Creating Markets for Wind Electricity in China: Case Studies in Energy Policy and Regulation by Michael R. Davidson B.S., Mathematics and Physics, Case Western Reserve University (2008) B.A., Japanese Studies, Case Western Reserve University (2008) S.M., Technology and Policy, Massachusetts Institute of Technology (2014) Submitted to the Institute for Data, Systems, and Society in partial fulfillment of the requirements for the degree of Doctor of Philosophy in Engineering Systems at the MASSACHUSETTS INSTITUTE OF TECHNOLOGY June 2018 © Massachusetts Institute of Technology 2018. All rights reserved. Author ......................................................................................... Institute for Data, Systems, and Society April 6, 2018 Certified by .................................................................................... Prof. J. Ignacio Pérez-Arriaga Visiting Professor, MIT Sloan School of Management; Professor, School of Engineering and Director of the BP Chair on Energy & Sustainability, Comillas University, Madrid, Spain Thesis Supervisor Certified by .................................................................................... Prof. Valerie J. Karplus Class of 1943 Career Development Assistant Professor, Global Economics and Managament Group, MIT Sloan School of Management Thesis Supervisor Certified by .................................................................................... Prof. Margaret M. Pearson Professor, Department of Government and Politics, University of Maryland, College Park Accepted by .................................................................................... Prof. Stephen C. Graves Professor, Mechanical Engineering and Engineering Systems, MIT; Abraham J. Siegel Professor, Management Science, MIT; and Graduate Officer, Institute for Data, Systems, and Society 2 Creating Markets for Wind Electricity in China: Case Studies in Energy Policy and Regulation by Michael R. Davidson Submitted to the Institute for Data, Systems, and Society in partial fulfillment of the requirements for the degree of Doctor of Philosophy in Engineering Systems Abstract China’s rapid economic growth—largely industrial, energy-intensive, and reliant on coal—has gen- erated environmental, public health, and governance challenges. While China now leads the world in renewable energy deployment, curtailment (waste) of wind and solar is high and increasing, generating much discussion on the relative contributions of technical inflexibilities and incomplete institutional reforms on integration outcomes. These integration challenges directly affect China’s ability to meet long-term environmental and economic objectives. A second, related challenge emerges from how wind integration interacts with China’s reinvigoration in 2015 of a three-decade- old process to establish competitive electricity markets. A “standard liberalization prescription” for electricity markets exists internationally, though Chinese policy-makers ignore or underempha- size many of its elements in current reforms, and some scholars question its general viability in emerging economies. This dissertation examines these interrelated phenomena by analyzing the contributions of diverse causes of wind curtailment, assessing whether current experiments will lead to efficient and politically viable electricity markets, and offering prescriptions onwhenand how to use markets to address renewable energy integration challenges. To examine fundamentals of the technical system and the impacts of institutional incentives on system outcomes, this dissertation develops a multi-method approach that iterates between engineering models and qualitative case studies of the system operation decision-making process (Chapter 2). These are necessary to capture, respectively, production functions inclusive of physical constraints and costs, and incentive structures of formally specified as well as de facto institutions. Interviews conducted over 2013-2016 with key stakeholders in four case provinces/regions with significant wind development inform tracing of the processes of grid and market operations (Chapter 3). A mixed-integer unit commitment and economic dispatch optimization is formulated and, based on the case studies, further tailored by adding several institutions of China’s partially-liberalized system (Chapter 4). The model generates a reference picture of three of the systems as well as quantitative contributions of relevant institutions (Chapter 5). Insights from qualitative and quantitative approaches are combined iteratively for more parsimonious findings (Chapter 6). This dissertation disentangles the causes of curtailment, focusing on the directional and relative contributions of institutions, technical issues, and potential interactive effects. Wind curtailment is found to be closely tied to engineering constraints, such as must-run combined heat and power (CHP) in northern winters. However, institutional causes—inflexibilities in both scheduling and inter-provincial trading—have a larger impact on curtailment rates. Technical parameters that are currently set administratively at the provincial level (e.g., coal generator minimum outputs) are a third and important leading cause under certain conditions. To assess the impact of China’s broader reform of the electricity system on wind curtailment, this dissertation examines in detail “marketizing” experiments. In principle, spot markets for electricity naturally prioritize wind, with near zero marginal cost, thereby contributing to low 3 curtailment. However, China has not yet created a spot market and this dissertation finds that its implementation of other electricity markets in practice operates far from ideal. Market designs follow a similar pattern of relying on dual-track prices and out-of-market parameters, which, in the case of electricity, leave several key institutional causes of inefficiency and curtailment untouched. Compared to other sectors with successful marketization occurring when markets “grow out of the plan,” all of the major electricity experiments examined show deficiencies in their ability to transition to an efficient market and to cost-effectively integrate wind energy. Although China’s setting is institutionally very different, results support implementation of many elements of standard electricity market prescriptions: prioritize regional (inter-provincial) markets, eliminate conflicts of interest in dispatch, and create a consistent central policy on“tran- sition costs” of reducing central planning. Important for China, though overlooked in standard prescriptions: markets are enhanced by clarifying the connection between dispatch and exchange settlement. As is well established, power system efficiency is expected to achieve greatest gains with a short-term merit order dispatch and primarily financial market instruments, though some workable near-term deviations for the Chinese context are proposed. Ambiguous property rights related to generation plans have helped accelerate reforms, but also delay more effective markets from evolving. China shares similarities with the large class of emerging economies undergoing elec- tricity market restructuring, for which this suggests research efforts should disaggregate planning from scheduling institutions, analyze the range of legacy sub-national trade barriers, and prior- itize finding “second-best” liberalization options fit to country context in the form andorderof institutional reforms. J. Ignacio Pérez-Arriaga Committee Chair, Thesis Supervisor Visiting Professor, Sloan School of Management, Massachusetts Institute of Technology Professor, School of Engineering; Director of the BP Chair on Energy & Sustainability, Comillas University, Madrid, Spain Valerie J. Karplus Thesis Supervisor Class of 1943 Career Development Assistant Professor, Global Economics and Managament Group, Sloan School of Management, Massachusetts Institute of Technology Margaret M. Pearson Professor, Department of Government and Politics, University of Maryland, College Park 4 5 Acknowledgements Any insights I developed over the course of this work derive from the patient and generous advising by my committee: Ignacio Pérez-Arriaga, Valerie Karplus, and Margaret Pearson. Ignacio has guided me through all aspects of the electricity system, giving me the benefit of his decades of knowledge in systems around the world. He is the most approachable world expert in any domain I have met. Valerie has been a fantastic advisor and mentor, to whom I am grateful for bringing me into the unique collaboration with Tsinghua University she carefully built up. She has been generous with her time and experience and, important to a young scholar, always has the bigger picture in mind—whether advising on research or career goals. Margaret has been a consistent source of research ideas and practical advice in trying to understand the politics of regulation in China. I will always be grateful to her for introducing me to a larger community of scholars in these topics, with whom I have had the opportunity to further extend my academic impact. An interdisciplinary thesis requires a special kind of committee, and no amount of three-legged chair metaphors would be sufficient to convey how uniquely served these three have been to advise on this topic. I was fortunate to receive support from a range of organizations during my time at MIT. I would like to thank ICF International, the other founding sponsors of the Tsinghua-MIT China Energy and Climate Project—Eni