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					Proceedings of the 2002 Global Wind Energy Conference, April 2 – 5, 2002, Paris.



   CONFLICTS BETWEEN ELECTRICITY MARKET LIBERALISATION AND WIND ENERGY POLICIES


                                 B. P. Ó Gallachóir, C. V. Chiorean & E. J. McKeogh
 Sustainable Energy Research Group, Department of Civil & Environmental Engineering, University College Cork, Ireland


ABSTRACT: This paper is derived from an examination of the conflicts that exist between two of the key drivers of energy
policies worldwide. These are increasing cost competitiveness on the one hand and environmental responsibility on the other
(security of supply being the third pillar). The former has to lead to electricity market liberalisation, with the aim of reducing
the price of electricity. The latter has lead to sustainable energy policies including specific targets for the penetration of
renewable energy into electricity supply, which generally results in an increase in the cost of electricity. The particular focus
of the work is on the interaction of these two policy areas and their impact on wind energy deployment. This paper presents
the preliminary findings of this work.


1. INTRODUCTION
                                                                      The 1990s has seen a change in focus towards the other
In order to achieve sustainable energy development, it is             two pillars with cost competitiveness dominating. The
important to strike the correct balance between the three             overriding goal appears to be an increase in cost
main pillars upon which energy policies worldwide are                 competitiveness through use of market forces and a fuel
built, namely :-                                                      switch to natural gas.
      a) security of supply;
      b) cost competitiveness and                                     Due to growing public concern regarding the
      c) environmental responsibility.                                environment, environmental responsibility has also
                                                                      become a clear part of the agenda, although still not on
A secure energy supply is a key requirement for building              an equal footing. The contribution, for example, of
economic growth and social well being. Threats to this                renewable energy to world primary energy supply is
security appear in many forms but largely arise from an               expected to rise from 2% in 1999 to 3% by 2020. For the
over-dependency on a single energy resource, such as oil,             same period, the share of natural gas is expected to rise
available from a relatively small number of locations                 from 22% to 26% [3].
worldwide. The dangers associated with complacency
towards security of supply were clearly illustrated during            While each of the three policy drivers are very important,
the major oil shocks in 1973 and 1979.                                this paper focuses on the interactions between policies
                                                                      arising from just two, cost competitiveness and
Energy must be affordable as well as secure. In simple                environmental responsibility. The reason for this is that
terms a company, who has to pay more for its energy                   the policy instruments driven by cost competitiveness is
than its competitors, will be in a weaker competitive                 currently the dominant driver. this have a more direct
position, assuming all other costs being equal. In order to           impact on wind energy deployment that policies arising
achieve a reasonable standard of living, a household must             from security of supply concerns.
be able to meet its own energy needs without being
required to pay too high a proportion of household                    Section 2 examines electricity market liberalisation as a
income.                                                               mechanism to deliver cost competitiveness and the role
                                                                      of wind energy policies in incorporating environmental
The primary environmental impact of energy trends since               responsibility into the energy sector.
the industrial revolution is the significant increase in
gaseous emissions into the atmosphere such as CO2                     Section 3 teases out some of the conflicts between these
(leading to the dangers associated with climate change),              policies. Section 4 uses examples of attempts to resolve
SOx and NOx (responsible for acid rain). An over                      these conflicts as a means to looking ahead to the
reliance on fossil fuels and poor energy management                   framing of sustainable energy policies in which both are
against the backdrop of annual energy demand growth                   coexisting in a more amicable relationship.
rates of over 2% [1] displays an environmentally
irresponsible approach which requires a significant and
sustained effort.                                                     2. CURRENT ENERGY POLICY ELEMENTS

Looking back over the last 50 years shows a shift in                  2.1 Electricity Market Liberalisation
a) how these pillars were viewed in themselves or                     From the turn of the century, the dominant model for
b) the relative importance of one pillar compared with                electricity-sector organisation was characterised by the
another. From the late 1950s to early 1970s, a low and                conceptualisation of electricity as a public infrastructure
stable world oil price led to the widely-held view that               In addition, it was seen initially as part of the process of
long-term oil supplies would be both plentiful and cheap,             nation building and later, as part of post war
resulting in complacency about energy supply. The                     reconstruction modernisation [4].
complacency was replaced with grave concerns
regarding energy supply, following the oil crises. This               The perception of electricity as a public infrastructure
dominated energy policy minds during the late 1970s and               with natural monopoly characteristics, and the
the 1980s [2].                                                        organisation of the sector into publicly owned or
                                                                      franchised institutional monopolies, led to a build-up of
                                                                      powerful sectoral configurations, dominantly operating
Proceedings of the 2002 Global Wind Energy Conference, April 2 – 5, 2002, Paris.



as closed national systems. These mandated public                electricity costs to end users. Some of the expected
organisations had exclusive monopoly rights to supply            benefits include lower prices (resulting from competition
customers located within its domain.                             and increased electricity trade), savings in investment
                                                                 costs (due to better investment decisions and reduced
By the late 1970s, it was becoming apparent that                 capacity reserve margins, although this can have
economic efficiency was not as good as it might be and           implications for security of supply), high labour
hence prices were higher to consumers than they might            productivity and the development of new energy
be. The performance of this old regulatory framework             services.
gave cause for concern and began to prompt reform [5].
In 1978, the US adopted the Public Utility Regulatory            It is still too early to evaluate the performance of
Policies Act (PURPA), requiring the utilities to buy             electricity market liberalisation in achieving its goals.
electricity from “qualified facilities”, mostly co-              The experience so far indicates that there are significant
generators and small power producers. This was the               differences among reforming countries. For instances, in
initial step, the partial opening of electricity generation to   some countries intense price competition has developed
new entrants.                                                    quickly while in others the initial impact of reform on
                                                                 prices has been modest.
Momentum for reform grew steadily during the 1980s
and 1990s as cost competitiveness became increasingly            Examining evidence from almost all EU Member States
strong as a driver of energy policy. The England and             shows that electricity prices for industrial customers have
Wales electricity market, or “pool”, was established in          gone down since the Directive was implemented [7]. The
1990, the first such mechanism. The Norwegian pool,              most significant price reductions can be found in the
established in 1991, was extended in 1996 to incorporate         Member States that have opened their market 100%. In
Sweden, and NordPool was formed. NordPool now also               the UK, industrial users have benefited from an average
includes Finland and Denmark. The National Electricity           price reduction of 35% since liberalization started. Since
Market of Australia was created in 1997 from the merger          the introduction of competition in Finland (1995) and
of the Victoria Pool (in operation since 1994) and the           Sweden (1996), prices have reduced by 20%, and 15%
New South Wales Pool (established as a daily pool in             respectively. In Germany, liberalization started more
1996). The EU adopted a Directive [5] in 1996 placing a          recently and prices reduced rapidly by 25% between
responsibility on all Member States to open increasing           1998 and 2000. For small enterprises, the price has gone
share of their electricity markets to competition. The long      down in all Member States since 1998. Households have
term objective of the Directive is a single internal             also benefited from price reductions although the level of
electricity market within the EU. This is to cite but a few      reductions is less pronounced.
examples, chronicling the spread of electricity market
reforms. A more comprehensive list is provided in [6].           In Australia, electricity prices decreased over 1% in 1998
                                                                 following the establishment of the National Electricity
While there are many different approaches to reform of           Market. In New Zealand, final prices have not risen
the electricity supply industry there is clear evidence          significantly after the implementation of reform and
increasing convergence in the route chosen in the OECD           some rebalancing has occurred between the domestic
area. The term Electricity Market Liberalisation is used         tariffs and other tariffs [6].
here to encompass four elements common to recent
reforms                                                          2.2 Wind Energy Policies
     1. rapid introduction of full consumer choice;
                                                                 The 1990s have seen the global climate change debate
     2. an obligation to provide non-discriminatory 3rd
                                                                 evolve from an issue discussed largely among scientists
          party access to the transmission and
                                                                 to one that engages the collective attention of
          distribution networks;
                                                                 governments around the world. In December 1997, the
     3. unbundling of transmission; and
                                                                 international community negotiated the Kyoto Protocol
     4. liberalisation of electricity trade so that
                                                                 to the United Nations Framework Convention on Climate
          electricity can be traded through organised
                                                                 Change, which includes targets for developed countries
          power exchanges and on a bilateral basis.
                                                                 for reducing greenhouse gas emissions. Given that more
The concept of liberalisation envisages that, on the             than 80% of human-made greenhouse gas emissions are
demand side, end users are free to choose their supplier         energy related, and that energy consumption continues to
and to negotiate their contracts; on the supply side,            increase, energy policy has a new and demanding role
generators can sell their electricity to any other market        [8].
players. The setting up of competitive, effective, and
                                                                 In order to tackle the energy dimension of climate change
vital electric power markets is largely achieved by trial
                                                                 a twin track approach is being adopted internationally;
and error through various arrangements and adjustments
                                                                 decoupling CO2 emission growth from energy demand
between theory and practice, implementing corrections as
                                                                 growth and decoupling energy demand growth from
deemed to be necessary. The chosen market models are,
                                                                 economic growth. The latter requires achieving proper
in most countries, formed by a combination of the
                                                                 energy management and greater energy efficiency. The
concepts power pool, bilateral contracts over the short &
                                                                 former centers largely on fuel switching and
long term periods, power exchange (“PX,” or spot
                                                                 improvements in energy conversion technologies. It is
trading), and power derivatives (primarily financial
                                                                 here that the currently underused exploitation of
transactions).
                                                                 renewable energy has a key role to play. Renewable
                                                                 energy also contributes to other environmental goals and
The key goal of liberalisation is to increase economic
                                                                 can contribute to social cohesion and security of supply,
efficiency in the electricity market and thus minimise
                                                                 but it is because of its contribution to reducing CO2
Proceedings of the 2002 Global Wind Energy Conference, April 2 – 5, 2002, Paris.



emissions that it is being brought closer to center stage of   certificates are purchased (via brokers or traders) from
energy policies. In the short to medium term, the              generators, to whom they are issued according the
favoured renewable resource is the wind, due largely to        amount of renewable generated electricity they feed into
the significant improvements in technology and resultant       the network. These certificates have a umber of different
cost reductions, which have increased the competitive          names, depending on the jurisdiction in which they are
position of wind generated electricity.                        valid. Thus renewable energy credits are traded in Texas,
                                                               Wisconsin and Massachusetts, renewable energy
The most transparent way in which environmental                certificates (RECs) are traded in Australia, renewable
responsibility can be incorporated into energy policy is       obligation certificates (ROCs) are traded in the UK and
by internalising the external environmental costs              green certificates are traded in The Netherlands, Belgium
associated with the generation, transmission, supply and       and Italy. Interestingly, in The Netherlands, there is no
consumption of energy. In this scenario, the real              national imposed obligation with penalties stimulating
environmental costs arising from fossil fuel based             the demand for certificates. A tax incentive was
electricity generation are included in the selling price in    introduced for consumers of green electricity and this
the form of a tax. Political constraints have however          acts as the market stimulant.
acted as a barrier to the introduction of pollution taxes on
fuels in most countries.
                                                               3. CONFLICTS BETWEEN LIBERALISATION
Recognition of the benefits of wind energy and the             AND WIND ENERGY DEVELOPMENT
aforementioned distortions in energy economics, have
together prompted the introduction of a range of market        The most effective market mechanism employed to date
support measures to stimulate increased deployment of          for stimulating wind energy development is the fixed
wind energy. The range is very broad but can be                feed it tariffs. Key criticisms of this approach are that it
categorised as follows                                         does not foster competition, encourage cross border trade
     •    premium payment                                      or stimulate cost reduction [11]. These, however, are all
     •    capital grants                                       key elements of a successfully liberalised electricity
     •    fiscal and tax incentives                            market. It would appear, therefore, that successful wind
     •    R, D & D programmes                                  energy policies are not compatible with liberalised
                                                               electricity markets and need to be dealt with in a separate
Premium payments may be considered as a primary                context. If there is a secure market for wind-generated
support and all others as secondary supports [9]. This is      electricity, at a known selling price, irrespective of when
because secondary supports, in general, would not be           it is generated (except perhaps a day and night
enough to allow viable wind farms to be developed in the       differential), wind energy development will clearly
absence of a premium payment mechanism. Primary                flourish.
supports can themselves be further categorised as follows
    •     feed in tariff schemes                               One of the principal threats for wind energy
    •     competitive bidding schemes                          development, arising from the operation of a liberalised
    •     green certificate trading mechanisms                 electricity market, is the requirement that electricity
                                                               demand and supply to be balanced for every half hour
Feed in tariff schemes are characterised by an obligation      period. Excesses and shortfalls in supply are dealt with
on utilities to purchase electricity from wind farms at a      through a balancing market. The intermittent nature of
guaranteed price. The price typically relates to the           wind energy results in greater imbalances and an
consumer purchase price. This has been the most                increased reliance on the balancing market. This places
successful stimulus in Europe for increasing wind energy       wind generated electricity suppliers at a disadvantage
deployment, leading to current levels of installed             with respect to dispatchable electricity suppliers, as is
capacity of 8,735 MW in Germany, 3,335 MW in Spain             clear from the situation in the UK since the introduction
and 2,417 MW in Denmark [10].                                  of NETA (New Electricity Trading Arrangements) [12].

In a competition-bidding scheme, a quantitative target for     The effective wind energy policies of the past run
additional installed generating capacity is set nationally     counter to the principles behind electricity market
and potential wind farm developers prepare bids to meet        liberalisation. In addition, the operation of liberalised
the targets set at least cost. Under these systems             markets pose a serious challenge to wind energy, due in a
successful bidders secure fixed term power purchase            large part to its intermittent nature.
agreements for the sale of the wind generated electricity.
This has been successful in delivering cheap wind
energy, but has failed to meet initial targets set in the UK   4. CONFLICT RESOLUTION
(484 MW), France (85 MW) and Ireland (125 MW).
                                                               How can this conflict be resolved? In other words, how
Green certificate trading schemes are the newest form of       can wind energy be successfully supported within the
market mechanism, in which the environmental and other         liberalised market? A useful starting point is the wind
benefits are separated from the physical electricity and       energy policies which are as yet unproven, but which
traded separately. The stimulus for trade typically arises     seem more compatible with liberalised electricity
from an obligation on electricity suppliers to demonstrate     markets.
that a certain percentage of their electricity supply comes
from renewable energy, or else face penalties. Suppliers       Competitive bidding schemes, for example, seek to
achieve compliance with the obligation by handing over         achieve wind energy targets at least cost. One of the
certificates to a designated regulatory body. The              difficulties in the past has been that the focus was more
Proceedings of the 2002 Global Wind Energy Conference, April 2 – 5, 2002, Paris.



on least cost than target delivery. In Ireland, for example,   In conclusion, the difficulties associated with reconciling
the AER III (Alternative Energy Requirement) delivered         market liberalization with wind energy policies are
contracts for very low cost wind energy (the lowest price      clearly visible in the development of the recent EU
successful bid was 0.028 € / kWh) [9]. However, only 1         Directive on the promotion of renewable generated
(15 MW) of the 9 (100 MW) projects in the large wind           electricity [14]. This Directive aimed to harmonize
farm category was actually built. In order to filter out       policies arising in Member States in response to the
some of the more unrealistic bids, the AER V                   White Paper on Renewable Energy, with those arising for
competition had a requirement that wind farms secure           the Single Market Electricity Directive. The initial aim
planning permission before bidding. The lowest price           was to set a target for each Member State and harmonize
successful bid in this instance was 0.045 € / kWh. This        the various mechanisms in order to encourage a single
should mean a greater degree of success, although this         renewable generated electricity market within a single
has yet to be proven (the competition results were only        electricity market. In the final wording however, it was
recently announced [13]).                                      left Member States were allowed decide their preferred
                                                               mechanism and the targets were left as ‘indicative.’
The market support mechanism for wind energy, which
appears most compatible with liberalized electricity           Acknowledgement: This work is part funded by the
markets must an obligation on suppliers coupled with           Higher Education Authority of Ireland under the
green certificate trading. The electricity is traded           Programme for Research in Third Level Institutions 2000
separately and on an equal footing with electricity from       – 2003.
other sources. The environmental benefits of wind
energy is attributed a value, linked to the penalty price
for non-compliance. Policy makers can adjust the penalty       5. REFERENCES
price upwards if the target is not being met, or
downwards to stimulate cost reductions. This mechanism         [1] International Energy Agency, World Energy Outlook
is clearly more open to international trading than others,     – 2001 Insights. OECD/IEA (2001).
and indeed this has already commenced, although on a            [2] J Sheshire, The Future of Shared Analysis – some
voluntary basis.                                               initial ideas for discussion. Second Shared Analysis
                                                               Workshop, Challenges and Uncertainties for Energy
To establish such a mechanism effectively is of course,        Analysis, Brussels, March 10-11 1999.
not without difficulties. The value placed on the              [3] International Energy Agency, World Energy Outlook
certificate will vary from country to country depending        2000. OECD/IEA (2001).
on their wind energy policy. Is wind energy supported as       [4] L. Metz, A. Midttun & S Thomas, Restructuring
part of a climate change strategy, or also to stimulate the    Electricity Systems in Transition, in A. Midttun (ed),
turbine manufacturing industry? Careful structuring and        European Electricity Systems in Transition, Elsevier
monitoring will be required to seek to avoid wildly            (1997)
fluctuating prices for certificates. When there is a           [5] European Parliament and Council Directive 96/92/EC
shortage of electricity based on renewables, the price of      of the European Parliament and of the Council
green certificates will be high. Conversely, the price will    concerning common rules for the internal market in
fall to a low value when there is a surplus. Too many          electricity, 19 December 1996.
fluctuations will have a damaging effect on the operation      [6] International Energy Agency, Competition in
and stability of the market.                                   Electricity Markets. OECD/IEA (2001).
                                                               [7] Commission of the European Communities,
In parallel with adjusting wind energy policies to make        Completing the internal electricity market SEC(2001)
them more compatible with liberalized electricity              438 March 2001.
markets, the electricity market itself will need to be         [8] United States Department of Energy, Comprehensive
modified in order to facilitate the accommodation of           National Energy Strategy, DOE / S-1024, (1998).
wind generated electricity. This does not necessarily          [9] B. P. Ó Gallachóir Market Mechanisms - future
mean special treatment for wind generated electricity, but     possible options. Proc. Energy Show 2000 Workshop,
rather that a sensible approach to market regulation be        The Changing Market for Renewables, RDS, Dublin,
adopted which takes wind energy into account.                  May 18th 2000.
Liberalized electricity markets are typically established      [10] Wind Market Status, Wind Power Monthly 18 (3)
on a phased basis, opening to large electricity consumers      33-63 (2002)
initially. The rules and regulations are built around this     [11] Commission of the European Communities,
focus. As a result, these rules may not be relevant and        Electricity from renewable energy sources and the
may have a negative impact, when applied to small scale        internal electricity market. Staff Working Paper,
generators (in particular from intermittent sources such       Belgium (1999).
as the wind). The intermittent nature of wind energy           [12] D. Milborrow, Mastering Market Mechanisms,
should not be penalized beyond the cost associated with        Wind Power Monthly 18 (2) 42-45 (2002).
accommodating that intermittency. New developments in          [13] Department of Public Enterprise, New Green
wind energy forecasting will certainly assist in this          Energy To Power 250,000 Homes, Press Release
regard. As electricity storage technologies develop and        February 4th, 2002.
become cost competitive, these will also be very useful,       [14] European Parliament and Council, Directive
particularly when as the penetration of wind generated         2001/77/EC of the European Parliament and of the
electricity grows, and the impacts of intermittency            Council on the promotion of electricity produced from
become more pronounced.                                        renewable energy sources in the internal electricity
                                                               market, 27 September 2001.

				
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