for roll-out,
and data collection happens through a central hub.
Notwithstanding the benefits smart meters can provide, it should be
noted that the ownership model of these meters, and especially of their data,
may strongly affect the extent to which new demand-side services can be
designed. One downside resulting from having a regulated metering model,
in which ownership lies with the DSO and metering functionalities are uni-
form and based on predefined standards, is that this is a one-size-fits-all solu-
tion. For many consumers, if not most, the data provided by smart meters
may be partly unnecessary. For others, the data may be insufficient. Having a
competitive metering model allows for tailored solutions. However, because
meters and their data have high strategic value, a competitive ownership
Are Smart Grids the Holy Grail of Future Grid Mix? 145
Acknowledgments
This study has been implemented within the GREAT (Growing Renewable
Energy Applications and Technologies) project funded by the European
146 Analysis of Energy Systems: Management, Planning, and Policy
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6
Renewables Optimization in
Energy-Only Markets
CONTENTS
6.1 Introduction................................................................................................. 149
6.2 Growth of RES-E......................................................................................... 150
6.3 “Merit-Order Effect” and the “Missing Money Problem”.................... 154
6.4 Market Integration of High Level RES-E................................................. 159
6.5 RES-E Optimization through Market Integration................................. 163
6.6 Final Remarks.............................................................................................. 165
Acknowledgments............................................................................................... 166
References.............................................................................................................. 166
6.1 Introduction
The promotion of renewable energy source for electricity (henceforth referred
to as RES-E) by the European Union (EU) aims to reduce dependency on
imported fossil fuels and greenhouse gas (GHG) emissions, resulting in
the successful deployment of RES-E generation in Europe (European Union
2009a). This has been achieved through a set of energy policies, compris-
ing, among others, strong financial instruments, like feed-in tariffs, feed-in
premia, fiscal incentives, and tax exemptions (Meyer 2003; Jager et al. 2011).
The changes in the European electricity systems are profound and ongo-
ing. New challenges arise from the high-level penetration of RES-E, both in
the technical sense and in the market design, due to the known RES-E inter-
mittency and nondispatchability (Benatia et al. 2013).
Simultaneously, electricity markets in Europe are being restructured in
face of a number of European policies intending to guarantee the supply of
electricity, reduce costs, foster competition, ensure security of supply, and
protect the environment (European Union 2009b). Alongside, unbundling
and privatization of the electricity supply industry has been achieved in most
of the EU Member States, together with the creation of independent national
regulatory agencies, introducing competition at the different market levels
149
150 Analysis of Energy Systems: Management, Planning, and Policy
6.2 Growth of RES-E
The world demand for energy calls for increasing sustainable energy sys-
tems. “Sustainable” means, in this context and according to Brundtland’s
report (Brundtland 1987), energy that does not jeopardize future genera-
tions, a reality that can be accomplished through renewable energy sources.
Renewables Optimization in Energy-Only Markets 151
Denmark
Hydropower RES-E (without hydro) Wind power Solar power Geothermal and biomass
0.5
Electricity generation share of demand
0.4
0.3
0.2
0.1
0.0
1990 2000 2010 1990 2000 2010 1990 2000 2010 1990 2000 2010 1990 2000 2010
Date
FIGURE 6.1
Hydropower, RES-E, wind, solar, and geothermal/biomass electricity generation shares evolu-
tion in Denmark. (From BP, Statistical Review of World Energy 2015, 2015, http://www.bp.com/
en/global/corporate/energy-economics/statistical-review-of-world-energy.html. Accessed
March 31, 2016.)
Portugal
Hydropower RES-E (without hydro) Wind power Solar power Geothermal and biomass
0.5
Electricity generation share of demand
0.4
0.3
0.2
0.1
0.0
1990 2000 2010 1990 2000 2010 1990 2000 2010 1990 2000 2010 1990 2000 2010
Date
FIGURE 6.2
Hydropower, RES-E, wind, solar, and geothermal/biomass electricity generation shares evolu-
tion in Portugal. (From BP, Statistical Review of World Energy 2015, 2015, http://www.bp.com/
en/global/corporate/energy-economics/statistical-review-of-world-energy.html. Accessed
March 31, 2016.)
Renewables Optimization in Energy-Only Markets 153
Spain
Hydropower RES-E (without hydro) Wind power Solar power Geothermal and biomass
0.5
Electricity generation share of demand
0.4
0.3
0.2
0.1
0.0
1990 2000 2010 1990 2000 2010 1990 2000 2010 1990 2000 2010 1990 2000 2010
Date
FIGURE 6.3
Hydropower, RES-E, wind, solar, and geothermal/biomass electricity generation shares evolu-
tion in Spain. (From BP, Statistical Review of World Energy 2015, 2015, http://www.bp.com/en/
global/corporate/energy-economics/statistical-review-of-world-energy.html. Accessed March
31, 2016.)
Germany
Hydropower RES-E (without hydro) Wind power Solar power Geothermal and biomass
0.5
Electricity generation share of demand
0.4
0.3
0.2
0.1
0.0
1990 2000 2010 1990 2000 2010 1990 2000 2010 1990 2000 2010 1990 2000 2010
Date
FIGURE 6.4
Hydropower, RES-E, wind, solar, and geothermal/biomass electricity generation shares evolu-
tion in Germany. (From BP, Statistical Review of World Energy 2015, 2015, http://www.bp.com/
en/global/corporate/energy-economics/statistical-review-of-world-energy.html. Accessed
March 31, 2016.)
154 Analysis of Energy Systems: Management, Planning, and Policy
United Kingdom
Hydropower RES-E (without hydro) Wind power Solar power Geothermal and biomass
0.5
Electricity generation share of demand
0.4
0.3
0.2
0.1
0.0
1990 2000 2010 1990 2000 2010 1990 2000 2010 1990 2000 2010 1990 2000 2010
Date
FIGURE 6.5
Hydropower, RES-E, wind, solar, and geothermal/biomass electricity generation shares
evolution in the United Kingdom. (From BP, Statistical Review of World Energy 2015, 2015,
http://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world-
energy.html. Accessed March 31, 2016.)
2008-07-01 to 2014-03-15
Electrical energy bids at zero (MWh)
50,000
40,000
30,000
20,000
10,000
FIGURE 6.6
OMIE electrical energy bids at zero vs. renewable power generation.
2008-07-01 to 2014-03-15
Electrical energy bids at zero (MWh)
50,000
40,000
30,000
20,000
10,000
0 40 80 120
Spot electricity price (€/MWh)
FIGURE 6.7
OMIE electrical energy bids at zero vs. spot electricity price.
aggregated supply curves with, and without, the RES-E bids, it is possible to
compute the merit-order effect, which for this hour alone amounted to 2.1
million Euros.
Felder (2011) actually stated that by providing incentives to “out-of-market”
technologies, such as most renewables, spot electricity prices would fall to
zero. Lower spot electricity prices* are often used to justify the incentives
* For example, each GWh of RES-E predicted in German-Austria Würzburg et al. (2013)
reported €1/MWh decrease in spot electricity price.
Renewables Optimization in Energy-Only Markets 157
2014-01-28 hour 20
150
Price (€/MWh)
100
50
0
0 20,000 40,000 60,000 80,000
Electrical energy (MWh)
FIGURE 6.8
OMIE residual electrical energy vs. spot electricity price.
2008-07-01 to 2014-03-15
50,000
40,000
Residual load (MWh)
30,000
20,000
10,000
0 40 80 120
Spot electricity price (€/MWh)
FIGURE 6.9
OMIE aggregated demand and supply curves (with RES-E bids—solid and without RES-E
bids—dashed).
* Exit barriers, originating from policy or economic reasons, means retiring plants from the
electricity market not mothballing (Nelson et al. 2015).
† Balancing services can consist of primary reserve, secondary reserve, automatic generation
45% generation share, further spot electricity price reductions will be seen,
aggravating the missing money problem. Edenhofer et al. (2013) summa-
rize three possible causes for the “missing money problem”: capped spot
prices during scarcity events, low spot electricity prices to sustain existing
capacity, and investors discouraged by high price volatility and risks. A gen-
eration adequacy problem arises, given the absence of new capacity deploy-
ment (Cramton and Stoft 2006).
The challenges faced by the integration of high levels of RES-E require the
introduction of additional strategies in the European electricity sector. These
are discussed in the following section.
Given the GHG emission reduction targets and the flexibility required,
it is fundamental to prioritize the development of power storage and
Rule−of−thumb
1.0
0.8
ility
probab
0.6
t split
Marke
0.4
0.2
0.6
0.0
h)
MW
0.4
T(
0.6
er P
pow
Hy 0.4 0.2
dro
pow
nd
er P
T( 0.2 Wi
MW
h)
0.0
FIGURE 6.10
Predicted probability response to wind and hydro power generation shares in Portugal.
* The current cross-border interconnection capacity is 3000 MW representing 32% of the small-
est bidding area peak demand.
Renewables Optimization in Energy-Only Markets 165
the European energy policy. This would allow price convergence between
bidding areas to be within reasonable levels, fostering market integration.
6.6 Final Remarks
As we mentioned in the previous sections, the extensive deployment of
RES-E in some European electricity markets creates demanding challenges
to the electricity sector. RES-E development aims to improve energy secu-
rity, decrease the dependency on fossil fuels, and reduce greenhouse gas
emissions. With the targets set for 2030 by the EU, establishing a RES-E
share increase to 45%, RES-E is required to further grow in the electricity
system. Given the “merit-order effect,” where the low marginal cost RES-E
displaces the aggregated supply bid curve to the right, the available residual
load decreases dramatically for technologies with higher marginal costs.
Additionally, spot electricity prices also decrease and the market fails to pro-
vide correct signals to sustain adequate generation capacity, the “missing
money problem.”
Moreover, RES-E integration into the electricity market requires market
adjustments in order to overcome the identified failures. The melting-pot
and salad-bowl express the two alternative routes for policy makers; how-
ever, one thing we can ascertain is that flexibility of the electricity system is
fundamental to obtain an efficient electricity market. This flexibility can be
obtained through a number of strategies, of which regional market integra-
tion and demand response seem to be unanimous throughout the literature.
Policy makers pursue regional market integration because it is believed
that it will lead to economic efficiency and greater competition, benefiting
from cross-border interconnections and trade. It provides the desired elec-
tricity system flexibility for RES-E market integration and improves secu-
rity of supply. Nevertheless, congestion of cross-border interconnections,
thus electricity price divergence between bidding areas, is demonstrated
to occur with high low marginal cost generation, and consequently rein-
forcing the transmission grid and cross-border interconnections is vital.
Transmission grid and cross-border interconnection expansions should be
coordinated with RES-E deployment in order to contribute to electricity
price convergence.
Albeit recognizing some factors that influence the deployment of renew-
ables, there is no defined formula to facilitate the integration of high lev-
els of RES-E into the electricity system. Policy makers and stakeholders, in
general, have to consider all available strategies and tailor the best possible
path, bearing in mind that interactions between regions exist and that the
objective is common: to obtain a competitive, reliable, and sustainable elec-
tricity system.
166 Analysis of Energy Systems: Management, Planning, and Policy
Acknowledgments
This work was supported by the Fundação para a Ciência e a Tecnologia (FCT)
under project grant UID/MULTI/00308/2013.
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7
Optimal Scheduling of a Microgrid
under Uncertainty Condition
CONTENTS
7.1 Introduction.................................................................................................171
7.2 Microgrids....................................................................................................172
7.2.1 Definitions........................................................................................172
7.2.2 Structures of Control......................................................................174
7.2.3 Microgrid Ownership and Business Model................................175
7.2.3.1 The DSO Monopoly Model.............................................175
7.2.3.2 The Prosumer Consortium Model.................................175
7.2.3.3 The Free Market Model...................................................175
7.3 Deliberalized Energy Market Structure...................................................176
7.3.1 Agents in the Deregulated Electricity Market............................176
7.3.2 The Pool............................................................................................177
7.4 Uncertainties Evaluation...........................................................................178
7.4.1 Uncertainty Factors.........................................................................178
7.4.1.1 Load...................................................................................178
7.4.1.2 Electricity Prices...............................................................179
7.4.1.3 Renewable Power Production........................................179
7.4.2 Forecasting Techniques..................................................................179
7.4.2.1 Conventional Approach..................................................180
7.4.2.2 Computational Intelligence............................................183
7.4.2.3 Other Approach: The Weather Predictions..................184
7.5 Case Study...................................................................................................186
7.6 Conclusion...................................................................................................194
References..............................................................................................................194
7.1 Introduction
Due to the increase of the energy demand, to the obsolescence of the HV grid,
to the improving of the sensitivity to environmental issue, micro-grids (MGs)
and smart-grids (SGs) can become a real opportunity of success.
171
172 Analysis of Energy Systems: Management, Planning, and Policy
These are conceived as electric grids in low voltage (LV) and medium volt-
age (MV), respectively, able to deliver electricity in a controlled smart way
from points of generation to consumers. Through the two-way flow of infor-
mation between suppliers and consumers, the new grids encourage users’
participation in energy saving and their cooperation through the demand–
response mechanism.
Several investigators have analyzed the role played by MGs/SGs in terms
of energy price reduction or reliability system improvement, as well as their
impact on the operating costs reduction or on environmental aspects.
In this chapter, a risk management model for the day-ahead energy market
is proposed to determine optimal economic choices for the management of
an MG that works under uncertainty conditions.
The chapter is divided into four sections. In the first, the MG concept is
described; in the second, the market structure is analyzed; in the third, sev-
eral methodologies to evaluate the uncertainties are discussed; and in the last
section, a case study is presented.
7.2 Microgrids
7.2.1 Definitions
The power grid consists of various electrical components and at multiple
levels: transmission in high voltage (HV), distribution in medium voltage
(MV), and distribution in low voltage (LV).
In this framework, the microgrids (MGs) are classified as a distribution grid
with distributed energy resources (microturbines, fuel cells, photovoltaics—
PV, etc.) and storage devices (flywheels, energy capacitors, and batteries),
usually in LV, able to provide services in both autonomous (island) and grid-
connected modes (Figure 7.1).
Different components, designs, and rules are defined by the manager of an
MG, who aggregates the capacity of different components and buys or sells,
for each hour, power from/to the grid with higher-level voltage (Lassater,
2001; Schwaegerl et al., 2009b; Del Carpio et al., 2010; El-hawary, 2014; Graditi
et al., 2016a).
From the grid’s point of view, an MG is as a controlled entity within the
power system that can operate as a single aggregated load; from a customer’s
point of view, MGs not only provide their thermal and electricity needs, but
in addition, enhance local reliability, reduce emissions, improve power qual-
ity, and can contribute to the accommodation of electric vehicles and stor-
ages (Figure 7.2). In this framework, the concept of control and management
assumes a key role (Favuzza et al., 2006; Schwaegerl et al., 2009a,b, 2010).
Optimal Scheduling of a Microgrid under Uncertainty Condition 173
20 kW
Grid
400 V
Residential load
PV 3
Commercial load
Industrial
load
PV 2
PV 1
PV 4
FIGURE 7.1
Microgrid scheme.
Micro grid
Objectives
Accomodation of
Environmental Smart devices
electric
friendly implementation
vehicles and storages
FIGURE 7.2
Microgrid advantages.
174 Analysis of Energy Systems: Management, Planning, and Policy
7.2.2 Structures of Control
There is no general structure of MG control architecture, since the configura-
tion depends on the type of MG or the existing infrastructure, but, indepen-
dent of the architecture, the hierarchic scheme comprises the three following
levels (Schwaegerl et al., 2009b; Mahmoud et al., 2014):
* There is no formal definition of an agent, but in the literature (Alfredo et al., 2012; Alessandrini
et al., 2014) the following basic characteristics are provided:
• An agent can be a physical entity that acts in the environment or a virtual one, that is, with
no physical existence.
• An agent is capable of acting in the environment, that is, the agent changes its environment
by its actions.
• Agents communicate with each other, and this could be regarded as part of their capability
for acting in the environment.
• Agents have a certain level of autonomy, which means that they can take decisions without a
central controller or commander. To achieve this, they are driven by a set of tendencies.
Optimal Scheduling of a Microgrid under Uncertainty Condition 175
*
There also exists the possibility of bilateral contracts between suppliers and consumers
defined outside an organized market place.
Optimal Scheduling of a Microgrid under Uncertainty Condition 177
7.3.2 The Pool
The pool is a marketplace where the energy is traded and typically includes
(Figure 7.3)
1. A day-ahead market
2. Several adjustment markets
3. Balancing markets
In the pool, producers submit production offers while consumers and retail-
ers submit consumption bids to the day-ahead, adjustment, and balancing
markets, and in turn, the MO clears these markets and determines prices and
traded quantities.
The energy traded in the pool is mostly negotiated in the day-ahead mar-
ket, while adjustment markets are used to make adjustments to the output of
the day-ahead market.
In the day-ahead and adjustment markets, producers submit energy blocks
and their corresponding minimum selling prices for every hour of the market
horizon and every production unit. At the same time, retailers and consum-
ers submit energy blocks and their corresponding maximum buying prices
for every hour of the market horizon (Rossi, 2007).
The MO collects purchase bids and sale offers and clears the market (both
day-ahead and adjustment) using a market-clearing procedure.
A market-clearing procedure results in market-clearing prices, as well as
production and consumption schedules. If the transmission grid is not con-
sidered in the market-clearing procedure, the resulting market-clearing price
is identical for all market agents.
Day-ahead
market
Adjustment
market First section
The pool
Adjustment
market Last section
Balancing
market
FIGURE 7.3
The pool structure.
178 Analysis of Energy Systems: Management, Planning, and Policy
On the other hand, if the transmission network is taken into account for
clearing the market, instead of a single market-clearing price, a locational
marginal price (LMP) is associated with each node of the power system.
The balancing market, cleared on an hourly basis (or several times within
each hour) through an auction, provides energy to cover both generation
excess and deficit and constitutes the last market prior to power delivery to
balance production and consumption.
Producers/consumers submit balancing offers that are accepted by the
MO on an increasing price basis until balance is guaranteed in the case of
deficit of generation.
Alternatively, for the case of excess of generation, offers to reduce produc-
tion are accepted on a decreasing price basis until balance is ensured.
Producers participate providing balancing (up and down) energy, while
nondispatchable producers and consumers use this market to self-balance
their energy productions and consumptions, respectively, to those values
agreed upon in previous pool markets. Retailers that behave as consumers
are not represented in this figure for the sake of simplicity. The balancing
market ensures a balanced system operation (Rossi, 2007).
7.4 Uncertainties Evaluation
Forecasting is an important tool and a crucial factor, especially in the deregu-
lated energy market where a decision maker has the need of accurate forecasts
of future demands, energy prices, and also fossil fuel to maximize revenues.
Depending on the time horizon and the operating decisions that need to
be made, different forecasts are needed: short-term, medium-term, and long-
term forecasting.
In general, long-term forecasting is needed for system planning and eco-
nomic analyses; medium-term forecasting is needed for maintenance of the
system; finally, short-term forecasting is needed for the day-to-day operation
of the system (Conejo et al., 2010; Silva et al., 2011).
In this work, short-term forecasting (for electricity price, load, and intermit-
tence power production) is treated in depth because the accuracy of these
allows significant saving operating costs and an enhanced system reliability.
7.4.1 Uncertainty Factors
7.4.1.1 Load
Electricity demand forecasts are extremely important for energy suppliers
and other participants in electric energy generation, transmission, distribu-
tion, and markets. Various techniques and models have been developed for
the forecasting of electrical load with varying degrees of success.
Optimal Scheduling of a Microgrid under Uncertainty Condition 179
Load series exhibits several levels of seasonality; the prediction does not
depend only on the previous hour load, but also on the load of the same
hour on previous day, and same denominations in the previous week (Bunn,
2000; Hesham et al., 2002; Feinberg and Genethliou, 2005; Khan et al., 2006;
Kyriakides and Polycarpou, 2007).
According to the forecasting horizon, load forecasting can be broadly
divided into three categories: short-term forecasts, which are usually from
1 hour to 1 week; medium forecasts, which are usually from a week to a year;
and long-term forecasts, which are longer than a year.
7.4.1.2 Electricity Prices
Electricity price forecasting is characterized by time-of-the-day effect, mul-
tiple seasonality, high volatility, and nonstationarity mean and variance.
Various techniques and models have been developed for the forecast-
ing of electrical price with varying degrees of success. According to the
forecasting horizon, price forecasting can be broadly divided into three
categories: short-term forecast that covers time intervals ranging from less
than 1 hour to a few hours; medium forecast that covers several hours to
a few days ahead; and long-term forecast that covers seasonal to annual
horizons (Bunn, 2000; Khan et al., 2006; Hu et al., 2009; Jain et al., 2013;
Weron, 2014).
7.4.2 Forecasting Techniques
A large number of methods and techniques have been developed and vari-
ous approaches have been introduced. They can be grouped, usually, into
two main classes: classical/conventional methods and computational intel-
ligence-based techniques. The first category includes methods such as time
series models, regression models, and Kalman filtering-based techniques.
Computational intelligence-based techniques include expert systems,
180 Analysis of Energy Systems: Management, Planning, and Policy
Forecasting techniques
Others
Conventional Computational
techniques
approaches intelligence
(i.e., meterological)
Evolutionary
Neural
Statistical methods Fuzzy and genetic
network
algorithm
Regression Kalman
Time series
model filtering
FIGURE 7.4
Forecasting techniques classification.
7.4.2.1 Conventional Approach
7.4.2.1.1 Time Series Models
Time series analysis is a method of forecasting that focuses on the past behav-
ior of the dependent variable. Using the time series approach, a model is first
developed based on the previous data, and then future variable is predicted
based on the model. The basic assumption of stationarity on the error terms
includes zero mean and constant variance.
These techniques assume that the data follow a certain stationary pattern
that depends on autocorrelation; trends in the data; and daily, weekly, and
seasonal variations.
Time series models appear in the literature in different forms such as
Box–Jenkins, time series, stochastic models, autoregressive moving aver-
age (ARMA), autoregressive integrated moving average (ARIMA), auto
Optimal Scheduling of a Microgrid under Uncertainty Condition 181
y (t ) = ∑
i =1
ai y ( t − i ) + ∑∑
k =1 jk = 0
b jk uk ( t − jk ) + ∑c w (t − h )
h =1
h (7.1)
where
uk(t), k = 1, 2, … , nu represent the inputs
w(t) is a zero-mean white random process that represents uncertain effects
on load demand and random load behavior
The goal is to identify the parameters ai , bjk , and ch and the integers n, nu, mk,
and H by fitting the model using historical data.
In general, time series methods give satisfactory results if there is no change
in the variables that affect load demand (i.e., environmental variables).
where
μ is the mean of the series
φ1, … , φq are the parameters of the model
εt−1, … , εt−q are white noise error terms
Y ( t ) = ϕ ( B ) a ( t ) (7.3)
where
(
Y ( t ) = µ + 1 + ϕ1B + + ϕqBq εt )
(7.5)
7.4.2.1.3 Autoregressive (ARMA)
The autoregressive moving average model takes into account the random
nature and time correlations of the phenomenon under study.
In this model, the current values of time series Y(t) express linearly in terms
of the previous period (y(t − 1) , y(t − 2) , …) and current and previous values
of white noise (a(t) , a(t − 1) , a(t − 2) , …).
The mathematical model is as follows:
Y ( t ) = Φ1 y ( t − 1) + + Φ p y ( p − t ) + + a ( t − 1) + + Φ q a ( t − q ) (7.6)
In the ARMA(p, q) model, the current value of the price yt is expressed lin-
early in terms of its p past values (autoregressive part) and in terms of q pre-
vious values of the noise (moving average part): φ(B)Xt = θ(B)εt.
Here, B is the backward shift operator, θ(B) is a shorthand notation for
θ(B) = 1 + θ1B + … + θqBq, where φ1 , … , φp and θ1 , … , θq are the coefficients of
autoregressive and moving average polynomials, respectively.
Finally, εt is the noise (or white noise) with zero mean and finite vari-
ance, which is often denoted by White Noise (0, σ2). For q = 0, we obtain the
well-known AutoRegressive AR(p) model, and for p = 0, we get the Moving
Average MA(q) model.
7.4.2.1.4 ARIMA Model
If a process is nonstationary, it should be transformed into a stationary
process.
If a process is nonstationary, it should be transformed into a stationary
process by introducing ∇ operator.
The autoregressive integrated moving average (ARIMA) or Box–Jenkins
model has three types of parameters: the autoregressive parameters
(φ1 , … , φp), the number of differencing passes at lag-1 (d), and the moving
average parameters (θ1 , … , θq).
A series that needs to be differenced d times at lag-1 and afterward has
orders p and q of the AR and MA components, respectively, is denoted by
ARIMA(p, d, q) and can be written conveniently as φ(B)∇dXt = θ(B)εt, where
∇Xt ≡ (1 − B)xt is the lag-1 differencing operator, which is a special case of the
more general lag-h differencing operator
∇hXt ≡ ( 1 − Bh ) xt ≡ xt − xt − h.
7.4.2.1.5 Regression Models
The regression-type forecasting model is based on the relationship between
several dependent variables and a number of independent variables that are
known or estimated.
Although regression-based methods are widely used by electric utilities,
they suffer from a number of drawbacks. Due to the nonlinear and complex
relationship between the load demand and the influencing factors, it is not
simple to develop an accurate model.
One of the main reasons for this drawback is that the model is linearized
in order to estimate its coefficients. However, the load patterns are nonlinear
and it is not possible to represent the load demand during distinct time peri-
ods using a linearized model.
Finally, as with time series methods, regression-based methods may suffer
from numerical instability.
The proposed procedure requires few parameters that can be easily calcu-
lated from historical data by applying the cross-validation technique.
Multiple regression is based on least squares: the model is fitted such that
the sum-of-squares of the differences between observed and predicted val-
ues is minimized. In its classical form, multiple regression assumes that the
relationship between variables is linear:
where
B is a vector of constant coefficients
Xt is the vector of regressors
εt is an error term
7.4.2.2 Computational Intelligence
7.4.2.2.1 Artificial Neural Network (ANN)
The artificial neural networks (ANNs) are highly interconnected, simple pro-
cessing units designed to model how the human brain performs a particular
184 Analysis of Energy Systems: Management, Planning, and Policy
task. The main idea behind the use of neural networks for forecasting is the
assumption that there exists a nonlinear function that relates past values and
some external variables to future values of the time series.
During the training process, neurons in the input layer pass the raw
information onto the rest of the neurons in the other layers, without any
processing. The weights between neurons keep updating according to
supervised learning. Based on the measures of minimal error between the
output produced and the desired output, the process is repeated until an
acceptable error is reached. This training process is called back propaga-
tion. After the model acquires the knowledge, new data can be tested for
forecasting.
There are three steps that need to be considered in using neural network
models for time series prediction: designing the neural network model, train-
ing the network, and testing the trained network on a data set that has not
been used during the training.
Due to their nonlinear approximation capabilities and the availability of
convenient methods for training, artificial neural networks are among the
most commonly used methods for electricity load forecasting, especially
during the last 10 years.
the observed historical energy production associated with the selected historical
forecasts (Kumar and Kumar, 2011; Alessandrini et al., 2014, 2015). For each fore-
cast lead time and location, the ensemble prediction of solar power is constituted
by a set of past production data. These measurements are those concurrent to
past deterministic numerical weather prediction forecasts for the same lead time
and location, chosen based on their similarity to the current forecast, and in the
current application, are represented by the 1 hour average produced solar power.
1. The neural network performs the forecasting and the fuzzy logic sys-
tem is used to determine the final output.
2. The data are preprocessed using fuzzy logic to remove uncertain-
ties and subsequently a neural network is used to calculate the load
estimates.
3. Integrated fuzzy–neural systems where the hidden nodes of the neu-
ral network correspond to individual fuzzy rules that are adaptively
modified during the training process.
4. Separate neural and fuzzy systems that perform a forecast of differ-
ent components of the load; these components are then combined at
the output to calculate the total load demand.
The combination of fuzzy logic and artificial neural networks creates a hybrid
system that is able to combine the advantages of each technique and dimin-
ish their disadvantages. The main advantages of the hybrid system are the
ability to respond accurately to unexpected changes in the input variables,
the ability to learn from experience, and the ability to synthesize new rela-
tionships between the load demand and the input variables.
7.5 Case Study
In this case study, the risk-bidding strategy for the day-ahead energy market
is proposed to determine optimal economic choices for the management of a
grid-connected residential MG (Kumar and Kumar, 2011; Taheri et al., 2012).
It is assumed that the MG consists of different power generation units and
traditional power plants, combined heat and power (CHP) generators, PV
system, and independent boiler, and that it is controlled and managed by a
prosumer. The prosumer participates in the electricity market and needs to
determine the optimal bidding (Timmerman and Huitema, 2009; Vogt et al.,
2010; Shandurkova et al., 2012; Ferruzzi et al., 2015, 2016; Ottensen et al., 2016).
PV power forecast and the uncertainty associated with its electricity genera-
tion have been evaluated through the AnEn approach: the choice of the AnEn
approach has been made considering the suitable features of this probabi-
listic method, such as statistical consistency, reliability, resolution, and skill.
Let ΩCe be the set of CHP plants, ΩB be the set of heat production plants,
and ΩG be the set of power plants that only produce electricity. PCet, j indicates
the power of the jth unit of CHP generation production at the tth hour; PGt , j
is the power of the jth unit of only electricity production at the tth hour; PBt , j
is the thermal power of the jth heat production at the tth hour; and Pgridt is the
power interchange with the MV distribution network at the tth hour. The latter
is assumed positive if it is bought from the utility grid and negative if it is sold
to the utility grid. Finally, CCj indicates the power production cost of the jth
unit of CHP; Cgj is the power production cost of the jth thermoelectric unit, and
Cgj is the thermal production cost of the jth heat production. ρt is the energy
e
price at the tth hour, which is assumed equal for both buying and selling.
Then, the optimization problem consists of minimizing the following func-
tion under a set of technical and operational constraints, as in Ferruzzi et al.
(2015, 2016):
24
∑ ∑ ( ) ∑ ( ) ∑ ( )
j∈ΩC
Cc j PCet , j + CBj PBt , j + CGj PGt , j + ρte Pgridt
t =1 j∈ΩB j∈ΩC
n
+ ∑∑ (
j∈ΩRES p =1
)
ξρte xt − xtp
(7.8)
Optimal Scheduling of a Microgrid under Uncertainty Condition 187
where ε is a weight (Mongin, 1997) that takes into account the case in which
( x − x ) is positive (overproduction) or negative (underproduction), which
t
p
t
is only caused by PV power generation.
The term ( x − x ) represents the difference between the expected value
p
t t
of the power produced by the PV plant and the probabilistic value of the
analogs.
The introduced weight assumes different values in underproduction and
overproduction cases. It is important to factor it into the model because sev-
eral countries have in place legislation requiring power producers to pay
penalties proportional to the errors of the day-ahead energy forecast, which
makes the accuracy of such prediction a determining factor for producers to
reduce their economic losses.
In Equation 7.9, the hourly production costs can be expressed by the fol-
lowing functional relations:
( )
Cc j Pcet , j = α c j Pc2et , j + βc j Pcet , j + γ c j
( )
CGj PGt , j = αGj PG2t , j + βGj PGt , j + γ Gj (7.9)
CB j (P ) = β
Bt , j P
B j Bt , j + γ Bj
TABLE 7.1
Technical and Economic Characteristics of the Power Plants
Power Plants Pjm (kW) PjM (kW) γPj (c€) βPj (c€) αPj (c€) βBj (c€)
Cogeneration (CHP)
XA: 60 kW 10 60 800 45.81 0.2222
XB: 60 kW 10 60 461 51.60 0.1000
YA: 180 kW 36 180 892 34.40 0.0021
YB: 180 kW 36 180 892 180 0.0420
Traditional
ZA: 400 kW 80 400 1054 25.78 0.0005
ZB: 400 kW 80 400 1054 21.63 0.0025
Boiler 0 4500 63.0
150
X Y Z
100
Price
50
XA = 60 YA = 180 ZA = 400
XB = 60 YB = 180 ZB = 400
FIGURE 7.5
Power production related to various energy prices.
The forecast trends of power generation from the PV system are reported
in Figure 7.6, where each panel shows the boxplots of the forecast for the
power generated by the PV plant and computed by the AnEn algorithm.
The three curves resulting from the genetic algorithm optimization,
shown in each panel, quantify the amount of PV electricity included in the
Optimal Scheduling of a Microgrid under Uncertainty Condition 189
TABLE 7.2
Minimum and Maximum Spot Prices and Electrical Loads
Averaged over 12 Months for a 24-Hours Period
Hours Min Price (€/MWh) Max Price (€/MWh) Load (kW)
1 30.7 102.6 440
2 25.7 96.6 440
3 21.4 92.0 440
4 17.3 87.0 440
5 14.9 85.7 440
6 16.6 86.8 740
7 16.1 85.5 1200
8 16.6 145.1 1905
9 26.4 188.8 2345
10 32.7 207.0 2405
11 32.2 207.1 2420
12 29.5 206.5 2440
13 27.2 143.9 2470
14 15.2 121.9 2465
15 12.1 144.5 2450
16 12.8 163.7 2395
17 20.2 186.6 2360
18 36.5 196.6 2335
19 56.9 222.3 1695
20 69.9 211.9 1425
21 64.1 324.2 1295
22 60.0 156.3 955
23 52.0 144.4 530
24 39.1 101.7 425
400 Type
PV high risk
PV low risk
PV medium risk
300
Power (kW)
200
100
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
(a) Hours (t)
400 Type
PV high risk
PV low risk
PV medium risk
300
Power (kW)
200
100
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
FIGURE 7.6
PV power production as a function of risk (adverse, neutral, incline) and price: (a) low price;
(b) medium price. The boxplots show the AnEn PV power forecasts, and the different curves
indicate the quantity of PV electricity included in the bidding depending on the prosumer
adversity to risk. (Continued)
Optimal Scheduling of a Microgrid under Uncertainty Condition 191
400
Type
PV high risk
PV low risk
PV medium risk
300
Power (kW)
200
100
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
(c) Hours (t)
optimal production versus the spot price coincides with the curve of the
equivalent marginal cost of production. This curve is obtained by summing
for the same price the marginal costs of the various power generation units.
For each point of the bidding curve, the value of power offered is equal to
the difference between the total electric load requested and the total electric
power produced within the MG.
The hourly power offered in the day-ahead energy market coincides with
the power exchanged with the MV distribution network, in correspondence
to a specific energy market price. The power corresponding to the vertical
segment of the bidding curve is the difference between the load and the max-
imum production of the generating units compatible with the constraints,
including the energy produced by the PV system for the specific hour.
Results show that PV energy production can be integrated with optimal
outcomes in an MG if the prosumer strategy takes into account the uncer-
tainty linked to the energy output. Outcomes show different optimal bids
depending on the risk adversity with respect to the uncertainty of PV power
production. The proposed methodology exhibits most improvement during
the hours in which the price of electricity is high and where the prosumer is
inclined to take risks.
192 Analysis of Energy Systems: Management, Planning, and Policy
2500
Type
2000 Load
Pgrid
Power generated
1500 PV
Power (kW)
1000
500
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
(a) Hours (t)
2500
Type
2000 Load
Pgrid
Power generated
1500 PV
Power (kW)
1000
500
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
(b) Hours (t)
FIGURE 7.7
Power production in function of risk in case of low price: (a) risk adverse, (b) risk neutral. Red
line (top) is the electricity load, green line (medium) is the electricity power exchanged (buy/
sell) with the MV grid, blue sky line (bottom) is the power generated. The last line is the total
amount of energy produced by PV. (Continued)
Optimal Scheduling of a Microgrid under Uncertainty Condition 193
2500
Type
2000 Load
Pgrid
Power generated
1500 PV
Power (kW)
1000
500
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
(c) Hours (t)
140 Type
Risk high
120 Risk low
Risk medium
100
Price (c...)
80
60
40
20
FIGURE 7.8
Bidding curve for the hour assuming a prosumer taking high risk (solid), medium risk (dotted),
and low risk (dashed).
194 Analysis of Energy Systems: Management, Planning, and Policy
7.6 Conclusion
A risk-bidding strategy for the day-ahead energy market was proposed to
determine optimal economic choices for the management of a grid-connected
microgrid comprising different generation units. It is assumed that the MG
was controlled and managed by a prosumer that participates in the electric-
ity market and needs to determine the optimal bidding.
Results show that PV energy production can be integrated with optimal
outcomes in an MG if the prosumer strategy takes into account the uncer-
tainty linked to the energy output.
PV power forecast and the uncertainty associated with its electricity gen-
eration have been evaluated through the AnEn approach.
Furthermore, outcomes show different optimal bids depending on the risk
adversity with respect to the uncertainty of PV power production.
Further research will focus on the evaluation of the uncertainty of the
energy price and also the electrical load, in order to provide to the manager
of the MG a complete decisions support tool.
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8
Cost–Benefit Analysis for Energy Policies
Jacopo Torriti
CONTENTS
Abstract..................................................................................................................197
8.1 Introducing Cost–Benefit Analysis...........................................................198
8.2 Historical Development of CBA...............................................................199
8.3 Assessing Costs and Benefits....................................................................200
8.4 Basic Principles Underpinning CBA........................................................202
8.5 Beyond CBA: Other Appraisal Tools to Assess Energy Policies,
Programs, and Projects...............................................................................204
8.6 CBAs on Energy: Institutional Differences.............................................205
8.6.1 CBAs on Energy Policies by Government Departments...........205
8.6.2 CBAs on Energy Regulation..........................................................208
8.6.3 CBAs by the European Commission............................................209
8.7 Quality of the Data and CBAs on Energy...............................................210
8.8 Conclusion...................................................................................................212
References..............................................................................................................214
Abstract
Over the past three decades, cost–benefit analysis (CBA) has been applied to
various areas of public policies and projects, including energy. Research on
CBA varies significantly and can be classified into two wide areas of work:
(1) studies identifying the technical and economic reasons underpinning CBA
and (2) studies consisting of empirical evaluations over the performance of
samples of CBA.
CBA is not the only example of economic tools applied to energy policy-
making. Since the 1960s, the impact of energy policy measures has been
assessed within the framework of various appraisal and evaluation tools.
Decision analysis, environmental impact assessment, and strategic envi-
ronmental assessment are all notable examples of appraisal tools predating
and alternatives to CBA in the assessment of energy policies, programs, and
projects. This chapter provides an overview not only of CBA but also of other
197
198 Analysis of Energy Systems: Management, Planning, and Policy
appraisal and evaluation tools that have been historically applied to assess
the impacts of energy policies, programs, and projects. It focuses on the types
of data and models that typically inform CBAs for energy policies, the orga-
nizations involved, and issues of data exchange between energy companies
and policy-makers. It is concluded that the technical and economic analy-
ses underpinning CBAs on energy policy and regulation vary significantly
depending on the type of policy, institutional aspects of decision-making,
and availability of data.
From a theoretical point of view, CBA has been seen as a tool to increase
the quality of regulation and public policy through welfare economics
principles and Pareto efficiency. CBA in theory allows for the improve-
ment of social and environmental conditions based on empirical evidence
(Koopmans et al., 1964; Sunstein, 2002) while improving market competi-
tiveness (Viscusi et al., 1987).
Empirical studies on CBA have focused on the choice of discount rate
(Dasgupta, 2008; Gollier, 2002; Lind, 1995; Viscusi, 2007), the integration of
distributional principles (Adler and Posner, 1999), the choice of data sets
(Hahn and Litan, 2005; Morral, 1986), the performance of different meth-
odologies for monetizing benefits, and costs in cases where a market value
does not exist (Sunstein, 2004; Viscusi, 1988). The latter point is of particular
interest given the distance between theory and practice and deserves further
reflection.
The impact of energy policy measures has been assessed with various
appraisal and evaluation tools since the 1960s. Decision analysis, environmen-
tal impact assessment (EIA), and strategic environmental assessment (SEA)
are all notable examples of progenitors of CBA in the assessment of energy
policies, programs, and projects. This chapter provides an overview not only
of CBA but also of other policy tools that have been historically applied to
Cost–Benefit Analysis for Energy Policies 199
Capital costs
Costs for business
New legislative Administrative
costs costs
Opportunity costs
FIGURE 8.1
Typologies of costs in a public sector CBA.
Cost–Benefit Analysis for Energy Policies 201
Economic
Monetization
benefits valued
in the market
Noneconomic
benefits that are
not valued in the
market that can
be quantified and
monetized
Noneconomic
benefits that
can be
No quantified but
not monetized
quantification
Noneconomic
benefits that
cannot be
quantified or
monetized
FIGURE 8.2
Classification of benefits in a public sector CBA.
Economic benefits for which a value is provided in the market are not dif-
ficult to monetize.
An example could come from a policy designed to add electricity gen-
eration from wind turbines. The market benefits are known because both
the physical amount of energy that the extra turbines would provide (i.e.,
kWh) and the monetary value of the physical quantity (i.e., €/kWh) are
known.
A contentious category of benefits consists of non-economic benefits that
are not valued in the market, but can be quantified and monetized. There is
no market value for this and neither for saving lives, but the monetary value
of the benefit can be seen as a reduction in the risk of dying or catching a
disease. Economists have developed four main methods for monetizing non-
market values associated with reductions in risk:
1. Willingness to pay values ask citizens how much they would pay
to reduce the likelihood of a specific risk. In practice, this is imple-
mented through (a) stated preference surveys, where individuals
are asked questions on changes in benefits; (b) close-ended surveys,
where respondents are asked whether or not they would be willing
to pay a particular amount for reducing risk; and (c) stochastic pay-
ment cards, which offer to respondents a list of prices and associates
likelihood matrix describing how likely the respondent would agree
to pay the various offered prices.
202 Analysis of Energy Systems: Management, Planning, and Policy
in 1985 (85/337), which was amended in 1997 (97/11). Currently, EIAs are
carried out by institutions like the World Bank, the OECD member states,
transition countries, and several developing countries.
Because the environmental performance of the energy sector has been
subject to higher degrees of scrutiny, questions were raised about whether
EIA was the right tool to address the challenges associated with energy
supply (Wood, 2003). SEA is designed to address environmental issues at
a higher level of planning, which may take place at a regional, national,
and supernational scale. This is consistent with the idea that environmental
protection needs to be embedded into energy frameworks at early phases
of conception. The main origins of SEA in the EU relate to the Strategic
Environmental Assessment Directive (2001/42). SEA is supposed to comple-
ment EIA for strategic actions. Strategic action is a more nebulous process
than the formal submission of a development proposal, as in EIAs. Thus,
SEAs address concepts rather than particular activities and must deal with
incremental and nonlinear policy processes (Wood and Dejeddour, 1992).
Because it is focused on strategic actions, SEA is designed to include a stron-
ger consideration of alternative options than EIA. The environment is often
singled out in SEA, more so than in EIA or CBA, in large part because of the
need to bolster its importance relative to the economic and social dimen-
sions (Thérivel and Partidário, 1996). Finnveden et al. (2003) note that it is
not clear which, if any, applications within the energy sectors require an
SEA, and Jay (2010) notes that SEA has not been extensively adopted in the
area of energy production.
This may be explained in relation to the fragmented nature of the industry,
since generation, transmission, distribution, and supply operate as separate
markets—at least where liberalization took place. This makes the use of stra-
tegic planning tools more difficult. Today, SEA has potential in the fields of
landscape, carbon reduction, and air quality.
no research has collected and let alone examined the body of CBAs produced
by government departments. This section seeks to capture four salient fea-
tures of CBAs by government departments. Four issues characterize the CBA
in energy policies by government departments:
1. In spite of its highly technical features, the final CBA seldom con-
tains much detail about the actual cost curves of distribution net-
work operators. Issues of competition mean that regulators may
not make explicit allowances for particular infrastructural projects.
Thus, some companies may enter dialogue with the regulators dur-
ing the review process but find relatively limited justifications for the
review decisions in the final CBA (Guy and Marvin, 1996).
2. Price review CBAs typically neglect non-techno-economic
impacts, including social and environmental impacts. For instance,
Cost–Benefit Analysis for Energy Policies 209
2013
2011
2009
2007
2005
2003
0 2 4 6 8 10 12
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
DIGIT 0 0 0 0 0 0 1 0 0 0 0
Environment 0 0 0 0 0 2 0 0 0 0 0
Climate 0 0 0 0 0 0 0 1 0 1 0
ECFIN 0 0 0 0 0 0 1 0 1 0 0
Energy 0 0 0 0 0 0 0 8 8 9 8
TREN 2 0 2 2 5 6 10 0 0 0 0
FIGURE 8.3
Cost–benefit analyses on energy policies carried out by the different Directorates General of the
European Commission (2003–2013).
assessments. For instance, the CBA on the EU’s Objectives on Climate Change
and Renewable Energy for 2020 (European Commission, 2008) considers the
actual EU partitioning between Emission Trading Scheme (ETS) and non-
ETS sectors to be cost-effective, whereas, according to Böhringer et al. (2009),
the CBA did not take into account the excess costs associated with differen-
tial emission pricing (Torriti, 2010).
First, there are data that companies have a right to maintain confidential.
Second, there are data that are public in principle but costly to gather and
assemble. Third, there is no general consensus on the desirability of data
exchange. Ofgem’s guidance on CBA admits the challenges of capturing
competition effects of regulatory change.
In the case of markets being opened up to competition, for example, it is
inherently difficult to predict with any accuracy the potential efficiency bene-
fits that introducing a competitive process might bring, or to quantify mean-
ingfully the dynamic benefits of competition such as the scope for increased
innovation and the introduction of new products, services and technologies.
(Ofgem, 2013, p. 23)
In principle, the exchange of information from energy companies to
policy-makers is desirable because lack of exchange of data leads to incom-
plete information and inefficient screening of the market (Brown, 2001).
According to this view, under publicly available CBAs, the information
these disclose should be available not only for those who have the legal
and financial capability to access data but also to all market and nonmar-
ket actors. However, in practice, incumbents argue that there are instances
where transparency may violate property rights or harm business when the
disclosure of crucial information can alter the competitive process (Campbell
and Lindberg, 1990). An example of this relates to the treatment of electricity
consumption data from smart meters. In principle, if regulators had access
to such data, they could make informed decisions about tariffs, based on
actual end users’ consumption. In reality, the consultation and CBAs con-
ducted in the Netherlands show that both energy companies and consumers
were opposed to the disclosure of consumption data (Cavoukian et al., 2010).
Moreover, even new entrants to the market may find data exchange problem-
atic. Perfect visibility of the strategies of competitors may be beneficial to the
defense of market power by the dominant company. Some delay in making
market bids transparent may help the strategies of new competitors. In the
recent Electricity Market Reform in the United Kingdom, DECC proposed to
publish historical data on the bidding prices for the Short Term Operating
Reserve, a service for the provision of additional active power from genera-
tion and/or demand reduction, and energy aggregators, which have only
entered energy markets in the past 5 years, opposed such change.
Compared with the European Commission’s DG Energy, the U.S. Federal
Energy Regulatory Commission features a higher legislative power for access
to data and a greater financial capacity to purchase data. Since data are kept
confidential by the regulator, business concerns of being negatively affected
by data disclosure for competition purposes are limited. This arrangement
implies that in the United States the transparency of CBAs is sacrificed in sup-
port of effective market monitoring and higher quality of data and analysis.
In the EU, institutional market monitoring activities are lagging. In some
European countries, the regulator is recipient of a wealth of data (Gilbert
et al., 2002), and the main issue is whether to publish them in a CBA or not.
212 Analysis of Energy Systems: Management, Planning, and Policy
In other countries, data gathering does not represent a problem, but organi-
zational deficiencies make the treatment of data rather difficult.
8.8 Conclusion
This chapter described the context, theories, and main features of and alter-
natives to CBA applied to energy policies. The discussion on the historical
development of CBA shows that this appraisal tool represents a mix of engi-
neering and economics methodologies that are very suitable to most energy
policy problems. CBA is most directly applicable to civil engineering projects
and programs that rely on quantifiable units of cost. The chapter provides
a breakdown of typologies of costs and benefits, hence noting some of the
difficulties associated with the practice associated with benefits appraisal
in energy problems. Most economic appraisal techniques tend to treat net
benefits (or undiscounted cash flows) as given. However, gathering data
on future flows of benefits is an intrinsically uncertain exercise. CBAs on
energy policies have traditionally relied on different modes of data collection
and statistical inference, based among other things on the type of institution
conducting the economic appraisal (e.g., central government departments,
European Commission, or regulatory authorities).
This is one of the reasons why the chapter addresses what economic effi-
ciency means for CBAs on energy policies. This chapter reviewed economic
efficiency as the core principle underpinning CBA, as it is a method by
which this concept of efficiency can be applied to publicly supplied goods.
Assuming that energy policies and projects bring utility to people, these peo-
ple are associated with a willingness to pay, which represents the benefit of
supplying such goods. Willingness to pay corresponds to a willingness to
accept (i.e., the cost for supplying the goods). In energy policy appraisals,
difficulty exists, however, in transferring the efficiency concept for market
goods to publicly supplied goods. Two relevant points involve the efficiency
concept in CBA: (1) energy policies may be concerned with a much broader
range of consequences than firms and (2) energy suppliers may not always
use market prices in evaluating projects either because the market prices may
not exist or because market prices may not represent true marginal social
benefits/costs. The efficiency criteria on which CBAs for energy policies are
based are relatively different from the traditional willingness to pay vis-à-vis
willingness to accept relation because they are supposed to take into account
distribution and equity issues. When efficiency conflicts with other values,
it is actually impossible to create economic welfare criteria that integrate all
values. An example of this discussion on the impractical use of CBA in the
context of the macroeconomics of energy policy comes from projects aimed
Cost–Benefit Analysis for Energy Policies 213
to address fuel poverty. These create both winners and losers. In most of the
cases, losers already belong to the poorest and more marginalized members
of society. While fuel poverty projects can bring enormous benefits to society,
their costs to the poorest have effects on their health and even their lives
(Kanbur, 2002). The use of CBA by government departments for fuel pov-
erty projects is widespread and often criticized for not considering areas like
basic needs approaches, shadow prices, social discount rates, and macroeco-
nomic shocks to public goods (Brent, 1998; Devarajan et al., 1997; Kirkpatrick
and Weiss, 1996).
The examples given in this chapter offer a picture of the range of CBAs
applied to energy policies. This chapter has observed how the level of
techno-economic analysis varies in CBAs conducted by regulators, govern-
ment departments, and the European Commission. However, no judgment
is placed here on the value of less technical CBAs. Indeed, a lower level of
analysis may yield positive benefits in terms of greater engagement with
stakeholders and the wider public in the development of policies that will
have significant consequences for society as a whole. This benefit is even
greater when taking into account the detachment of the lay public from
energy policies (Cotton and Devine-Wright, 2012). Unlike some of the
more technically focused exercises that have been used to assess energy
regulation, CBA for energy policy is intended to be an inclusive and par-
ticipative process, in which there is an opportunity for deliberation and
consensus building. It has been pointed out elsewhere that the application
of cost–benefit analysis to energy policies emphasizes three typical weak-
nesses: (1) the exclusive concern with economic values, (2) the treatment of
uncertainty, (3) and the neglect of intergenerational effects (Simpson and
Walker, 1987).
Very much like environmental policies, energy policies tend to be designed
to achieve multiple objectives ranging from climate change to utilities’ tar-
iffs. Correspondingly, the impacts generated by energy policies tend to
vary substantially in nature and size. Over the years, policy-makers have
expanded the types of analytical tools used in the appraisal and evaluation
of energy policies from narrowly scoped geophysical and ecological models,
on the one hand, and purely socioeconomic-oriented tools of decision analy-
sis, on the other hand, to highly integrated assessment tools, such as CBA.
Through an expansion of geographic and temporal scopes and depiction
of large complex systems, CBA models were expected to overcome many
of the shortcomings of earlier analyses, that is, absent or inadequate depic-
tion of technological change, micro-behaviors of economic actors (e.g., firms
and consumers), intergenerational trade-offs and fairness, and uncertainty
(Greening and Bernow, 2004). However, given their broad approach, CBAs
are prone to the problem of finding a balance between quantification of cur-
rent economic and physical phenomena and future variations in the sup-
ply and demand of energy systems. In energy policy, the main added value
214 Analysis of Energy Systems: Management, Planning, and Policy
of the CBA system has been associated with explicitly providing a range of
policy-relevant criteria including a broad range of stakeholder opinions that
can be used to assess (in traditional cost–benefit terms) and develop alterna-
tive environmental and energy policies.
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216 Analysis of Energy Systems: Management, Planning, and Policy
CONTENTS
9.1 Introduction: Background and Context................................................... 219
9.2 Drivers of Energy Efficiency in MENA................................................... 220
9.3 The Arab Future Energy Index.................................................................222
9.4 Areas of Assessment and Parameters......................................................222
9.5 Comparing Results from Two Cycles of Benchmarking.......................225
9.5.1 2013 Cycle.........................................................................................225
9.5.2 2015 Cycle......................................................................................... 228
9.6 Discussion and Concluding Remarks...................................................... 230
References.............................................................................................................. 232
219
220 Analysis of Energy Systems: Management, Planning, and Policy
matter but also the governance arrangements for enabling energy efficiency
transitions. In the same IEA report, a grouping of the possible arrangements
is made in three main headings: enabling frameworks, institutional arrange-
ments, and coordinating mechanisms (OECD/IEA 2010, p. 15).
Informed by this understanding of energy efficiency transition and its
governance arrangements, and while working for the Regional Center for
Renewable Energy and Energy Efficiency (RCREEE),* the authors par-
ticipated in the development and testing† of a benchmarking index for
a systematic analysis of energy efficiency transitions in RCREEE’s Arab
member states within the Middle East and North Africa (MENA) region.
The underlying logic and motivation for RCREEE is that an energy effi-
ciency governance perspective is warranted for the adequate assessment
of countries’ transitional processes. An assessment of this nature would
also allow the Center to gauge the extent to which political rhetoric and
targets are realistic within the national market conditions, institutional
arrangements, and national capacities (Myrsalieva and Samborsky 2013;
Myrsalieva and Barghouth 2015). Furthermore, it should facilitate strategic
conversations with national focal points working with energy efficiency
questions on the strengths and weaknesses of national energy efficiency
strategies.
This chapter presents the experience and lessons learned from this bench-
marking exercise. It is organized to give a brief overview of the drivers for
energy efficiency in the MENA countries, followed by a description of the
benchmarking framework and its parameters, hereafter referred to as the
Arab Future Energy Index (AFEX). Finally, key findings and insights based
on the process and outcomes are presented and discussed.
* RCREEE was founded in 2008 through a cooperation agreement among 10 Arab countries
with the support from the German and Danish governments. A Secretariat was set up in
Cairo in 2010 and given the mandate by its founding members to act as policy advocacy part-
ner to national governments and support the member states with their efforts in developing
markets for renewable energy and energy efficiency investments.
† The authors also acknowledge the contribution and involvement of many other actors in the
actual production of the benchmarking index from within and outside RCREEE.
Benchmarking Energy Efficiency Transitions in MENA Countries 221
Not more than 5 years ago, a noticeable shift in attitude occurred among
national authorities and key stakeholders within the energy sectors in favor
of coordinated efforts toward energy efficiency. This shift is driven by the
convergence of several internal and external factors putting pressure on
national governments to adequately balance the supply and demand in
energy services.
The most important factors often cited in this discussion include
The effect of these key factors and the resulting dynamics pressuring the
internal energy systems and their policy implications are not necessarily the
same due to the fact that the energy and economy profiles of the MENA
countries differ considerably (ESMAP 2009). Further treatment of these dif-
ferences and the drivers is provided in a later section of this chapter; however,
it needs to be emphasized that from a fundamental cause–effect relationship,
these two factors remain significant driving forces in the discourse on energy
efficiency transitions across all countries in the region. Other factors can be
cited such as aging and inefficient infrastructure and technologies across the
energy system value chain but tend to be more specific to one country or a
smaller group of countries. In comparison to other regions, climate change
and environmental consideration played rather in an significant role* in the
discourse and subsequent strategies shaping the energy efficiency transi-
tions in the region (Reiche 2010; Waterbury 2013).
With this background, noticeable efforts from countries in the region
toward improved energy efficiency are taking shape. The formal adoption
in 2011 by the Arab Ministerial Council for Electricity of the recommenda-
tions and supporting guidelines encouraging member countries to establish
national energy efficiency action plans (NEAPS) and provided further impe-
tus toward more coordinated and systematic efforts to organize energy
efficiency strategies and programs at the national level. Still, the landscape
remains unclear as to how far the efforts in the member countries in terms
of policies, strategies, and implementation are adequately guiding the transi-
tion toward the right direction.
Regulatory phase-out of inefficient lighting technology Policy adopted; under preparation; nonexistent
EE regulations for industries Number of regulatory policies
Regulatory phase-out of old or inefficient vehicles Adopted; under development; nonexistent
Policies discouraging car ownership and Number of policies adopted
promoting public transport and car sharing
223
(Continued)
224
* Countries assessed under AFEX Energy Efficiency 2013: Algeria, Bahrain, Egypt, Iraq,
Jordan, Lebanon, Libya, Morocco, Palestine, Sudan, Syria, Tunisia, and Yemen.
226 Analysis of Energy Systems: Management, Planning, and Policy
Just as the countries within the region are different, their performance in
energy efficiency is also different. The most diverse performance has been
observed under the energy pricing category. Although the MENA region
as a whole is characterized by heavily subsidized energy prices, the differ-
ences between individual countries’ energy prices are significant. Figure 9.1
shows that the highest energy prices are in energy-dependent countries:
Palestine, Morocco, Tunisia, and Jordan. Residential electricity tariffs in
Palestine are nearly 20 times higher than residential tariffs in Bahrain, Syria,
and Iraq. Industrial electricity tariffs in Morocco shown in Figure 9.2 are
five times higher than industrial tariffs in Libya, Egypt, Iraq, and Bahrain.
Subsequently, the countries with less subsidized energy prices ranked the
highest under energy pricing evaluation criteria.
With regard to energy efficiency policies, the countries again showed dif-
ferences. Five out of thirteen countries (Egypt, Lebanon, Palestine, Sudan,
and Tunisia) have national energy efficiency action plans in place with spe-
cific energy savings targets. Other five countries (Algeria, Jordan, Morocco,
Syria, and Tunisia) have energy efficiency legislation in place. Only one
country (Tunisia) has officially banned the import and sale of incandescent
light bulbs and only Tunisia has the most comprehensive program in place
to promote industrial energy efficiency. Only six countries have put in place
mandatory energy efficiency regulations for buildings. The customs duties
on the import of efficient light bulbs and solar water heaters ranged from 0%
in Jordan to 30% in Algeria.
Implied subsidy
Bahrain 0.8 95%
Syria 0.8 Residential: 95%
483 kWh/month average
Iraq 0.9 94%
Libya 1.6 90%
Egypt 2.6 84%
Yemen 4.1 74%
Lebanon 4.8 69%
Algeria 5.5 66%
Sudan 8.3 48%
Jordan 9.2 42%
Tunisia 11.8 25%
Morocco 12.0 25%
Palestine 15.8 Benchmark
0 2 4 6 8 10 12 14 16 18 20
Price (US cents/kWh)
FIGURE 9.1
Residential electricity tariffs and implied subsidies (2011).
Benchmarking Energy Efficiency Transitions in MENA Countries 227
Implied subsidy
Libya 3.4 Industrial: 80%
Egypt 4.1 30,579 kWh/month average 75%
Iraq 4.2 75%
Bahrain 4.3 74%
Algeria 4.4 73%
Syria 6.1 63%
Jordan 8.0 51%
Lebanon 8.1
51%
Sudan 8.2 50%
Yemen 10.3 38%
Tunisia 13.9 16%
Palestine 16.6 Benchmark
Morocco 17.1 –3%
0 2 4 6 8 10 12 14 16 18 20
Price (US cents/kWh)
FIGURE 9.2
Industrial electricity tariffs and implied subsidies (2011).
Tunisia 81
Morocco 55
Jordan 53
Palestine 48
Algeria 42
Lebanon 42
Egypt 41
Syria 35
Bahrain 33
Sudan 29
Yeman 23
Libya 19
Iraq 14
0 10 20 30 40 50 60 70 80 90 100
FIGURE 9.3
Country ranking based on 2013 assessment.
9.5.2 2015 Cycle
The scope of AFEX Energy Efficiency 2015 was broadened. Four more coun-
tries, Kuwait, Qatar, Saudi Arabia, and UAE, have been added to the assess-
ment. Also, the scope of assessment have been broadened to include the
assessment of energy efficiency in the transport sector. Although the overall
ranking of countries did not change much, many developments took place
under individual indicators since the publication of AFEX 2013.
Benchmarking Energy Efficiency Transitions in MENA Countries 229
The biggest developments took place under the energy pricing category.
Six countries, Egypt, Jordan, Morocco, Tunisia, Sudan, and Yemen, imple-
mented energy subsidy reform efforts. Egypt introduced a 5-year plan on
gradual increases of electricity prices and significantly increased prices
of gasoline, diesel, and natural gas. Jordan also approved a 5-year plan
for gradual increases of electricity tariffs and completely removed subsi-
dies from oil products. Morocco also eliminated subsidies for gasoline and
industrial fuel. Tunisia introduced increases on electricity tariffs and fuel
prices. Sudan and Yemen both have significantly increased prices for gaso-
line and diesel.
The policy framework category also showed some developments. Three
more countries adopted national energy efficiency action plans with spe-
cific energy savings targets (Iraq, Jordan, and Tunisia adopted its third
plan). The biggest improvement has been made in phasing out inefficient
appliances. Three countries, Jordan, UAE, and Qatar, introduced technical
standards for home appliances with minimum energy efficiency require-
ments. Bahrain, UAE, and Qatar also introduced a ban on the import and
sale of inefficient light bulbs. The two large energy-consuming sectors
were found to be the least regulated across all MENA countries: trans-
port and industrial sectors. These two sectors represent areas with great
untapped energy efficiency potential. The transport sector specifically
appears to be the most challenging to tackle as the energy efficiency
improvements are associated with high investment costs for infrastruc-
ture development projects.
The least progress has been observed under the institutional capacity
category. The countries overall did not make much progress in strengthen-
ing the institutional base and improving the implementation capacity. The
greatest challenge with enforcement lies in the building sector. Although the
countries put in place energy efficiency building regulations, many of these
regulations remain unenforced. To improve the compliance in this sector,
countries need to dedicate more effort to establishing clear and transparent
enforcement procedures, building technical capacities, and designing mea-
sures to promote voluntary compliance.
Figure 9.4 illustrates the performance of countries over two categories:
policy framework and institutional capacity. In this figure, only Tunisia and
UAE appear to perform well under both categories. These countries have
better policy frameworks and relatively stronger institutional capacities,
enabling better implementation of energy efficiency policies and measures.
Jordan scores well under policy framework, but needs to improve its institu-
tional capacity to ensure effective implementation of its policies. Majority of
the countries are still in the lower left quadrant. This means that countries
still need to improve their regulatory frameworks and strengthen their insti-
tutional capacities.
230 Analysis of Energy Systems: Management, Planning, and Policy
1.0
0.8
TUN
JOR
0.6 UAE
Institutional
capacity
0.0 0.2 0.4 ALG QAT 0.6 0.8 1.0
0.4
EGY MOR
LEB PAL
BAH
SYR
SAU
KUW
IRA 0.2
LIB SUD
YEM
0.0
Policy framework
FIGURE 9.4
Countries’ performance over two categories based on 2015 assessment.
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Gillingham, K., R. Newell, and K. Palmer. 2009. Energy efficiency economics and
policy: Annual review of resource economics. Annual Reviews 1(1): 597–620.
Howarth, R. and B. Andersson. 1993. Market barriers to energy efficiency. Energy
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energy-index%E2%84%A2-afex-2015-energy-efficiency. Accessed June 15, 2016.
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Waterbury%20v3.pdf. Accessed June 18, 2016.
10
Analysis of the European Energy Context:
A Snapshot of the Natural Gas Sector
Vincenzo Bianco
CONTENTS
10.1 Introduction................................................................................................. 233
10.2 Preliminary Background...........................................................................234
10.3 Organization of Natural Gas Industry.................................................... 237
10.4 European Regulatory Framework............................................................ 238
10.5 Supply and Demand Balance in Europe................................................. 242
10.5.1 Analysis of the Consumption....................................................... 242
10.5.2 Analysis of the Supply................................................................... 245
10.5.3 Development of Infrastructure..................................................... 249
10.6 Natural Gas Pricing.................................................................................... 252
10.6.1 Market Context................................................................................ 252
10.6.2 Oil-Linked Formulas...................................................................... 253
10.6.3 Gas Hubs.......................................................................................... 256
10.6.4 Hub Pricing...................................................................................... 258
10.6.5 Recent Developments..................................................................... 260
10.7 Conclusions.................................................................................................. 262
References.............................................................................................................. 263
10.1 Introduction
Since its discovery in the United States at Fredonia, New York, in 1821, natu-
ral gas has been used as fuel in areas immediately surrounding gas fields.
In the period 1920–1930, some long-distance pipelines were installed in the
United States to transport gas from remote areas to industrial centers (Ikoku,
1984).
The natural gas industry of today did not emerge until after World War II,
when the consumption started to increase rapidly. This growth was due to
several factors, including the development of new markets, replacement of
coal as a fuel for providing space and industrial process heat, strong demand
for low-sulfur fuels that emerged in the mid-1960s, and so on (Ikoku, 1984).
233
234 Analysis of Energy Systems: Management, Planning, and Policy
In light of this, natural gas can be considered a relatively new fuel, even
though it plays an important role in the global energy balance, and its impact
in the European energy scenario is significant.
In particular, from the end of the 1990s, a sharp increase of consumption
has been detected due to its massive utilization for power generation in com-
bined cycle gas turbine (CCGT) plants.
The use of natural gas for power generation has been encouraged by the
implementation of the EU Emission Trading Scheme (i.e., a scheme for the
trading of CO2 emission allowances), which gives advantages to low-carbon-
intensive fuels.
Due to the efficiency and coverage of the distribution network, natural gas
is largely used also in other sectors of activity, for example industrial or resi-
dential, for different purposes, such as process steam generation, heating,
and so on.
Natural gas is considered as the necessary fuel to support the European
energy transition toward renewable energies; therefore, it has a deep strate-
gic relevance in the EU energy policy. However, the indigenous production
is limited and able to satisfy only a partial share of the demand.
To support the consumption of natural gas, different infrastructures were
developed and others are under development, in order to connect the EU
with exporter countries (i.e., Russia, Algeria, and others) by means of pipe-
lines. These infrastructures rigidly connect supply and demand; therefore,
to limit the market power of the suppliers, many regasification plants have
been also built all around Europe to permit the import of liquefied natural
gas (LNG) from other regions (i.e., Nigeria, Venezuela, and others), allowing
more competitive supply sources.
In the last years, due to the economic downturn, a decrease of natural gas
consumption has been detected, causing a destabilization of the market, and
it is not clear if it will be a transient effect or if it will lead to a reshape of the
market.
This chapter will analyze all the main issues connected with natural gas
sector in Europe, by taking into account the current situation and possible
future perspectives.
10.2 Preliminary Background
Natural gas is a combustible mixture of hydrocarbon gases. In general, it is
mainly formed of methane (70%–90%), but it often includes ethane, propane,
butane, and pentane (0%–20%), and a minor share of impurities such as car-
bon dioxide, nitrogen, and hydrogen sulfide.
The composition of natural gas can widely vary according to the location
of extraction.
Analysis of the European Energy Context 235
It can be divided in three main categories, namely, dry natural gas, wet
natural gas, and sour natural gas:
Natural gas is a fossil fuel. This means that it is the result of the decomposi-
tion of plants, animals, and microorganisms that lived millions of years ago.
It represents organic material prevented from its complete decay.
Natural gas originates from two different mechanisms, namely, ther
mogenic and biogenic.
1. Shale gas: the gas is in shale deposits typically found in river del-
tas, lake deposits, or flood plains. Shale is both the source and the
reservoir for the natural gas. This can either be “free gas,” which is
trapped in the pores and fissures of the shale rocks, or adsorbed gas,
which is contained in surfaces of the rocks (Wang et al., 2014).
2. Coal-bed methane: in coal deposits, significant amounts of methane-
rich gas are generated and stored within the coal structure when it
has an extremely low permeability.
3. Tight gas: unlike shale gas or coal-bed methane, it is formed outside
the rock formations where it has migrated over millions of years into
extremely impermeable hard rock or sandstone or limestone forma-
tions that are unusually nonporous (Wang et al., 2014).
4. Gas hydrates: natural gas hydrates (also known as clathrates) are
solid gas molecules surrounded by a lattice of water molecules. They
are formed by water and natural gas (methane) at high pressures
and low temperatures (ETSAP, 2010).
FIGURE 10.1
Fundamental phases of the natural gas production/commercial process.
238 Analysis of Energy Systems: Management, Planning, and Policy
could benefit from a favored position with regard to the distribution network
and, consequently, the possible customer base (Bianco et al., 2015).
The main aim of this renovation process was to create a more convenient
market for final users by breaking national monopolies and by creating a
free market based on the concurrency of the operators.
The optimal target of this process would have been the creation of a single
European market, with the price set by the interaction of supply and demand,
namely, based on the “clearing price” mechanism.
A first step in this direction was achieved with the release of the 98/30/EC
directive, also known as the “first gas directive,” which aimed at creating a
common framework for the EU gas market.
This directive presented for the first time the principle that consumers
could freely choose their suppliers and established some basic rules for the
settling of a European competitive market.
For the first time, there was the introduction of competition in the natural
gas market, which was characterized by strong national monopoly, and “gas
to gas” competition was also mentioned for the first time. “Gas to gas” com-
petition refers to the concurrency of the gas supplies of the different opera-
tors working in a free market.
These changes were supposed to optimize the efficiency of the natural gas
industry and to guarantee better supply conditions for final users.
The competition was gradually introduced firstly allowing power plants
and large industrial users to freely choose their suppliers and subsequently
opening the market also to the small consumers.
A fundamental issue for all the network industries (e.g., water, electricity,
TLC) is represented by the management of the network, which can be seen
as a “natural monopoly,” because the infrastructure has to be managed as a
whole and it cannot be split in smaller parts. Therefore, only one (or a few at
maximum) subject can be in charge of managing it.
Natural gas grid is usually characterized by transmission and distribution
networks; therefore, there is the necessity of a regulatory framework in order
to guarantee the access to the third parties.
The directive of 1998 forces incumbent operators to guarantee third party
access (TPA) to private operators that want to operate in the natural gas sector.
To stress this aspect, the directive established the principle of the separation
of the activities of the incumbents to ensure a transparent and nondiscrimi-
natory access for third parties to the existing infrastructure.
The 98/30/EC directive represents a milestone, because it was the first
clear step, at least from the “conceptual” point of view, toward the establish-
ment of a free market, but its practical implementation in the different mem-
ber states was very limited.
The inadequate implementation of the directive was due to the lack of
specific prescriptions for the member states on how to implement the new
market mechanisms; therefore, a lot was left to their willingness toward the
implementation of a real liberalization process. In many cases, it was refused.
240 Analysis of Energy Systems: Management, Planning, and Policy
TABLE 10.1
Description of Unbundling Models according to the Directive 2009/73/EC
Definition Description
Ownership unbundling (OU) A new company that owns and manages the transport
network is created. This company results to be totally
independent by the vertically integrated companies
operating in the exploration, production, and retail business.
In 2009/73/EC, OU is indicated as the most effective way to
promote investments in infrastructure in a
nondiscriminatory way, fair access to the network for new
entrants, and transparency in the market.
Independent system Vertically integrated company maintains the ownership of
operator (ISO) the transport network, but its management is in charge of an
independent company.
Independent transmission Vertically integrated company maintains the ownership of
operator (ITO) the transport network and the control of the company in
charge of its management, but it must guarantee its
independence. The independence of the transmission
operator is assessed by controls of the national authorities.
Source: Bianco, V. et al., Appl. Energy, 113, 392, 2014.
FIGURE 10.2
Development of the regulatory framework.
242 Analysis of Energy Systems: Management, Planning, and Policy
Residential users may think to switch from natural gas to fuel oil, electric-
ity, or renewables to produce hot sanitary water, but to do this, the immedi-
ate availability of an alternative technology is necessary and this is usually
not possible. Therefore, this option could be seen as a “long run” opportu-
nity rather than a “short run” move. A similar consideration can be done in
the commercial sector, in particular for small shops.
Industrial users or power producers are in a different situation. Most of
them are provided with different kinds of equipment; therefore, they have
more chances to pursue fuel switching strategies.
For example, a large power operator may decide whether to operate a natu-
ral gas or a coal power station belonging to its power plant’s fleet.
In general, it can be said that residential and commercial gas demand is
“less price elastic” than industrial and electric utilities’ demand. In other
words, residential and commercial natural gas demand is less sensitive to
price changes, because these users have limited opportunities to use other
sources of energy. On the other hand, industrial and power generation users
have much more opportunities to diversify their energy sources; therefore,
they are more “reactive” to the changes of price.
Residential and commercial customers are, in general, defined as “captive,”
due to their difficulties in reacting to the price signals; therefore, their con-
sumption pattern is smoother with respect to other consumption categories.
Figure 10.3a reports the trend of energy consumption in EU15* from 1965
up to 2014 by showing the contribution of the different sources.
The figure shows that before 1970, energy consumption was dominated
by oil and coal, whereas after that time the situation became more dynamic.
This was due to the energy crisis of 1973, when there was the so-called OPEC
embargo, which caused a sudden increase in oil prices. Since then, all the
Hydro RES
1600 RES 100%
Hydro
Energy consumption
Nuclear
Nuclear 80%
1200 Coal Coal
Share (%)
(Mtoe)
60%
800 Gas Gas
40%
400 Oil 20% Oil
0 0%
19 5
19 0
19 5
19 0
19 5
19 0
20 5
20 0
20 5
10
19 5
19 0
19 5
19 0
19 5
19 0
20 5
20 0
20 5
10
(a) (b)
6
7
7
8
8
9
9
0
0
6
7
7
8
8
9
9
0
0
19
19
FIGURE 10.3
Historical trend of energy consumption in EU15 (a) and shares of different energy sources
(b). (From BP, BP Statistical review of world energy, 2016, http://www.bp.com/en/global/
corporate/energy-economics/statistical-review-of-world-energy.html. Accessed December 30,
2016.)
* EU15 includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy,
Luxemburg, the Netherlands, Portugal, Spain, Sweden, and United Kingdom.
244 Analysis of Energy Systems: Management, Planning, and Policy
TABLE 10.2
Natural Gas Consumption for Each Country of EU15 in Billions of Cubic Meters (bcm)
Billions of Cubic
Meters (bcm) 1995 2000 2005 2010 2011 2012 2013 2014
Austria 7.60 7.77 9.73 9.80 9.25 8.85 8.36 7.61
Belgium 12.66 15.94 17.57 20.27 18.04 17.08 17.17 15.08
Denmark 3.78 5.31 5.25 5.28 4.43 4.14 3.95 3.37
Finland 3.39 4.08 4.29 4.58 4.01 3.57 3.41 3.00
France 35.28 42.66 48.93 50.74 44.18 45.61 46.52 38.50
Germany 80.26 85.70 92.77 90.38 83.00 80.86 87.19 76.47
Greece 0.05 2.03 2.81 3.86 4.74 4.49 3.86 2.96
Ireland 2.78 4.10 4.14 5.60 4.91 4.78 4.61 4.45
Italy 53.13 69.11 84.27 81.18 76.12 73.19 68.45 60.48
Luxemburg 0.66 0.80 1.40 1.43 1.23 1.25 1.06 1.01
Netherlands 41.14 41.74 42.13 46.76 40.79 39.06 39.42 33.91
Portugal — 2.43 4.47 5.35 5.32 4.80 4.48 4.14
Spain 9.21 18.15 35.59 37.13 34.58 33.69 31.20 28.23
Sweden 0.90 0.93 1.00 1.75 1.38 1.20 1.14 0.95
United Kingdom 77.67 104.24 101.94 101.15 83.73 79.09 78.34 71.25
Source: ENI, World oil and gas review 2016, 2016, https://www.eni.com/en_IT/company/fuel-cafe/world-oil-gas-
review-eng.page. Accessed December 30, 2016.
Analysis of Energy Systems: Management, Planning, and Policy
Analysis of the European Energy Context 247
United Others
Kingdom (7%)
(6%) NL
(27%)
NO
(60%)
23.3
88.8 1.8
3.8
4.0
275 10.1
41.3
163
21.6
Europe Russia North Total Qatar MENA Nigeria South Europe Total
(a) Africa (bcm) (b) America (bcm)
FIGURE 10.4
Supply of natural gas by country of origin by pipelines (a) and LNG (b) in 2012. (From BP,
BP Statistical review of world energy, 2016, http://www.bp.com/en/global/corporate/energy-
economics/statistical-review-of-world-energy.html. Accessed December 30, 2016.)
The reason for this mechanism is due to the difficulty in storing natural
gas; in fact, storage facilities are rare and quite expensive to build. Moreover,
because most of natural gas is supplied through pipelines, it is difficult to
find alternative markets to reach. The inadequacy of storage capacity is a
great problem for several EU member states and reduces their abilities to
react in the event of an energy crisis (Makinen, 2010).
10.5.3 Development of Infrastructure
Because of the difficulty in transporting natural gas from the extraction to
the consuming locations, infrastructures play a fundamental role in the nat-
ural gas industry.
As observed by Dieckhöner et al. (2013), the European gas market is con-
fronted with significant challenges over the next years. Within the borders
of the EU, natural gas production is declining due to limited reserves. This
especially affects today’s largest gas-producing countries in the EU, the
United Kingdom and the Netherlands.
In order to import the expected increasing natural gas volumes, an expan-
sion of the import capacity for natural gas into the EU will be necessary.
These additional volumes delivered at the EU border by pipelines or as LNG
will also affect the gas flows within the EU, as this natural gas has to be
transported to final consumers.
To receive these new volumes, it will be necessary to expand cross-border
capacities, in terms of pipelines, LNG terminals, and storages. Storages are
important to allow a possible decoupling between demand and supply, espe-
cially if many pipeline connections are planned (Dieckhöner et al., 2013).
Another important issue to take into account in the development of new
infrastructure is the “security of supply.” For example, during the 2009
Russian–Ukrainian gas conflict or the Libya crisis of 2011, some EU consum-
ers experienced short-term supply disruptions.
Western and Central Europe avoided disruptions due to diversified sup-
ply portfolios and transport routes, sufficient natural gas storage, and high
physical market integration. The high level of integration allowed the trans-
portation of gas volumes against the normally prevailing flow directions
and, thus, to supply countries that are dependent on the Ukrainian route
(e.g., Hungary).
The Russian–Ukrainian crisis gave two important lessons to the EU
(Dieckhöner et al., 2013):
Legend
LNG Terminal “Operational”
LNG Terminal “Under Construction”
LNG Terminal “Planned”
Pipeline capacity
Pipeline capacity-GazpromOwnership
8
48
43
1915 30 Helsinki
Stockholm 55
2
7
Klaipeda 56
Teesside
Wilhelmshaven Swinoujscie 11
Shannon 39
Dragon Isle of Grain Gate Rotterdam 112
Zeebrugge 4
South Hook
Dunkirk 75
19
Montoir-de-Bretagne 41
Odessa 16
Porto Levante Koper
Adria
Mugardos Bilbao Fos-sur-Mer Fos-Cavaou Panigaglia
Offshore LNG Toscana 20
Barcelona Marmara Iriglesi
Sagunto 2
Izmir
Sines Cartagena Sicily Revithoussa
Huelva
13
14 8 36 11
FIGURE 10.5
Map reporting the most relevant European infrastructures. (From Richter, P.M. and Holz, F.,
Energy Policy, 80, 177, 2015.)
Other possibilities for gas import in the EU involve the supply from Iran
and Iraq through Turkey.
The lifting of sanctions on Iran would allow European countries to import
gas from Iran. Although Iran already exports natural gas to Turkey, it has long
had plans to export larger volumes of natural gas through Turkey to Europe.
However, other hurdles would remain, including agreeing on a natural gas
price and meeting Iran’s growing domestic demands for natural gas, especially
for enhanced oil recovery, power generation, and winter heating (EIA, 2015).
Another project under discussion is the GALSI pipeline, which should
connect Algeria and Italy.
In parallel with pipeline plans, also projects based on LNG infrastructures
are under development. LNG allows adding more flexibility to the supply of
natural gas, because more suppliers can be involved from all over the world.
This reduces the dependence of the EU on supply from pipelines that depend
on countries such as Russia and Algeria.
The possibility to access the LNG market gives to the EU buyers a very
powerful instrument in the negotiation or renegotiation of long-term supply
agreement for pipeline gas, because they can leverage on the possibility to
sign obtain competitive LNG provisions.
LNG is supposed to increase the competition on the natural gas market
and it can be seen as an element of “globalization” of the gas market, which,
in general, has a regional dimension.
252 Analysis of Energy Systems: Management, Planning, and Policy
relatively cheaper, increasing the demand for gas, which in turn results in an
upward pressure on the gas price (Hulshof et al., 2016).
However, this is more a theoretical statement, rather than a practical evi-
dence; in fact, Stern (2012, 2014) argues that short-run fuel switching is hardly
relevant anymore in West Europe, because oil has virtually disappeared in
most stationary energy sectors, maintenance of dual-fuel burners is expen-
sive, and because of tight environmental standards as well as the inefficiency
of using oil in new gas-burning technologies. In other words, oil has been
almost completely substituted by natural gas and in large power or indus-
trial plants oil is basically used only in case of emergency, rather than for fuel
switching purposes due to possibly favorable market conditions.
Apart from the lack of short-run substitutability, there are other relevant
reasons why oil and gas should have different price evolutions. The value
chains of oil and gas are substantially different; in fact, transportation,
production, and storage facilities have completely different characteristics,
which determine a totally different cost structure.
Moreover, oil and gas markets developed with diverse features. Oil market
is based on the world context of supply and consumption. Although regional
differences between types of crude oil exist, such as Brent and West Texas
Intermediate, their prices are usually correlated. On the other hand, natural
gas price is much more subjected to regional dynamics of demand and sup-
ply. Regional prices can move in very different directions and on diverse
levels, as can be seen from the recent divergence in European and North
American gas prices (Hulshof et al., 2016).
This is due to the fact that the market is less flexible due to the difficulties in
transporting natural gas. For example, if there is a pipeline connection, demand
and supply are “rigidly” connected, because there is not a wide range of alter-
native markets for both sellers and buyers, and therefore the price has been
usually determined on the basis of long-term bilateral contracts. This market
structure has characterized the European context from the 1960s to the present.
10.6.2 Oil-Linked Formulas
During the 1960s, natural gas begun to be consumed in significant quantities
and to be seen as the ideal substitute for oil. Natural gas market developed
on a regional basis, in opposition to the oil market that developed on a global
scale, due to the difficulty to supply natural gas all over the world. Therefore,
the natural gas market assumed different configurations in different geo-
graphic areas; in particular in the United States and the United Kingdom,
price level was determined on hub markets, while in continental Europe the
long-term oil-indexed gas price was adopted, and in the Soviet area there
was a regulated price model (Stern, 2012).
Accordingly, European consuming countries stipulated long-term sup-
ply agreement with producing countries, namely, Norway, Russia, the
Netherlands, and Algeria.
254 Analysis of Energy Systems: Management, Planning, and Policy
• The exporter assumed the price risk, that is, the risk that the price,
however determined, would be sufficient to remunerate the invest-
ment in production and transportation of gas to the border of the
importing country.
• The importer assumed the volume risk that a large enough market
would be developed in order to honor the volume commitments in
the contract. This risk was formalized by means of a “take or pay”
clause, which imposed to the buyer to withdraw a fixed amount of gas
volume per year and if it was not able, it should pay for it in any case.
The formulas reported in these contracts assumed that gas price is affected
by a number of parameters, namely, prices of competing fuels, GDP growth
rates, inflation and taxation, industrial structure, environmental regulations,
and a range of other country-or region-specific conditions that change over
time. Therefore, the cost of gas supply varies according to the variation of the
parameters included in the formula.
In these contracts, prices are generally adjusted quarterly, based on an aver-
age of (mainly) oil prices in the preceding 6–9 months, with a lag of 3 months.
Thus, the buyer pays a price in the first quarter of a year related to an average
of oil prices in the first two or three quarters of the previous year (Stern, 2014).
The long-term supply contracts often include the possibility to perform a
“price review,” which allows modifying the structure of the formula upon
Analysis of the European Energy Context 255
where
LFO0 and HFO0 are the starting price of light fuel oil and heavy fuel oil
LFOm and HFOm represent the price for the month m, which generally
takes the average value of the previous 6–9 months
γ1 and γ2 are two coefficients taking into account the natural gas mar-
ket segments competing with HFO and LFO, factors to share risks or
rewards between sellers and buyers and technically converting factors
to have homogeneous units of measures
Finally, Pm is the price paid by the buyers in the month “m,” whereas P0
depends on the starting price of natural gas when the supply agreement is
signed and by the private negotiations between buyer and seller. Thus, the
256 Analysis of Energy Systems: Management, Planning, and Policy
10.6.3 Gas Hubs
Trading hubs can be seen as “points” in a natural gas pipeline where gas is
exchanged between sellers and buyers. A hub can be physical or virtual. In
a physical hub, natural gas is injected or withdrawn at a specific point of the
pipeline, whereas a virtual hub covers a network area and the gas injected
or withdrawn from this area is associated with the reference virtual hub.
Table 10.3 reports a list of the main European hubs and their major features.
A physical hub offers the advantage to express a localized price signal, but
it complicates the creation of a liquid market, because natural gas should be
delivered and withdrawn at a specific point in the network. This necessitates
that buyers and/or sellers should purchase the pipe transportation capacity
to reach the physical hub. Therefore, this means that a physical hub needs a
relevant infrastructure to connect it with the rest of the network in a way that
the transactions could be easily performed, namely, that a liquid market can
be created. This implies very high investment costs.
Virtual hubs are introduced in order to avoid these problems and to cre-
ate a more flexible market. They have a number of entry and exit points;
therefore, the market operators only have to be sure that gas is delivered to
one of the inlets of the network or withdrawn from one of the outlets. In this
way, market participants have more options to interact with the hubs, and
this tends to increase the liquidity of the market. This structure simplifies
the trading activities, because the different possibilities in terms of entry/
exit points in the network give the opportunity to use different pipe routes
to interact with the hub.
Since the entry and exit charges do not depend on the location of the vir-
tual hub where natural gas is finally injected or withdrawn, all the gas can
be taken or delivered at the same price within the network representing the
hub. In light of this, the area connected with a virtual hub expresses a single
Analysis of the European Energy Context 257
TABLE 10.3
Principal European Gas Hubs
Name Description
National Balancing Point (NBP), UK Started in the United Kingdom in 1996, it is the most
liquid hub of Europe.
Zeebrugge, BE It is the first trading hub of continental Europe and it
started its trading activity in 2000.
Title Transfer Facility (TTF), NL It was established as a virtual hub in 2003 for trading
on Netherlands’ national transmission grid. In 2005, it
was opened to the international trading. It is the most
liquid hub in continental Europe.
Punto di Scambio Virtuale (PSV), IT It is the virtual hub of the Italian market, developed
with the intention to allow more advantageous price
to Italian consumers.
PEG, FR Similar situation as Italian PSV.
Gaspool, DE Developed in Germany in 2009, these two hubs are
NCG, DE expanding rapidly. Their combined trading is larger
than TTF.
CEGH, AT CEGH started traded activity in 2005. It is an important
hub to monitor, as it will play a role in introducing
“gas to gas” competition and market pricing in Central
and Eastern Europe. Its delivery point is Baumgarten,
where pipelines originating in Russia diverge to
supply gas to Austria as well as to Germany, Italy, and
Hungary through transit pipelines.
price linked to the number of trading operations, that is, liquidity of the
hubs, executed on the hubs.
Natural gas trading hubs have a twofold function: the first one is to balance
demand and supply within a specific area. The interaction between demand
and supply also determines a price (i.e., clearing price) for the delivery or
withdrawal of gas on the hubs for a specific date.
The second function is that a trading hub serves as a source of physical
flexibility to balance supply and demand. In fact, an excess of production can
be sold on the hubs, as well as if some operators are “short” they can buy gas
on the virtual hubs.
The problem with physical transactions on gas hubs (i.e., commercial oper-
ations that end with physical exchange of natural gas) is that simultaneously
with the commercial operation, it is necessary to develop a corresponding
“physical operation” consisting of buying the necessary pipeline capacity to
transport natural gas from the hub to the location of delivery (which is usu-
ally external to the hub and even located in another country) or vice versa.
This difficulty has limited the role of the hubs only to the physical exchange
of residual quantities. Moreover, there is also an issue connected with the
“flexibility” of the supply.
258 Analysis of Energy Systems: Management, Planning, and Policy
10.6.4 Hub Pricing
As given in the previous section, gas hubs are “physical” or “virtual” in loca-
tion, where natural gas is exchanged among market operators; thus, there is
a close interaction between demand and supply and the respective curves in
a given moment can be obtained, as sketched in Figure 10.6a.
The clearing between supply and demand determines the price level
expressed on the hub. In this way, the price of natural gas is only an expres-
sion of market fundamentals, namely, demand and supply levels, and it is
not correlated to its potential substitutes.
From the side of the supply, a “gas to gas” competition is created, because a
sort of “merit order” of the supply is determined and the level of the demand
will set the market price (Figure 10.6b). This principle is economically justi-
fied as supply and demand of natural gas determine price.
To avoid abuse of market power (pushing prices up), competitiveness is
assured by giving access to many players on demand and supply sides.
With the progress of gas market liberalization in Europe, gas systems
moved from a monopolistic to a more fragmented environment. In the for-
mer, a single vertically integrated company managed most of the injections
and withdrawals in the gas network. In the latter, instead, different agents
cover a smaller share of the aggregate traded gas volumes, increasing the
number of associated exchanges. A gas hub offers a way to clear individual
positions, easing the need to balance physical injections and withdrawals. In
turn, as liquidity develops, price signals become more reliable and a whole-
sale market offers a second source of gas provision in alternative to the tradi-
tional long-term contracts (Miriello and Polo, 2015).
On the other hand, it should be also mentioned that, although a large num-
ber of traders are active on the gas hubs, the supply to the gas market is con-
centrated because of the limited number of producers. The limited number
of producers of gas within the European context raises some concerns on the
degree of competitiveness of the gas market (Hulshof et al., 2016).
However, as a consequence of the numerous transactions, influenced by
structural and random events, hub prices are much more volatile than long-
term contract rates. For example, a more pronounced seasonality trend, due
to climate conditions, can be observed with respect to long-term contracts
Analysis of the European Energy Context 259
Demand
curve Supply
curve
Demand and
Price
supply
Market price
equilibrium
Equilibrium
quantity
(a) Quantity
Cost of
Demand supply
(€/bcm)
Market
price
Supply
Supply
from LNG
from
country
country
“B” by
“A” by
pipe
pipe
FIGURE 10.6
Natural gas market: sketch of supply and demand equilibrium (a); an example of natural gas
merit order (b).
(Davoust, 2008). In fact, during the summer period, when heating systems
are switched off, a relevant drop of the prices is detected, because the level
of the demand is very low; on the other hand, there is an increase of the
demand during the winter, with a consequent rise of the price. Therefore,
an immediate reaction of the market to the changes of demand level can be
observed and the price changes accordingly.
The hub trading mechanism tends to increase the elasticity of the demand
with respect to the price (i.e., demand is more reactive to price signals), but
in order to fully achieve this object, it is necessary to develop an adequate
infrastructure.
260 Analysis of Energy Systems: Management, Planning, and Policy
In fact, once the gas is “financially” traded on the hub, then it is neces-
sary to guarantee the corresponding physical delivery by means of pipeline
networks and, to this end, it is necessary to have a transparent and efficient
transportation and distribution capacity market to allow all the operators
the possibility to deliver the gas to final customers. Therefore, there is the
necessity to develop a parallel capacity market in order to sustain the growth
of the gas market; this requires the close cooperation of the EU transmission
system operators (TSOs) to guarantee the security and the correct balance of
the network (Bianco et al., 2015).
10.6.5 Recent Developments
The development of gas hubs in Europe started around 2005, with the excep-
tion of NPB in the United Kingdom that begun its operations in the mid-
1990s. Until 2007–2008, gas hubs of continental Europe did not show price
levels significantly different from oil-indexed contracts and they had a lim-
ited liquidity.
As observed by Bianco et al. (2014), after 2008 this situation was radically
transformed as a consequence of the general economic downturn and due to
some specific events:
In light of this context, power generators with large supply contracts in their
portfolio to contain their financial losses tried to sell part of their TOP on the
gas hubs. Similarly, gas suppliers, to face the drop in consumption, offered large
quantities of gas on the European hubs, as also the LNG operators, who decided
to adopt the same strategy to sell the volumes originally directed to the United
States, where, in the meanwhile, shale gas sector had an unforeseeable growth.
The sum of these events determined a substantial increase of liquidity on
the hubs, and, according to the general market law of equilibrium, when
the offer increases, a drop in the prices is obtained. Therefore, prices on the
hubs “decoupled” from oil-indexed contracts and set on much lower levels,
as reported in Figure 10.7 (Stern, 2014). On the other hand, the price of the
gas based on oil-indexed contracts continued to increase, because oil prices
had an upward trend; thus, oil-indexed and hub-based gas prices showed
Analysis of the European Energy Context 261
45
40
35
30
25
Euro/MWh
20
15
Average of TTF day-ahead prices
NWE GCI typical price for long-
term oil-indexed gas supplies
10
0
Apr-11
Apr-12
Apr-13
Feb-11
Feb-12
Feb-13
Aug-10
Aug-11
Aug-12
June-11
June-12
Oct-10
Oct-11
Oct-12
Dec-10
Dec-11
Dec-12
FIGURE 10.7
Monthly averages (August 2010–April 2013) of European long-term contracts and TTF spot
prices. (From Stern, J., Energy Policy, 64, 43, 2014.)
an uncorrelated behavior. This situation was new and unexpected for the
European natural gas market.
As observed by Stern (2012), from 2008 the usual commercial environment
for European gas companies has been subjected to a number of new (and dif-
ficult to predict) forces, which have exacerbated the problems of reliance on
the relatively rigid oil-linked price formulas in long-term contracts.
This situation caused the renegotiation of many oil-indexed contracts,
because the buyers observed very low prices on the gas hubs if compared
with the values of their contracts and therefore they claimed for supply con-
ditions aligned with the market levels. Clearly, not all the negotiations had
a successful ending and many arbitrage processes were also opened. This
condition was typical of large and very large operators with huge supply
contracts in portfolio.
262 Analysis of Energy Systems: Management, Planning, and Policy
On the other hand, small power operators and natural gas wholesalers
tried to exploit this situation by buying natural gas volumes on the hubs by
benefiting from the very low prices, therefore offering electricity and natural
gas at very competitive prices.
This situation forced large operators to offer their power plants or gas
quantities at prices based on the hub level, whereas their cost structure
was much higher, based on the oil-indexed contract level. This strategy was
implemented in order to avoid their displacement from the market, but it
caused huge financial losses.
Stern (2012) highlighted that this situation generated a great confusion,
because hub prices have been perceived as “more convenient” with respect
to oil-indexed formulas, but the fallacy of this equation is rather evident,
because there is the mistake of confusing price formation with price level.
Thus, the assertion that when the gas supply/demand balance tightens, gas
prices will “recouple” with oil prices, reflected this confusion.
A tight supply/demand balance will certainly result in higher prices, but
there is not necessarily a relationship between the latter and oil-related price
levels (Stern, 2012).
This is certainly true from the theoretical point of view, but from the prac-
tical point of view, it might be considered a “rule of thumb” that the oil-
indexed gas formulas represent the highest limit for price levels. If gas price
on the hubs should exceed oil-indexed formulas, it does not make any sense
for large consumers to purchase on the hubs due to the complex issues con-
nected with the physical delivery; on the contrary, it is more convenient to
sign a long-term agreement to obtain a stable furniture, even though less
flexible.
10.7 Conclusions
European natural gas sector is experiencing a period of radical changes,
which were in act before the economic downturn. On the other hand, the
economic crisis has exacerbated and accelerated these processes.
In particular, it is highlighted how the oversupply condition due to the low
demand on both power and gas markets represented a “boost” for the gas
hubs, which, in a short time, moved from low to high liquidity, becoming an
important reference for the EU gas markets.
This situation has weakened the link between oil and gas markets, as
auspicated by the EU directives. A hub-based gas market implies that natu-
ral gas price is connected with the dynamics of gas production and supply
chain, rather than to the oil sector, which is considerably different.
By analyzing current natural gas market, it is possible to observe that
fundamental factors affecting demand or supply in the gas market have
Analysis of the European Energy Context 263
References
Bianco, V., Scarpa, F., Tagliafico, L.A. 2014. Scenario analysis of nonresidential natural
gas consumption in Italy. Applied Energy 113:392–403.
Bianco, V., Scarpa, F., Tagliafico, L.A. 2015. Current situation and future perspectives
of European natural gas sector. Frontiers in Energy 9:1–6.
BP. 2016. BP Statistical review of world energy. http://www.bp.com/en/global/
corporate/energy-economics/statistical-review-of-world-energy.html.
Accessed December 30, 2016.
Davoust, R. 2008. Gas Price Formation, Structure & Dynamics. Paris, France: IFRI.
Dieckhöner, C., Lochner, S., Lindenberger, D. 2013. European natural gas infrastruc-
ture: The impact of market developments on gas flows and physical market
integration. Applied Energy 102:994–1003.
Dilaver, O., Dilaver, Z., Hunt, L.C. 2013. What drives natural gas consumption in
Europe? Analysis and projection. Surrey Energy Economics Discussion Paper
Series. Guildford, U.K.
EIA. 2013. Multiple factors push Western Europe to use less natural gas and more
coal. Washington, DC: U.S. Energy Information Administration.
EIA. 2015. Natural gas pipelines under construction will move gas from
Azerbaijan to southern Europe. Washington, DC: U.S. Energy Information
Administration.
ENI. 2016. World oil and gas review 2016. https://www.eni.com/en_IT/company/
fuel-cafe/world-oil-gas-review-eng.page. Accessed December 30, 2016.
264 Analysis of Energy Systems: Management, Planning, and Policy
CONTENTS
11.1 Introduction................................................................................................. 265
11.2 State of the Art of Renewable Energy Sources....................................... 267
11.2.1 Global View of Renewable Energy Sources................................ 267
11.2.2 Relevance of Renewable Energy Sources in the EU.................. 272
11.3 Spanish Focus on Renewables.................................................................. 275
11.4 Stages of the Renewable Energy Policy................................................... 276
11.4.1 Initiating the Support of Renewables.......................................... 276
11.4.2 Development of Specific Technologies and
Strong Support of Renewables...................................................... 277
11.4.2.1 Slowing the Support of Renewables.............................. 280
11.4.3 Counterpart of Renewables Support............................................ 283
11.4.3.1 Tariff Deficit...................................................................... 283
11.4.3.2 Security Supply................................................................ 285
11.5 Conclusions.................................................................................................. 291
References.............................................................................................................. 291
11.1 Introduction
Energy is one of the main engines of economic development and social
transformation that is present in each and every aspect of economic activity,
both in production and consumption. It is therefore a basic necessity of the
overall economy and a key element of the cost structure of the productive
system which has a strong social and environmental impact. This is why
energy policy plays a vital role in economic development, and therefore, it
should take into consideration all these aspects in order to achieve its goals.
The slow development of the European Union’s (EU) energy policy led to
differences, divergences, and disagreements between the Member States of
265
266 Analysis of Energy Systems: Management, Planning, and Policy
the EU. The absence of an effective common foreign policy and the low con-
fidence in joint actions have resulted in an unsustainable energy policy in
the long run given the challenges that the EU has to face (Marín-Quemada,
2008).
Ever since the 1950s, the EU has based its existence on energy resources
and energy pacts. Nevertheless, one of the first aspects considered by the EU
regarding the energy sector was its liberalization with the aim of enhancing
competition within the sector. However, with the awareness of environmen-
tal changes and their consequences, the focus of the EU energy policy moved
toward the environmental impact of energy generation. In other words, the
EU policy started to urge the reduction of fossil fuels at the time of increas-
ing renewable energy sources and energy efficiency. The European objective
regarding renewable energy sources suggested that by 2020 each Member
State should generate 20% of electricity by using renewable energy sources.
Thus, each Member State of the EU triggered different mechanisms to sup-
port the development of renewables in order to reach the agreed manda-
tory targets. For achieving these targets, the governments had to choose the
most adequate out of a wide range of strategies to suit the country’s context.
However, the promotion and implementation of the proper strategy is not
an easy task, as many snags must be faced. One of the most common is the
accumulation of deficit due to the high amount of subventions to renewable
energy sources as well as the conflict between traditional and renewable
energy producers and suppliers. Despite the possible barriers the support to
renewables may present, recent events (e.g., the Arab spring, the accident at
the oil platform in the Gulf of Mexico, the Fukushima nuclear accident), in
the words of Burgos-Payán et al. (2013), underline some of the hostile conse-
quences of using fossil fuel as an energy source: (1) supply uncertainty and
price volatility of the oil and its derivatives; (2) environmental degradation
and health risks; (3) huge expenditures (especially public funds) needed for
mitigating the damages caused. Yet, it is worth mentioning that renewable
energy has so far failed in being a protuberant competitor to fossil energy
technologies as a consequence of the multiple barriers* in implementing
renewable technologies (Liao et al., 2011). The high production cost and the
low return on the investment of renewable energy sources compared with
traditional fossil energy has contributed to the limitations of the renewable
energy market (Pimentel et al., 1994). Furthermore, the use of fossil fuels may
have contributed to the security of supply due to low-intensity damages on
a daily basis. Having flexible fossil fuel generation in the system, the ran-
domness of the energy from renewable sources could be alleviated. Thus, a
combination of both types of energy sources is needed with a higher share
of renewable sources in the energy mix.
* Barriers are divided mainly into four groups: (1) financial and economic, (2) institutional and
political, (3) technical, and (4) awareness/information/capacity (European Environmental
Agency, 2004).
The Spanish Energy Policy Roller Coaster within the European Union 267
The initiative of promoting renewable energy sources is not new despite the
fact that the EU had issued a specific directive on this topic in 2009 (Directive
2009/28/EC). The Spanish government started its promotion more dynami-
cally back in the 1990s by introducing an active system to jointly support
renewables and cogeneration (the so-called special regime). Subsequently, a
large expansion of renewables was experienced, especially of wind energy
(Gelabert et al., 2011) as well as solar energy (Sebastián, 2015).
Thus, Spain climbed to a leading position among the EU Member States,
following Germany, in the amount of wind power in the energy mix ranking
in 2014 (ENTSO-E, 2015). This could be explained by the capacity of wind
energy to generate savings that could overcome the subsidies received for
promoting this technology (Azofra et al., 2014; Gil et al., 2012.
Since the end of 1996 and the beginning of 1997 until today, the regulatory
process that has been affecting the energy sector has been very deep. This
is not only due to the high number of directives issued, but also due to the
profound changes triggered by the dynamism of the legal framework.
If during the 2000s energy policy caused many conflicts between renew-
ables and traditional energy generators/suppliers for the enormous support
of renewables, after 2020, the weaker policy framework for future renewables
and energy efficiency development may not likely continue giving investors
certainty regarding their investments in clean energy (Buchan et al., 2014).
* For more details, see International Energey Agency (IEA), 2014. World Energy Outlook 2014.
Available at http://www.iea.org/publications/freepublications/publication/WEO2014.pdf.
Accessed on October 20, 2016.
268
TABLE 11.1
Promoting Programs for Developing Renewable Energy
Items Objects Fiscal Incentive Tools Nonfinancial Incentive Tools
Research, development, and • Government • Subsidies for research and development • Legislation and international treaties
demonstration (RD&D) • Electric producers • Capital grants • Research, development, and
• Grid producers • Third-party finance demonstration
• Guidelines for energy conservation
• Public investment
Investment • Government • Capital grants • Voluntary programs
• Electric producers • Bidding system • Regulatory and administrative rules
• Grid producers • Subsidies for investment
• Third-party finance
• Investment tax credits
• Accelerated depreciation
Production and distribution • Electric producers • Guaranteed price • Obligations
• Grid producers • Production tax credits • Voluntary programs
• Tradable certificates
Consumption • Government • Consumer grants/rebates • Obligations
• Consumers • Excise tax exemptions • Government purchases
• Net metering • Green pricing
• Fossil fuel taxes • Public awareness
Source: Liao, C.-H. et al., Renew. Sustain. Energy Rev., 15, 787, 2011.
Analysis of Energy Systems: Management, Planning, and Policy
The Spanish Energy Policy Roller Coaster within the European Union 269
the access to energy for millions of people who face difficulties in this regard,
as well as for creating new opportunities (REN21, 2015).
Thus, according to each country and its particular situation, different pro-
grams promoting the development of renewable energy were created and
implemented (see Table 11.1).
As a consequence, a vast number of governments started planning and
implementing renewable energy policies in parallel with greenhouse gas
emission reduction and energy efficiency (EIA, 2007). The International
Energy Agency divided renewable energy policies into nine different types
as depicted in Figure 11.1.
A great part of these policies imply fiscal support from governments. These
instruments have been used much earlier in some countries; for example,
Denmark was already using regulatory instruments, incentives/subsidies,
and RD&D for promoting renewables in 1976. This was only the beginning
of the avalanche started in the mid-1990s which is actively continuing till
today.
In this line, due to the undoubted awareness of the relevance of renew-
able energy sources and energy efficiency at the global level, a great uprising
trend of policies facilitating renewable energy sources was experienced.
1985 DE DE DE DE
KR KR KR
KR
1990
DE
US
JP JP
US
1995 DK DE
TW BR DE CN BR JP
KR
TW IT
IT UK BR BR IT
2000 US BR IT UK TW DK IT UK UK IT DE JP
TR DK IN KR TR
UK CN CN ES IT UK BR UK JP UK JP KR ES
ES IL BR
JP KR ES IT IN
IN IN IL IN
2005 US
ES ES ES
CN TR US CN US TR UK CN
TR
ES DK DK ES CN BR
TW ES IL TW IL
2010 IN IT IN IT ES IN IT UK IT ES IN ES
Incentives/ Public Tradable Education Policy Regulatory Voluntary
RD&D Financial
subsidies investment permits and outreach processes instruments agreement
FIGURE 11.1
Mapping the adoption of various policies in representative countries. Note: BR, Brazil; CN,
China; DE, Germany, DK, Denmark; IN, India; IT, Italy; IL, Israel; ES, Spain; KR, Korea; JP,
Japan; TR, Turkey; TW, Taiwan; UK, United Kingdom; US, United States.) (From Liao, C.-H.
et al., Renew. Sustain. Energy Rev., 15, 787, 2011.)
270 Analysis of Energy Systems: Management, Planning, and Policy
In less than a decade, renewable energy policies and targets were intro-
duced in more than 80% of the countries worldwide, registering an exponen-
tial growth. In this context, renewable energy provided the estimated 19.1%
of the global final energy consumption in 2013 (REN21, 2015). Furthermore,
over 58% of net addition to global power capacity was due to renewables,
with China, the United States, Japan, and Germany as leaders in cost reduc-
tion as well as their significant investment in the field (around €200 billion).
Wind, solar photovoltaic, and hydropower were the dominant renewable
sources in 2014.
Currently, not all countries are situated in the same phase of renewable
energy promotion. It is true that the majority of countries worldwide are
already in the intermediary stage of developing a renewable energy market.
Yet, many differences could be highlighted depending on their development
stage (see Table 11.2).
A dominant instrument for promoting renewable energy sources in the
EU, especially for electricity generation from renewables, is the feed-in tariff
(FIT) scheme. The EU’s long-term strategy is to achieve a harmonized frame-
work for electricity from renewable energy support at EU level based on the
FIT scheme (Muñoz et al., 2007). With the current legislation, EU Member
States are allowed to use the support scheme considered most appropri-
ate for each country’s circumstances and socioeconomic objectives. In the
Spanish case, the broad social and political coalition leading to political
commitment and continuity of support schemes and the specific design ele-
ments of the support scheme itself (i.e., the FIT) are the two main factors that
explain the success of its model. As a way of adapting concerns of different
actors, especially the government—due to the financial impact on electric-
ity consumers—and electricity from renewables generators, the authorities
decided to modify the regulatory framework regarding FIT several times.
However, it must be noted that, generally, the support of electricity from
renewables is finally paid by electricity consumers as part of their electric-
ity bills (Sáenz de Miera et al., 2008) despite the fact that Jensen and Skytte
(2003) underlined that higher electricity from renewables deployment would
incur a reduction of final electricity prices. This is because the promotion
of electricity from renewables encourages its generation because of lower
variable costs than fossil fuel conventional electricity. Wholesale electricity
price is generally established by fossil-fuel-fired plants, which are usually
the marginal generation plants. At the same time, these types of plants are
substitutes for renewable energy sources. Therefore, the wholesale electricity
price would be reduced with a higher deployment of renewables. This reduc-
tion could balance the growth in final electricity prices as a consequence
of renewables support, leading to a net reduction in retail prices. In other
words, renewables promotion could lead to a win–win situation while an
increase in renewables deployment (counting its environmental and socio-
economic benefits as well) could contribute to a reduction in electricity prices
(Sáenz de Miera et al., 2008).
TABLE 11.2
Goals and Energy Instruments Characteristic to Each Renewable Energy Market Stage of Development
First Stage: Undeveloped Third Stage: Developed
Phase Market Second Stage: Developing Market Market
Steps R&D, investment Production Consumption Production, consumption
Goals • To establish renewable • To improve the • To improve the • To replace fossil fuel with
energy market production of renewable consumption of renewable energy
energy renewable energy • To return to the free market
mechanism
Non-market-based • Regulatory instruments
policies • Policy processes
• Voluntary agreement
• Education and outreach
Market-based policies • RD&D • Financial • Financial • Liberalization
• Incentives/subsidies • Public investment
• Tradable permits
Specific applications • R&D grants and subsidies • Investment deduction • Tax incentives • Removal of fossil energy
• Demonstration • Tax credit • Grants and subsidies subsidies
• Accelerated depreciation • Public investment • Carbon tax
• Guaranteed price • Green pricing
• Obligations and tradable • Removal of renewable
permits energy incentives/subsidies
Mechanisms Quota system Quota system Price system Free market system
Price system
The Spanish Energy Policy Roller Coaster within the European Union
Source: Liao, C.-H. et al., Renew. Sustain. Energy Rev., 15, 787, 2011.
271
272 Analysis of Energy Systems: Management, Planning, and Policy
* For more details, see Directive 96/92/EC and Directive 2003/54/EC (European Commission,
2003).
The Spanish Energy Policy Roller Coaster within the European Union 273
100
1999
90 2008
2010
2014
80
70
60
50
%
40
30
20
10
0
De lic
ry
d
th a
a
ain
ly
Re m
ce
ce
Po d
ia
ga
an
ni
i
ni
ar
lan
lan
tv
Ita
b
ga
ec lgiu
ak
an
ee
ua
to
Sp
nm
pu
rtu
m
La
Ire
un
ov
Po
Gr
Fr
Es
er
Be
Sl
H
G
Li
h
Cz
FIGURE 11.2
Market share of the largest generators in the electricity market (in %). (From Eurostat, http://
ec.europa.eu/eurostat/data/database.)
* According to the green objective of the EU growth strategy (EUROPE 2020), by 2020 the EU
should experience a fall in greenhouse gas emissions by 20% compared with the levels of
1990, should have 20% of energy from renewable sources, and should increase the energy
efficiency by about 20% (not binding).
274 Analysis of Energy Systems: Management, Planning, and Policy
60.0
50.0
40.0
30.0
%
20.0
10.0
0.0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Bulgaria Denmark
Germany Estonia
Spain Finland
Sweden EU
FIGURE 11.3
Share of renewable energy sources in the gross final consumption. (From Eurostat, http://
ec.europa.eu/eurostat/data/database.)
* http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/145397.pdf.
† http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52014SC0016&from=EN.
‡ Even if the EUROPE 2020 objective in the field of renewable energy is to reach 20% share of
renewable energy sources in the final consumption, this does not mean that each Member
State must have 20% of renewables in their final consumption. Each country has a different
objective, which, by 2020, will allow the EU to have, on average, 20% of energy from renew-
ables. For more details, see http://ec.europa.eu/europe2020/pdf/targets_en.pdf.
The Spanish Energy Policy Roller Coaster within the European Union 275
* United Nations Framework Convention on Climate Change (UNFCCC, Kyoto, December 11,
1997).
276 Analysis of Energy Systems: Management, Planning, and Policy
* Among others, Dinica (2003), Bustos (2004), García and Menéndez (2006), Bechberger (2006),
and Meyer (2007) underline the effectiveness of the Spanish feed-in tariff model.
† h ttp://www.tribunalconstitucional.es/es/salaPrensa/Documents/NP_2016_001/2013-
05347STC.pdf.
The Spanish Energy Policy Roller Coaster within the European Union 277
These new trends established by the legislation of the late 1990s ensured the
prevailing principles of freedom of installation and contracting. At the same
time, the new framework showed more transparency and allowed higher
competitiveness, undoubtedly due to the enhancement of the energy markets.
In this legal context, the Spanish government was looking for an appropriate
balance between sustainable development and energy policy measures. In
other words, the aim was to design an energy model tailored to the needs
and characteristics of the Spanish market to avoid possible “bottlenecks.”
Moreover, the avalanche of changes continued with the Royal Decree on
Special Regime (RD 2818/1998). Two different options were offered to elec-
tricity generators from renewables: fixed-premium on top of the electricity
market price and fixed-feed-in adjusted annually. The fixed-feed-in system
gave investors the opportunity to know their own revenues in advance,
independently of the market price shifts. As a consequence, huge imbalances
were caused as well as an overload of the final price for consumers (del Río
González and Gual, 2007). According to Robinson (2015), the overload of the
final price was due to an improper strategy of promoting renewable energy
sources and, hence, to the tremendous governmental wedge.
Furthermore, a Plan for Promoting Renewable Energy Sources IDAE (1999)
was established in 1999 that set more explicit objectives. The aim of this plan
was to maintain the commitment to meet at least 12% of the total energy use
from renewable sources as well as achieving 29.4% of electricity generated
from renewable sources and 5.75% of transport fuel needs to be met from
biofuels by 2010.
In the field of biomass and wind electricity, the targets were established
through the Electricity and Gas Infrastructure Plan for 2002–2011. Very
ambitious targets were established for each administrative region.
The Spanish Energy Policy Roller Coaster within the European Union 279
Additionally, the inflation index used until then for updating the remunera-
tion of regulated activities started to eliminate variations in energy and food
products and any impact as a consequence of tax changes.
The reform of the electricity in Spain started with the Royal Decree Law
9/2013 targeting the promotion of efficiency, transparency, and competition
and the reduction of the tariff deficit and the financial stability in the elec-
tricity market (CNMC, 2014).
Law 24/2013 of the Power Sector obliges all renewables installations to sell
the produced electricity in the market, receiving the market price together
with regulated revenue. Thus, the parameters to determine regulated
income, according to this act, have to be reviewed every 6 years.
Likewise, Law 24/2013 establishes three different categories of self-
consumption. Additionally, grid connection and extension costs should be
considered while integrating electricity from renewables generation tech-
nologies into an existing network (Swider et al., 2008). This aspect is also
covered by Law 24/2013 as it obliges those installations connected to the grid
to contribute to the costs and services of the system in the same conditions as
the rest of the customers.
The Royal Decree 900/2015 regulates the administrative, technical, and
economic conditions and generation for self-consumption, keeping in
mind the relevance and need of the grid system in which self-consumption
must be regulated. Thus, small self-consumers are forced to give away the
energy that they do not consume to power companies. Furthermore, self-
consumers connected to the grid are already paying the entire fixed por-
tion (having to pay the same system tolls as any other consumer) and the
portion corresponding to the energy that they may demand from the grid.
This could be interpreted as a barrier to the self-consumption development
in Spain.
The Royal Decree 947/2015 was approved for supporting new installations
of plants for generating electricity from biomass and wind energy.
Although steps were taken to regain support for renewable energy sources,
the price of electricity continued to ascend. This increase was not only the
result of the rising energy and supply price but was caused especially by the
growing costs of taxes and levies as well as of networks (see Figure 11.4). It
is therefore not surprising that more than 50% of the price of electricity is
composed of network costs together with taxes and levies. This seems to be
the result of the policy undertaken in the second stage of renewables support
(end of the 1990s until 2007), among others.
In spite of the increase in network costs and taxes and levies for industrial
consumers (see Figure 11.5), it must be underlined that their proportion in
the electricity price is much lower than that of domestic consumers.
Consequently, and contradictory to the supposition of Jensen and Skytte
(2003), renewables support seems to lead, at least in the Spanish scenario,
to an increase in final electricity price. Is this because Sáenz de Miera et al.
(2008) had not yet accomplished their study? Further research should be
282 Analysis of Energy Systems: Management, Planning, and Policy
0.3000
Energy and supply Network costs Taxes and levies
0.2500
0.2000
€/kWh
0.1500
0.1000
0.0500
0.0000
2008 2009 2010 2011 2012 2013 2014 2015
FIGURE 11.4
Evolution of electricity price components of domestic consumers. Band Dc: 2500 kWh <
consumption < 5000 kWh. Note: Band Dc is chosen as a medium domestic consumer. (From
Eurostat, http://ec.europa.eu/eurostat/data/database.)
0.1400
Energy and supply Network costs Taxes and levies
0.1200
0.1000
0.0800
€/MWh
0.0600
0.0400
0.0200
0.0000
2008 2009 2010 2011 2012 2013 2014 2015
FIGURE 11.5
Evolution of electricity price components for industrial consumers. Band IC: 500 MWh <
consumption < 2000 MWh. Note: Band IC is considered as a medium-size industrial consumer.
(From Eurostat database, http://ec.europa.eu/eurostat/data/database.)
The Spanish Energy Policy Roller Coaster within the European Union 283
carried out in order to give a clear and tested answer to this question. But
meanwhile, the huge imbalances caused by the inadequate use of the feed-
in systems has led to an increase in electricity prices, which is ultimately
suffered by the consumers, as del Río González and Gual (2007) state. This
situation is even worse when it comes to domestic consumers, as Robinson
(2015) underlines.
Yet, the results of the drawback stage in the excessive support of renewable
energy sources have started contributing to the decrease in electricity prices
since 2013.
11.4.3.1 Tariff Deficit
Promoting and supporting renewable energy sources meant an increase in
tariff deficit for the Spanish government.* Since the early 2000s, especially
since 2005, a growing trend has marked the beginning of a new stage,
which resulted in a tariff deficit (cumulative) of more than €32,000 million
by the end of 2012. Despite the sharp increase in the rate paid by consum-
ers in recent years and the efforts to find the optimal recipe in energy
regulation, the increasing importance of renewable energy sources in the
energy mix has contributed considerably to the increase in tariff deficit
and is expected to follow the same path in the future (Fabra and Fabra,
2012).
Sallé-Alonso (2012) pinpoints that the tariff deficit could have been solved
with small adjustments with a frequency (of 2, 3, or 6 months) adapted to the
size of the imbalance detected. In his opinion, the government has four dif-
ferent regulative keys as depicted in Figure 11.6. Accordingly, an improper
management of the four keys is the reason for tariff deficit accumulation in
the Spanish system.
With the increasing tariff deficit, and despite the established principle of
tariff sufficiency in Law 54/1997 to be accomplished by the public adminis-
tration, new legal frameworks have been developed. Nevertheless, with the
shifts experienced by the energy legislation focused on the reduction of the
* Tariff deficit is the difference between the recognized rights of incomes and the electricity
tariffs.
284 Analysis of Energy Systems: Management, Planning, and Policy
Energetic planification
Efficient energy mix versus other
objectives
Demand management versus installed
capacity
Etc.
FIGURE 11.6
Regulative keys of public administration. (From Sallé-Alonso, C., Papeles de Economía Española,
134, 101, 2012.)
tariff deficit through numerous legal changes since 2008; the trend changed
completely in 2014 as a surplus was experienced (see Figure 11.7).
Even though the strong support of renewables came to an end with the
RD 1578/2008, a long list of laws, royal decrees, and royal decree laws had
to be designed and approved in order to solve the consequences of the lack
of a realistic energy strategy with a long-term focus on renewable energy
sources.
As a consequence of the lack of consistency in the administrative
actions with the RDL 6/2009, the Royal Decree Law 6/2010 defined further
increases in deficit limits that had previously established the Royal Decree
Law 6/2009.
The Royal Decree Law 1/2012 tried to stop future high costs planning that
would result from expensive renewable technologies. Alongside this, several
other royal decrees were approved in the same year with a similar aim: to
reduce tariff deficit (RDL13/2012 or RDL 20/2012).
In addition, Law 24/2013 of Power Sector sets forth the legal background
of this sector keeping in mind the crucial need to avoid the accumulation of
new tariff deficits.
The Spanish Energy Policy Roller Coaster within the European Union 285
1000
550.3
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
–1000
–2000
–3000
–4000
–5000
–6000
–6307
–7000
FIGURE 11.7
Evolution of the tariff deficit in Spain (2000–2014). (From Comisión Nacional de los Mercados
y la Competencia (CNMC), Spanish Energy Regulator’s National Report to the European
Commission 2014, https://www.cnmc.es/Portals/0/Ficheros/Energia/Publicaciones_
Anuales/140731_NR_CNMC_final.pdf, 2014. Accessed November 20, 2016.)
11.4.3.2 Security Supply
The downturn of electricity demand suffered all over the world was even
stronger in Spain due to the extreme economic crisis it faced. In such a con-
text, with a lower demand today than in 2006, ensuring power supply was
not an easy task. The strong support of renewable energy sources promoted
since the 1980s until late 2000s (RD 661/2007) contributed to the profitability
issues faced by many power plants. This background facilitated a contradic-
tory perspective of traditional and renewable energy agents.
In the energy field, strong investments were made since 2003 mainly in
renewable energy sources, especially wind and solar photovoltaic, as well as
in power plants, this time essentially in combined cycle gas turbine (CCGT).
In spite of this, the limitation of the installed capacity came as a consequence
of the global economic crisis pictured in the 25,348 MW of CCGT at the end of
2015 and 22,845 MW in wind energy (REE, 2015). The need to increase the pen-
etration of renewables and of coal in the electricity mix was combined with a
high reduction in the functioning hours of CCGTs to 10% in 2015. Additionally,
a clear installed-capacity surplus was observed in CCGTs. Hence, several
changes were requested in the legal framework regarding capacity payment.
Guaranteeing energy supply in order to avoid possible blackouts was
effected by encouraging investments in new power plants as well as ensuring
286 Analysis of Energy Systems: Management, Planning, and Policy
energy resources (RES) plants, a high coverage rate, and the installed capacity
surplus are some of the incentives to modify the legal framework regarding
the availability of service payments. In the Royal Decree 134/2010, restric-
tions set for capacity payment were approved. Since then, power plants
employing domestic coal were programmed by REE in order to meet the
annual targets. The decision to promote the use of domestic coal was because
electricity generation with this fuel decreased significantly since 2008 due
to reduced competitiveness and sought to maintain the operation of those
electricity production units that employed local primary energy sources,
adopting measures to prevent alteration of the market price. These plants
acquired guaranteed minimum annual hours of operation, which resulted
in the reduction of electricity production by CCGTs, with a drop in demand
and an increase in RES production. The main consequences of this regula-
tion are the increase in greenhouse gas emissions and the lower production
of other technologies installed, which may jeopardize its continuity.
For promoting the availability of plants under the ordinal regime for a
period of 1 year, the Ministerial Order ITC/3127/2011 developed and estab-
lished the availability service of €5150/MW according to the technology
(CCGT having the highest incentive). Additionally, the investment incentive
was raised to €26,000/MW/year for a period of 10 years. Hence, the avail-
ability service is the availability to the system operator of the capacity of the
whole production network or of a part of it. More precisely, it is the availabil-
ity of the capacity of those thermal installations that produce electric energy
under the ordinary regime described in the First Section of the Installation
of Production of Electric Energy Administrative Register, which might not
be available at the moment of maximum demand without this incentive. This
might be because it is a marginal technology of the daily market, that is,
of fuel-oil plants, combined cycle, and coal plants, and also of pure water
systems that have mixed pumping and reservoir (damming). Availability
service as developed in this regulation is a transitory instrument applicable
between December 2011 and December 2012. Additionally, the investment
incentive for the long run for plants whose start-up certificate was issued
after January 1, 1998, was revised with the aim of updating and adapting
this kind of payment to the changes that occur during the operating hours
of these centrals, which makes this payment maladjusted and includes in
this service centrals with significant environmental investments for reduc-
ing emissions of sulfur oxides (SO2), in addition to the desulfurization plants
that were already considered in the 2007 legislation.
The Royal Decree-Law 13/2012 modified the values of investment incen-
tives to €23,400/MW/year for 2012 alone, justifying this modification by the
existence of a low demand of electricity and a low risk of installed capacity
deficit.
The Royal Decree-Law 9/2013 established an indefinite reduction of invest-
ment incentives with a value of €10,000/MW/year; this applies to all new
288 Analysis of Energy Systems: Management, Planning, and Policy
* During hibernation, a temporal shutdown of the plant is carried out. This makes it possible
to auto-adjust the latent capacity excess due to suppliers’ decisions; all this without dam-
aging either the system or its supply safety. The competitive auction procedure regulates
the assignment of capacity susceptible to hibernation. Normally, the period of temporary
hibernation of CCGT plants is 1 year. Therefore, at least 6 months beforehand, an auction for
each period is organized under the supervision of the CNMC. Regarding the liquidation of
the auctions, Red Eléctrica Española is the authority responsible for this process, while the
administrative procedures run under the State Secretariat of Energy.
The Spanish Energy Policy Roller Coaster within the European Union 289
FIGURE 11.8
Capacity payment regulation.
Analysis of Energy Systems: Management, Planning, and Policy
The Spanish Energy Policy Roller Coaster within the European Union 291
11.5 Conclusions
The EU has designed different objectives within its growth strategy (EUROPE
2020). Among these priorities, the use of renewable energy is one of the main
topics of discussion in Europe and Spain. Within the energy field, promoting
renewable energy sources is, for Europeans and Spaniards, a must.
However, despite the common objective of increasing energy from renew-
able sources, many differences can be observed between each Member State’s
legal framework, as well as in the mechanism used for supporting renew-
ables. In this sense, Spain is one of the leaders at the European level in pro-
moting renewables, especially when it comes to wind and solar energy and
its contribution to the electricity mix. This was possible due to a very strong
support of these renewable energy sources by the national government.
Three different stages were detected in the Spanish support process of
renewable energy sources: (1) a rather tentative support in the 1980s and the
beginning of the 1990s in the initial stage, (2) the development stage since
the second half of the 1990s until 2007, and (3) the slowdown stage from 2008
until today. It is the second stage that helped strongly promote renewable
energy sources in Spain. Nevertheless, it is this legislation that, as a counter-
part, contributed significantly to the creation of the tariff deficit, which led
to an unsustainable situation that required a break from this development.
Additionally, due to the discontinuity of renewable sources, security of sup-
ply was and still is one of the main concerns of all governments promoting
renewables. In this case, Spain has to deal with disputes with traditional
energy companies, mainly CCGTs. This is a consequence of the ambitious
support for renewables against traditional sources as CCGTs have faced a
huge limitation of their functioning hours. The legislation had to be designed
bearing in mind the need to increase the share of renewable energy sources
and their negative externalities (e.g., tariff deficit) and the security of supply,
at the same time finding a proper balance between all these aspects. This
has not yet been achieved by the different Spanish governments as they have
faced grave issues in terms of tariff deficit, which has partially been over-
come since 2014, when they started achieving surplus. Despite this timely
surplus, tariff deficit is a problem yet to be solved. Unfortunately, the final
consumers seem to be the ones paying for this mismatched strategy.
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296 Analysis of Energy Systems: Management, Planning, and Policy
A C
Absorption chillers, 80 Capacity payment (CP) mechanism
Adjustment markets, 177 investment incentive, 288
Advanced Local Energy Law 17/2007, 286
Planning (ALEP) Law 54/1997, 286
methodology, 20–21 regulation, 289–290
Analogs ensemble (AnEn) methodology, Royal Decree 134/2010, 287
184–185 structure, 286
Arab Future Energy Index (AFEX) unitary price, 288
benchmarking cycles Capacity remuneration mechanisms
2013 cycle, 225–228 (CRMs), 139–140
2015 cycle, 228–230 CBA, see Cost–benefit analysis
building sector, 231 CCHP systems, see Combined cooling,
data availability, 225 heating, and power systems
energy-exporting and energy- Central autonomous management
importing countries, 225 controller (CAMC), 174
evaluation criteria Clathrates, 236
energy pricing, 222 Coal-bed methane, 236
institutional capacity, 222 Combined cooling, heating, and power
policy framework, 222 (CCHP) systems
quantitative and qualitative design and sizing, 81–82
indicators, 222–224 end-use energy, 77
utility, 222 ICE, 78–79
government sector, 231–232 installed capacity, 97–98
policy assessment and benchmarking investment initiative, 82
tool, 222 energy market, 83
subsidy levels, 231 energy savings, 83
Tunisia, 230 price ratio, 83–84
Artificial neural networks (ANNs), project economics, 83
183–184 spark spread, 83
Autoregressive integrated investment viability
moving average (ARIMA) electricity and gas prices, 91–93
models, 182 investment break-even point, 90–91
Autoregressive moving average parameters, 88, 90–91
(ARMA) models, 182 and main producers, 97
micro-turbines, 79–80
operational viability
B
characteristics, 88–89
Balancing market, 178 cooling fraction, 88
Balancing service providers (BSPs), 144 parameters, 87–88
Baseline emission inventory (BEI), 19 substituted boiler efficiency, 89–90
Burovaya Companya Eurasia, 57 operation strategies, 82
299
300 Index
Microgrid central controller (MGCC), 174 ownership and business model, 175
Microgrids (MGs) scheme, 172–173
advantages, 172–173 structures of control, 174
case study Microsource controllers (MCs), 174
electrical load demand, 187 Micro-turbines (μT), 79–80
hourly production costs, 187 Middle East and North Africa (MENA),
minimum and maximum spot energy efficiency
prices and electrical loads, AFEX
187, 189 building sector, 231
optimal bidding curve, 189, data availability, 225
191, 193 energy-exporting and energy-
optimization problem, 186 importing countries, 225
power production in function of evaluation criteria, 222–224
risk in case of low price, 189, government sector, 231–232
192–193 policy assessment and
power production vs. energy benchmarking tool, 222
prices, 187–188 subsidy levels, 231
PV power forecast and Tunisia, 230
uncertainty, 186 2013 cycle, 225–228
PV power production as function 2015 cycle, 228–230
of risk and price, 188, 190–191 donor-countries’ projects, 220
risk-bidding strategy, day-ahead energy and economy profiles, 221
energy market, 186 internal and external factors, attitude
spot prices, 187 shift, 221
technical and economic NEAPS, 221
characteristics, power plants, Ministerial Order IET/2735/2015, 288
187–188 Ministerial Order ITC/2794/2007, 286
components, designs, and rules, 172 Ministerial Order ITC/3127/2011, 287
definition, 172 Missing money problem, RES-E, 158–159
deliberalized energy market structure Moving average (MA) models, 181–182
deregulated electricity market Municipalities, universities, schools, and
agents, 176 hospitals (MUSH) markets, 98
pool markets, 177–178
forecasting
N
AnEn methodology, 184–185
classical/conventional methods, National Energy Authority, 288
180–183 National energy efficiency action plans
computational intelligence, (NEAPS), 221
183–184 National Renewable Energy Action Plan
electricity price, 179 of Belgium (NREAP), 124
evolutionary programming and Natural gas
genetic algorithms, 185–186 biogenic methane, 235
fuzzy inference and fuzzy–neural conventional gas, 235
models, 185 dry natural gas, 235
load, 178–179 fossil fuel, 235
renewable power production, 179 hydrocarbon gases, combustible
short-term, medium-term, and mixture, 234
long-term, 178 sour natural gas, 235
techniques classification, 180 thermogenic methane, 235
Index 305