ESSAYS ON THE ECONOMICS OF RENEWABLE ENERGY AND CROSS-SECTORAL DECARBONIZATION Inauguraldissertation zur Erlangung des Doktorgrades der Wirtschafts- und Sozialwissenschaftlichen Fakultät der Universität zu Köln 2019 vorgelegt von MSc ETH Masch.-Ing. Jakob Peter aus Basel Betreuer: Prof. Dr.Felix Höffler Referent: Prof. Dr.Marc Oliver Bettzüge Korreferent: PD Dr.Dietmar Lindenberger Tag der Promotion: 29. Mai 2019 Preface I would like to express profound gratitude to my academic advisor, Prof. Dr. Felix Höffler, for his precise and constructive feedback, which inspired me and consider- ably improved my research. Also, I want to thank him for giving me the opportunity to collaborate with him on two research projects at his chair. Furthermore, I am very grateful to Prof. Dr. Marc Oliver Bettzüge for his availability to be the referee of my thesis. During my years as a doctoral student at the Institute of Energy Economics (EWI) at the University of Cologne, we had various very inspiring discussions and collaborations. Also, I want to thank PD Dr. Dietmar Lindenberger for co-refereeing my thesis and for our very professional collaboration in various projects. I am grateful to Johannes Wagner for the outstanding collaboration in our joint research project, which I deeply enjoyed. Furthermore, I am very thankful to Simeon Hagspiel and Andreas Knaut for inspiring discussions in our joint research project. Also, I want to express my gratitude to Simeon Hagspiel for giving me the oppor- tunity to collaborate with him on the research project he was working on as post- doctoral fellow. Furthermore, I want to thank Broghan Helgeson for all the intense and inspiring common working hours in our joint research paper. My thanks also go to Philipp Henckes, Christopher Frank and Nils Küchler, for the inspiring collab- oration within our joint multi-disciplinary research project in the fields of Energy Economics, Meteorology and Geophysics. Special thanks go to my fellow research associates at the Institute of Energy Eco- nomics for the great times we had together. I am very grateful for the good research and work environment at the institute, which was made possible by Monika Deck- ers, as well as the whole administration, communication and IT team. I would also like to extend my gratitude to Henrike Sommer, Andreas Fischer, Marcel Dahl and Marius Overath, who provided excellent research assistance. An institutionally and financially stable framework has been provided by the In- stitute of Energy Economics and the University of Cologne, as well as by the Ger- man Research Foundation (DFG) and the Ministry of Economic Affairs, Innovation, Digitalization and Energy of the State of North Rhine-Westphalia. The work was carried out within UoC Emerging Group on ‘Energy Transition and Climate Change v (ET-CC)’, UoC Forum ‘Market design and regulation for stochastic electricity sup- ply chains’, ‘Virtual Institute - Power to Gas and Heat’ (W041A), as well as ‘Virtual Institute - Power to Gas and Heat’ (EFRE-0400155). Funding by the DFG Zukunft- skonzept (ZUK 81/1) and by the ‘Operational Program for the promotion of invest- ments in growth and employment for North Rhine-Westphalia from the European fund for regional development’ (OP EFRE NRW) through the Ministry of Economic Affairs, Innovation, Digitalization and Energy of the State of North Rhine-Westphalia is gratefully acknowledged. Finally, I am deeply thankful to Lena Ditte Nissen, Benedict Vischer, Johannes Weickenmeier, Johanna Wehkamp, Sebastian Kraus, Christina Elberg, Jacob Rohm, Enrico Orselli, Tobias Flemming as well as other friends for providing indispensable motivation throughout my time as a doctoral fellow. Also, I am very grateful to my family for supporting me. I wish to dedicate this thesis to Philippa Leonie Carlotta. Jakob Peter Cologne, February 2019 vi Contents Prefacev 1 Introduction1 1.1 Outline of the thesis..............................4 1.2 Discussion of methodological approaches.................8 1.3 Concluding remarks.............................. 11 2 Reliability in Multi-Regional Power Systems – Capacity Adequacy and the Role of Interconnectors 13 2.1 Introduction................................... 13 2.2 Methodology................................... 17 2.2.1 Notation................................. 17 2.2.2 Reliability metrics for one region only............... 17 2.2.3 The effect of interconnections.................... 19 2.2.4 A framework for endogenous equivalent firm capacity..... 20 2.2.5 Extension to interconnected regions................ 22 2.3 Data........................................ 23 2.4 Results....................................... 25 2.4.1 Two-regional system.......................... 25 2.4.2 European system............................ 31 2.5 Conclusions.................................... 35 2.6 Appendix..................................... 38 3 Optimal Allocation of Variable Renewable Energy Considering Contri- butions to Security of Supply 41 3.1 Introduction................................... 41 3.2 Methodology................................... 46 3.2.1 Reliability metrics........................... 46 3.2.2 A framework for endogenous equivalent firm capacity in mul- tiple interconnected markets..................... 48 vii 3.2.3 Accounting for the contribution to reliability in an investment and dispatch model.......................... 51 3.2.4 A framework to endogenize the capacity value in a large-scale electricity market model....................... 53 3.3 Illustrative example: Two-country system................. 55 3.4 Large-scale application: European electricity market.......... 57 3.4.1 Electricity market model and scenario definition........ 57 3.4.2 Input data for variable renewable electricity generation and load 59 3.4.3 Results and discussion........................ 61 3.5 Conclusions.................................... 69 3.6 Appendix..................................... 71 4 How Does Climate Change Affect Optimal Allocation of Variable Re- newable Energy? 79 4.1 Introduction................................... 79 4.2 Methodology................................... 84 4.2.1 Investment and dispatch model................... 84 4.2.2 Performance of investment strategies without and with cli- mate change anticipation....................... 86 4.2.3 Clustering of variable renewable energy and load data.... 87 4.3 Scenario definition and data......................... 88 4.3.1 Scenario definition........................... 88 4.3.2 Data for variable renewable electricity generation and load.. 90 4.3.3 Description of climate change impacts............... 91 4.4 Results....................................... 96 4.4.1 Impacts of climate change on a system with no climate change anticipation strategy.......................... 96 4.4.2 Impacts of climate change on a system with climate change anticipation strategy.......................... 100 4.5 Conclusions.................................... 105 4.6 Appendix..................................... 108 5 The Role of Electricity in Decarbonizing European Road Transport - Development and Assessment of an Integrated Multi-Sectoral Model 113 5.1 Introduction................................... 114 5.2 Methodology................................... 118 5.2.1 Developing an integrated multi-sectoral model......... 119 5.2.2 Simulating energy transformation................. 127 viii 5.2.3 Simulating the European road transport sector......... 132 5.3 Application of the integrated model..................... 136 5.3.1 Scenario framework.......................... 136 5.3.2 Scenario results for the European road transport sector.... 137 5.3.3 Supplying ptx fuels in an integrated modeling framework... 140 5.4 Understanding the value of integrated models.............. 143 5.4.1 Decoupled versus coupled models................. 144 5.4.2 Identifying the added value of integrated multi-sectoral models144 5.5 Conclusions.................................... 148 5.6 Appendix..................................... 150 Bibliography 177 ix 1 Introduction There’s one issue that will define the contours of this century more dramatically than any other, and that is the urgent and growing threat of a changing climate. Barack Obama(2014) Climate change, resulting from rising greenhouse gas concentrations in the atmo- sphere, is a problem of the commons. Global commons are resources and areas, which do not fall under the sovereignty of any state. Examples include the water column beyond territorial seas, the outer space, the Antarctic and – the atmosphere (Wijkman(1982)). If each country had its own atmosphere, then self-interested countries would fulfill their climate targets, similar to their provision of education, transportation infrastructure and other public goods. But with the atmosphere being a global common, a country reducing its carbon emissions receives only a fraction of the benefits, yet carries the costs for abatement. The self-interested response is to free-ride – particularly in a globalized economy, where economic competitiveness depends, amongst others, on costs of energy (Cramton et al.(2017)). This results in the famous tragedy of the commons (Hardin(1968)). The solution to this game the- oretical problem – cooperation – was concisely described by Cramton et al.(2017): “To save the commons, the users of the commons must cooperate. That requires trust, and trust requires reciprocal agreement – we will if you will, and you will if we will.” Such a reciprocal agreement could be based on common commitments, e.g.,