Hannes Weigt

Cournot Versus Supply Functions: What Does the Data Tell Us?

The liberalization of the electricity sector increases the need for realistic and robust models of the oligopolistic interaction of electricity firms. This paper compares the two most popular models: Cournot and the Supply Function Equilibrium (SFE), and tests which model describes the observed market data best. Using identical demand and supply specifications, both models are calibrated to the German electricity market by varying the contract cover of firms. Our results show that each model explains an identical fraction of the observed price variation. We therefore suggest using Cournot models for short term analysis, as more market details, such as network constraints, can be accommodated. As the SFE model is less sensitive to the choice of the calibration parameters, it might be more appropriate for long term analysis, such as the study of a merger.

The Interaction of Emissions Trading and Renewable Energy Promotion

Given the ambitious goal of the European Union to achieve CO2 emission reduction, support to renewable energies, and increased energy efficiency a portfolio of different policies is going to be implemented or is already in place in the member states. These instruments have at least partly overlapping objectives; thus, a high degree of interaction is to be expected. In this paper we analyze how the EU ETS and renewable support mechanisms influence one another. We apply a static open economy computable general equilibrium (CGE) model of Germany incorporating different conventional and renewable generation technologies. We find that in case of an ETS with a green certificate trading scheme or a feed-in system the price for carbon drops to zero due to the high share of CO2-neutral renewable generation. Furthermore, the welfare reducing effect of an additional renewable support mechanism is rather low for both schemes.

ELMOD - A Model of the European Electricity Market

This paper provides a description of ELMOD, a model of the European electricity market including both generation and the physical transmission network (DC Load Flow approach). The model was developed at the Chair of Energy Economics and Public Sector Management (EE2) at Dresden University of Technology in order to analyze various questions on market design, congestion management, and investment decisions, with a focus on Germany and Continental Europe. ELMOD is a bottom-up model combining electrical engineering and economics: its objective function is welfare maximization, subject to line flow, energy balance, and generation constraints. The model provides simulations on an hourly basis, taking into account variable demand, wind input, unit commitment, start-up costs, pump storage, and other details. We report selected study results using ELMOD.

Nodal Pricing in the German Electricity Sector - A Welfare Economics Analysis, with Particular Reference to Implementing Offshore Wind Capacities

This paper compares the results of different pricing systems in the German electricity sector. In particular,we compare a competitive nodal pricing approach to a cost minimization scenario under a uniform price. The model also simulates the effects of increasing offshore wind energy in the North Sea, from the current 0 GW to 8 and 13 GW, respectively. Our model of the German electricity system includes 425 lines and 310 nodes of the 380-kV and the 220-kV grid. Power flows are calculated based on the DC Load Flow Model using a slightly modified version of the traditional approach (Schweppe et al., 1988, Stigler and Todem, 2005). Demand is proxied by linear demand functions that are regionally differentiated. Our results show that the nodal pricing regime is more efficient than uniform pricing and that offshore wind input leads to a significant welfare gain. The model also indicates that 8 GW offshore wind would be accommodated by the current network without significant investments.

When the Wind Blows Over Europe: A Simulation Analysis and the Impact of Grid Extensions

Wind power is the fastest growing renewable energy generation source in the European Union. Implementation of the EU-directive 2001/77/EG in the member states fosters incentives for further investments into wind capacities. Accordingly, there is the expectation of significant increase of installed wind capacities for the European Union. This paper analyzes the impact of wind energy extension scenarios in 2020 on the UCTE grid using a nodal pricing mechanism. Our study is based on a DC Load Flow network model and implemented in GAMS. The results show that necessary network extensions mostly stem from already existing congestion particularly between countries whereas the additional wind capacities can be integrated with relatively little effort.

A Dynamic Incentive Mechanism for Transmission Expansion in Electricity Networks - Theory, Modeling and Application

We propose a price-cap mechanism for electricity-transmission expansion based on redefining transmission output in terms of financial transmission rights. Our mechanism applies the incentive-regulation logic of rebalancing a two-part tariff. First, we test this mechanism in a three-node network. We show that the mechanism intertemporally promotes an investment pattern that relieves congestion, increases welfare, augments the Transcos profits, and induces convergence of prices to marginal costs. We then apply the mechanism to a grid of northwestern Europe and show a gradual convergence toward a common-price benchmark, an increase in total capacity, and convergence toward the welfare optimum.

CO2 abatement from RES injections in the German electricity sector: does a CO2 price help?

The overlapping impact of the Emission Trading System (ETS) and renewable energy (RE) deployment targets creates a classic case of interaction effects. Whereas the price interaction is widely recognized and has been thoroughly discussed, the effect of an overlapping instrument on the abatement attributable to an instrument has gained little attention. This paper estimates the actual reduction in demand for European Union Allowances that has occurred due to RE deployment focusing on the German electricity sector, for the five years 2006 through 2010. Based on a unit commitment model we estimate that CO2 emissions from the electricity sector are reduced by 33 to 57 Mtons, or 10% to 16% of what estimated emissions would have been without any RE policy. Furthermore, we find that the abatement attributable to RE injections is greater in the presence of an allowance price than otherwise. The same holds for the ETS effect in presence of RE injection. This interaction effect is consistently positive for the German electricity system, at least for these years, and on the order of 0.5% to 1.5% of emissions.

Intragas - A Stylized Model of the European Natural Gas Network

We present an optimization model of the European natural gas market which is intended for the use within a regulatory approach providing incentives for efficient transmission investments. The stylized model is designed as welfare maximization taking into account production, pipeline, LNG, and storage constraints. We develop several scenarios to analyze the future development of the European natural gas market.

Security of Supply and Electricity Network Flows after a Phase-Out of Germany’s Nuclear Plants: Any Trouble Ahead?

This paper, which examines the impacts of phasing out nuclear power in Germany, is the first to include an analysis of energy supply security and critical line flows in both the German and Central European electricity networks. The technical-economic model of the European electricity market, ELMOD, is used to simulate alternative power plant dispatch, imports, exports, and network use for a representative winter day. The results suggest that the shutdown of Germany’s nuclear plants will result in higher net imports, especially from the Netherlands, Austria, and Poland, and that electricity generation from fossil fuels will increase slightly in Germany and in Central Europe. We find that no additional imports will come from nuclear plants since they are already fully utilized in the merit order, and that electricity prices will rise on average by a few Euros per MWh. We conclude that closing the seven nuclear power plants within the government’s moratorium will cause no significant supply security issues or network constraints and an eventual full phase-out seem to be possible due to the completion of several new conventional power plants now under construction. Finally, we suggest that a nuclear phase-out in Germany within the next 3-7 years will not undermine security of supply and network stability in Germany and Central Europe.

Nodal Pricing of the European Electricity Grid - A Welfare Economic Analysis for Feeding-In Offshore Wind Electricity

In this paper, we apply the theory of nodal pricing to a particularly urgent issue of energy and environmental economics: the integration of wind power in electricity systems. We use a nodal pricing model to analyze the impact of German wind power production on the North Western European power grid. Especially the Benelux countries are supposed to suffer from congestion due to unintended, yet inevitable cross-border power flows. The paper shows that economic modelling, taking into account physical and technical constraints, makes important contributions to the assessment and optimization of system configuration and operation.