Essays in Electricity Economics
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Essays in Electricity Economics Empirical, Numerical and Theoretical Perspectives on Renewable Energy and Cross-Border Integration vorgelegt von Diplom-Volkswirt Alexander Zerrahn geboren in Recklinghausen von der Fakult¨atVII { Wirtschaft und Management der Technischen Universit¨atBerlin zur Erlangung des akademischen Grades Doktor der Wirtschaftswissenschaften { Dr. rer. oec. { genehmigte Dissertation Promotionsausschuss: Vorsitzender: Prof. Dr. Georg Meran Gutachter: Prof. Dr. Christian von Hirschhausen Gutachterin: Prof. Dr. Claudia Kemfert (Hertie School of Governance, DIW Berlin) Gutachter: Prof. Dr. Sebastian Schwenen (TU M¨unchen) Tag der wissenschaftlichen Aussprache: 21. April 2016 Berlin 2016 To my father. i Abstract Two developments in European electricity markets are eminent: the large-scale deployment of renewable resources and the closer interaction across borders. Both developments entail great potentials for efficiency gains, and imply challenges of integration. This dissertation contributes to the economic understanding of both integration challenges. To this end, it combines empirical, theoretical, and numerical approaches to assess qualitative and quantitative perspectives. Part I of this dissertation focuses on economic challenges arising from the integration of decentralized fluctuating renewable resources into the electricity system. After a synthesis of findings on wind power and externalities from different strands of the literature, it renders an econometric in-depth analysis of external effects of wind turbines. While wind turbines are found to raise externalities, and fluctuating feed-in poses challenges to the electricity system, the mitigated external costs of conventional generation are both by several magnitudes larger as well as spatially and temporally more widespread. For a deeper assessment of effects within the electricity system, a new numerical open-source model is developed. Storage and other flexibility options are found to complement variable feed-in. Part II of this dissertation focuses on economic challenges arising from the integration of electricity systems across borders. As electricity is a grid-bound commodity, aligning incentives of transmission system operators in network management can yield substantial efficiency gains. To this end, game-theoretic and simulation models are employed. Finally, a theoretical multi- stage equilibrium model explores the optimal expansion of the transmission network to mitigate market power. It shows that the integration across borders can foster competition and welfare if incentives of strategic generators are correctly taken into account. Keywords: energy economics, renewable electricity, wind power, externalities, non-market valuation, spatial econometrics, simulation models, flexibility options, Generalized Nash Equi- librium (GNE), equilibrium problems under equilibrium constraints (EPEC) iii Zusammenfassung Zwei Entwicklungen auf europ¨aischen Elektrizit¨atsm¨arktensind von besonderer Bedeutung: Der großfl¨achige Ausbau erneuerbarer Energien und eine immer engere Verflechtung ¨uber Grenzen hinweg. Beide Entwicklungen bergen große Wohlfahrtspotenziale, ziehen aber auch Heraus- forderungen f¨urFragen der Integration nach sich. Diese Dissertation leistet einen Beitrag zum ¨okonomischen Verst¨andnisdieser doppelten Integrationsaufgabe. Hierzu wendet sie empirische, theoretische und numerische Ans¨atzean. Der erste Teil dieser Dissertation analysiert ¨okonomische Herausforderungen der Integra- tion erneuerbarer Energien in das Stromsystem, sowohl qualitativ als auch quantitativ. Nach einer Synthese von Erkenntnissen zu Windkraft und Externalit¨atenaus verschiedenen Str¨angen der Literatur liefert eine ¨okonometrische Analyse vertiefte Ergebnisse zu externen Effekten von Windkraftanlagen. Die Befunde zeigen, dass Windkraftanlagen zu Externalit¨atenf¨uhren, und dass die Variabilit¨atder Windstromeinspeisung eine Herausforderung f¨urdas Stromsystem darstellen kann. Zugleich sind die vermiedenen externen Kosten aus konventioneller Stromerzeu- gung sowohl deutlich h¨oherals auch r¨aumlich und zeitlich weitreichender. F¨ureine tiefergehende Analyse von Auswirkungen innerhalb des Stromsystems wird ein neues Open-Source-Modell entwickelt. Die Ergebnisse zeigen, dass Energiespeicher und andere Flexibilit¨atsoptionenfluk- tuierende Erzeugung aus erneuerbaren Quellen wirksam erg¨anzenk¨onnen. Der zweite Teil dieser Dissertation analysiert ¨okonomische Herausforderungen der grenz¨uber- schreitenden Integration von Stromm¨arkten.Da Elektrizit¨atein netzgebundenes Gut ist, kann die Harmonisierung von Anreizen von Ubertragungsnetzbetreibern¨ beim Netzmanagement deut- liche Effizienzgewinne bewirken, wie in spieltheoretischen und Simulationsmodellen gezeigt wird. Schließlich wird ein theoretisches, mehrstufiges Gleichgewichtsmodell entwickelt, um optimalen Netzausbau zur Eind¨ammung von Marktmacht zu bewerten. Es zeigt sich, dass grenz¨uberschre- itende Integration Wettbewerb und Wohlfahrt f¨ordernkann, falls Anreize strategischer Erzeuger angemessen ber¨ucksichtigt werden. v vi ZUSAMMENFASSUNG Schl¨usselw¨orter: Energiewirtschaft, erneuerbare Energien, Windkraft, externe Effekte, außer- marktliche Bewertung, r¨aumliche Okonometrie,¨ Simulationsmodelle, Flexibilit¨atsoptionen,all- gemeines Nash-Gleichgewicht (GNE), Gleichgewichtsmodell unter Gleichgewichtsnebenbedin- gungen (EPEC) Acknowledgments First, I want to thank my supervisor Christian von Hirschhausen for giving me the freedom to set my own research agenda, guiding me toward relevant questions, and continuously encouraging me to start working. Likewise, I thank Claudia Kemfert for being part of my committee and for providing, together with the team of DIW's department energy, transportation, environment, an excellent research environment and an enjoyable working atmosphere. I also thank my committee member Sebastian Schwenen, for his willingness to work through three and a half years of research, and the committee chair Georg Meran. Moreover, I would like to thank the team of the DIW Graduate Center, in particular Helmut L¨utkepohl and Georg Weizs¨acker, for providing an excellent environment for a young researcher to develop. Financial support by the DIW Graduate Center, the Federal Ministry for the Envi- ronment, Nature Conservation, Building and Nuclear Safety, the Federal Ministry for Economic Affairs and Energy, Stiftung Mercator, and the Horizon 2020 program of the European Com- mission is gratefully acknowledged, as well as travel grants and conference participation support by the Econometric Society and the German Economic Association. I am especially grateful to my colleagues and co-authors Wolf-Peter Schill, Friedrich Kunz, Daniel Huppmann, and Christian Krekel. Friedrich introduced me to real electricity system modeling and always had the time and willingness to help me understand the mysterious ways of electricity flows. Wolf provided great academic guidance throughout my dissertation, en- couraging me to be precise and always question ideas and approaches. Daniel introduced me to the \simple" mathematical foundations of modeling strategic behavior, and Christian helped me to cold start empirical well-being research. I benefited a lot from their knowledge and encouragement. I am also indebted to my colleagues and fellow doctoral students within the department and at Technical University Berlin, particularly Philipp Richter, Clemens Gerbaulet, Jonas Egerer, Casimir Lorenz, and Roman Mendelevitch, for discussing research ideas, and all kinds of small and big practical issues for bringing ideas to fruition. I am also grateful to Steve vii viii ACKNOWLEDGMENTS Gabriel, Sauleh Siddiqui, and Jeremy Eckhause for continuously broadening my knowledge on optimization during many courses as teachers and colleagues, and the team at E-Control Austria's economics department for the interesting time in Vienna. Finally, I want to thank my fellow PhD students from the Graduate Center for making the last four and a half years a memorable time beyond (and also at) DIW Berlin. My family always endorsed my plans and helped me to stay on track. Last but certainly not least, I thank Mandy who bravely endured my numerous evenings and week-ends in the office and was always there for me during the highs and lows. Rechtliche Erkl¨arung Hiermit versichere ich, dass mir die geltende Promotionsordnung bekannt ist und ich die vor- liegende Dissertation selbtst¨andigund ohne unzul¨assigeHilfsmittel verfasst habe. Die verwen- deten Quellen sind vollst¨andigim Literaturverzeichnis angegeben. F¨urManuskripte, die in Zusammenarbeit mit Co-Autoren entstanden sind, sind deren Namen sowie mein Anteil an der gemeinsamen Arbeit in Tabelle 1.2 aufgef¨uhrt.Die Arbeit wurde noch keiner Pr¨ufungsbeh¨orde in gleicher oder ¨ahnlicher Form vorgelegt. Berlin, 8. M¨arz2016 Alexander Zerrahn ix Table of Contents List of Tables xv List of Figures xix List of Abbreviations xxi 1 Introduction: Integration of Renewables and Integration across Borders 1 1.1 Motivation . 1 1.2 Economics of renewable electricity generation . 4 1.3 Economics of cross-border electricity market integration . 11 1.4 Dissertation outline . 20 1.5 Concluding remarks and future research . 29 Part I { Integration of Renewables 34 2 Wind Power and Externalities 35 2.1 Introduction . 35 2.2 Wind turbines, wind electricity and externalities . 36 2.3 Wind turbines . 40 2.4 Wind electricity . 46 2.5 Economic side effects and security of supply . 53 2.6 Conclusions . 56 xi xii TABLE OF CONTENTS