Dominique Finon

Prices versus quantities: choosing policies for promoting the development of renewable energy

Abstract Now that the risks of climate change have been confirmed and the European States have declared their willingness to pursue ambitious objectives for producing electricity from renewable energy sources, it becomes crucial to take a look at the relative efficiency of the different incentive schemes used. Such schemes may focus on quantities—defining national targets and setting up bidding systems, or quota systems providing for green certificate trading—, or they may focus on prices—feed-in tariffs. Clearly, these instruments are much the same as those used in environmental policies, with similar discussion involved in their choice. Whatever the system chosen, the role of the public authorities is quite specific: to stimulate technical progress and speed up the technological learning processes so that ultimately renewable energy technologies will be able to compete with conventional technologies, once the environmental costs have been internalised. A comparison of instruments must thus take into account the characteristics of the innovation process and adoption conditions—uncertainties regarding cost curves, learning effects—which means also looking at dynamic efficiency criteria. The authors examine the efficiency of the different incentive schemes for the development of renewable energy sources, both from a theoretical point of view by comparing price-based approaches with quantity-based approaches, and from a practical point of view by looking at concrete examples of how these different instruments have been implemented. The paper concludes that a system of feed-in tariffs is more efficient than a bidding system, but highlights the theoretical interest of green certificate trading which must be confirmed through practice, given the influence of market structures and rules on the performance of this type of approach.

Optimisation model for the French energy sector

Abstract Faced with the growing complexity of the energy system in industrialised countries, we must make use of tools which enable us to identify those factors likely to modify, in the very long term, supply structures, production plant and consumption patterns. Comprehensive analysis of the relations between forms of energy and types of plant, as well as correlation between various branches of energy and different consumer categories, invite the use of a long-term optimisation model.

The transition of the electricity system towards decarbonization: the need for change in the market regime

The mainstream community of energy experts is not aware of the long-term impacts that carbon policies directly concerned with promoting the development of low-carbon technologies produce on the electricity market regime. Long-term market coordination should be replaced by public coordination with long-term arrangements. The current market coordination makes carbon pricing ineffective in orienting investors towards capital-intensive low-carbon technologies. Fossil fuel generation technologies are preferred because their investment risks are much lower in the market regime, even with a high but unstable carbon price. Thus, in order to avoid delaying investment that is aimed at the decarbonization of the electricity system, a number of new market arrangements that lower the investment risk of low-carbon technologies and provide output-based subsidization have or are being selected by governments. As the use of low-carbon equipment to produce electricity develops, long-term market coordination for other technologies (e.g. peaking units, combined cycle gas turbine) will fade away because they alter the market price setting. Thus it is likely that, in the future, public coordination and planning will replace the decisions of market players not only for low-carbon technologies but also for every other type of capacity development. Policy relevance The development of renewables as promoted by both feed-in tariffs and green certificate obligations, which answer to different market failures, is well known. Similar long-term arrangements, which both subsidize and de-risk low-carbon investments for every small-sized and large-sized technology, shift learning costs and risks onto consumers. Energy experts and regulators have ignored that the expansion and generalization of these arrangements are changing the coordination function of the electricity markets. Apart from those in the UK, they are still unaware of the impacts that such technology-focused policies produce on the electricity market regime. The transition from market coordination to public coordination, which is inconsistent with the market principles of European electricity legislation, and long-term contracting is inevitable and should be anticipated.

The EU Foreign Gas Policy of Transit Corridors: Autopsy of the Stillborn Nabucco Project

In this paper, we criticise the departure of the European Union (EU) from its traditional Soft Power vein in foreign energy policy, implying a strategy of gas corridors for import diversification in an intense political competition with Russia. We analyse intrinsic limitations of the EU initiative of promotion of Nabucco pipeline as a merchant line along three different economic perspectives. Firstly, the competition theory perspective which shows the possibility for Russia to challenge this project by a competing project (South Stream) because it could preempt access to Caspian resources. Secondly, the transaction cost economics perspective which shows why long-term commitments between producers and midstream buyers are necessary to jointly develop transport or transit infrastructures and new remote gas fields. Thirdly, the coalition theory perspective which sheds light on the weak cohesion of the Nabucco coalition in the competition with the South Stream coalition, which has more chance of success while it offers equivalent benefits in terms of transit risk suppression. We conclude with recommendations concerning the EU gas policy actions which are only relevant when focusing on better improved market integration, development of self-insurances and solidarity, and diplomatic action turned towards energy markets integration.

Investment risk allocation in decentralised electricity markets. The need of long-term contracts and vertical integration

Following Joskows (2006) line, we developed an empirical analysis of how to secure investments in generation through vertical arrangements between decentralised generators and large purchasers, suppliers or consumers. Empirical observations as risk analysis shows that adopting such arrangements may prove necessary. Various types of long-term contracts between generators and suppliers (fixed-quantity and fixed-price contract, indexed price contract, tolling contract, financial option) appear to offer effective solutions for risk allocation. Vertical integration appears to be another effective way to allocate risk. But it remains an important complementary condition to efficient risk allocation, i.e. that retail competition is sticky or legally limited in order to have a large part of risks borne by consumers on the different market segments.None of the far-reaching experiments in electricity industry liberalisation was able to ensure the timely and optimal capacity mix development. The theoretical market model features market failures due to the specific volatility of prices, and the difficulty of creating complete markets for hedging. In this paper, we focused on a specific failure, i.e. the impossibility of allocating the various risks borne by the producer onto suppliers and consumers in order to allow capacity development. Promotion of short-term competition by mandating vertical de-integration tends to distort investments in generation by impeding efficient risk allocation.Following Joskows (2006) line, we developed an empirical analysis of how to secure investments in generation through vertical arrangements between decentralised generators and large purchasers, suppliers or consumers. Empirical observations as risk analysis shows that adopting such arrangements may prove necessary. Various types of long-term contracts between generators and suppliers (fixed-quantity and fixed-price contract, indexed price contract, tolling contract, financial option) appear to offer effective solutions for risk allocation. Vertical integration appears to be another effective way to allocate risk. But it remains an important complementary condition to efficient risk allocation, i.e. that retail competition is sticky or legally limited in order to have a large part of risks borne by consumers on the different market segments.

European Electricity Market Reforms: The "Visible Hand" of Public Coordination

The paper investigates how proposed reforms on policies to maintain generation adequacy and to encourage clean technology investments in a number of European countries, modify the role of the market. This is reduced as the government, regulator and system operator take on explicit responsibility through the introduction of capacity mechanisms and long-term support for clean technologies. We highlight the interaction of these mechanisms with the electricity market and we look at how they reallocate risks between generators, government and consumers. The different mechanisms offer varying degrees of autonomy to generators with regards investment decisions. Looking towards the future, the paper also explores how designs of mechanisms might move towards a technology-neutral mechanism in the long-run. This could involve the auctioning of long-term contracts for all types of existing and new capacities, whether it be low carbon or fossil fuelled.

Reforms in the French power system: from weak contestability to effective competition?

Abstract One way to introduce competition in the power industries is to preserve the integration of the incumbent companies and to organise the access of potential competitors to the network on a fair basis. But the combination of hierarchy and bilateral contracts between entrants (IPP candidates, foreign producers, intermediaries), suppliers and consumers appears to be unstable because of permanent tensions between the incumbents dominant position and fair competition. Moreover, in an institutional environment enlarged by the supranational powers of the European Union, heterogeneity of rules and structures between quasi-integrated power industries and decentralised competitive ones are sources of permanent questioning. The paper analyses the stability of the recent reform of the French power industry, the extreme integration of which being deeply rooted in the French institutional peculiarities, has been weakly affected by the Directive 96/92 transcription. Two institutional scenarios are defined, which give a different weight to two competition paradigms in conflicts: one pertains to the industrial policy (which inclines to preserve hierarchy in the national area to gain national champions competitive advantages in the European as in the global field), and the other to the neo-classical paradigm of effective competition. In the first scenario, the integration of the industrial organisation is preserved but with transparent grid access rules supposed to create an actual market contestability, and the playing field is the continental Europe on which national champions compete. In the second one, the French industrial organisation has to conform to the competitive model, with vertical and horizontal disintegration and creation of a power exchange market for promoting competition. But this scenario is heavily strained by the institutional determinism of the nuclear legacy. The future reality should be set between these two scenarios.

Option value in low-carbon technology policies

The political dilemma presented by the deployment of large-size low-carbon technologies (LCTs) is analysed using a simple dynamic model to investigate the relation between irreversible investments and learning-by-doing within a context of exogeneous uncertainty about the carbon price. It is shown that in some cases when information about the future carbon price is expected, the irreversibility effect holds and fewer LCT plants should be developed. In other cases, this result is reversed, and acquiring information can justify the early deployment of LCT. In particular, marginal reasoning is limited when learning-by-doing, and more generally endogenous technical change, is considered. When acquiring information is expected, the optimal policy can move from a corner optimum with no LCT deployment to an interior optimum with a strictly positive development.

Efficiency of policy instruments for CCS deployment

Policy instruments for carbon capture and storage (CCS) technology investment during the learning phase are analysed and compared. The focus is on specific barriers to investment in learning during early commercial deployment. Imperfections in the carbon price signal and market failures from barriers indicate a need for support during the learning investment phase and the initial roll out of CCS in electricity generation. Different ways for CCS technology to cross the so-called investment ‘death valley’ are analysed and compared: a command and control instrument (CCS mandate), investment support (grant, tax credit, loan guarantee, subsidy by trust fund) and production subsidies (guaranteed carbon price, feed-in price, etc.). Three criteria are used in this comparison: effectiveness, static efficiency and dynamic efficiency. Policy instruments need to be adapted to the technological and commercial maturity of the CCS system. Mandate policies require handling with much care, and subsidization mechanisms must be designed to be market-oriented.

Competition, Contracts and Electricity Markets

This book fills a gap in the existing literature by dealing with several issues linked to long-term contracts and the efficiency of electricity markets. These include the impact of long-term contracts and vertical integration on effective competition, generation investment in risky markets, and the challenges for competition policy principles.