Which is the most effective approach to driving a sustainable energy reform: subsidising renewable energy or putting a price on carbon emissions? What effect will increased use of renewable energy have on the system as a whole? The three researchers Dr. Adhurim Haxhimusa, Fachhochschule Graubünden, Prof. Dr. Mario Liebensteiner, FAU, and Fabian Naumann, Technische Universität Kaiserslautern investigated the role of pumped-storage hydroelectric power stations, the only technology available at present which is capable of compensating for fluctuation in production. They came to the conclusion that by lowering market prices, direct subsidies for renewable energy actually jeopardise the economic success of the required storage facilities. In order to ensure the success of the energy reform, the researchers therefore recommend more stringent CO2 pricing.
The three researchers analysed the yield of energy storage facilities in the German-Austrian market with the aim of demonstrating the influence of renewable energy across the entire system. Using a statistical model, the researchers demonstrated that the operative profits of the Austrian pump-storage hydroelectric power stations which provide the energy system with the required buffer capacities fell by up to 25 percent as a result of the so-called merit order effect in the period from 2015 to 2018.
The researchers believe that targeting CO2 pricing would be a more effective approach instead of directly subsidising renewable energy.
‘Many countries are subsidising the expansion of renewable energy in order to tackle climate change and counteract its impact. The very nature of technologies such as wind or solar power leads to fluctuations in the amount of energy produced, however, posing a major challenge for grid stability. The success of the German energy reform will largely hinge on the effectiveness of storage technologies compensating for fluctuations in production,’ explains Fabian Naumann, TU Kaiserslautern.
The business-model behind pump-storage hydroelectric power plants is based on exploiting price differences for storing and releasing water from the reservoir over time. At times when energy prices are low (for example at night, when there is little demand for electricity), water is pumped from one of the lower basins to the upper reservoir, where it is then stored. During the day, the demand for energy and the wholesale electricity prices rise. The concept behind pump-storage hydroelectric power stations is that they release water stored in the upper reservoir at times when demand and prices are high, using turbines to produce energy which can then be sold at a good price.
‘Increased use of renewable energy leads, however, to what is known as the merit-order effect. In order to meet the energy requirements of industry and households, regenerative sources of energy which are capable of producing energy cheaply are replacing, for example, gas power plants, which have higher production costs as a result of using fuel,’ explains Prof. Dr. Mario Liebensteiner, assistant professor of Energy Markets and Energy Systems Analysis at FAU. ‘As a result, the wholesale price for electricity falls, as energy requirements can be met using cheaper sources. Wind energy production remains relatively constant over the course of a day, whereas solar energy is only available during daylight hours. This means that prices in general go down, especially during the day, when storage technologies produce energy. This has a negative knock-on effect on the profitability of pump-storage power plants, as we demonstrated in our study for operators in Austria.’
According to the researchers, this is a worrying trend, as increased subsidies aimed at encouraging a more widespread use of renewable energy will make these effects even more pronounced. ‘For example, Germany is planning to increase the proportion of renewable energy to 80 percent by 2050. In 2019 it accounted for 46 percent. It seems paradoxical that fluctuations in the production of renewable energies require the flexibility and capacities of storage facilities on the one hand, whilst on the other hand they have a negative effect on the profitability of these power plants, leading to less of an incentive for investors, but this is a factor which we have to incorporate into our calculations,’ adds Dr. Adhurim Haxhimusa from FH Graubünden.
The researchers believe that targeting CO2 pricing would be a more effective approach instead of directly subsidising renewable energy. ‘The aim of a targeted CO2 pricing policy is to make high-emission production technologies more expensive than methods with lower emissions. ‘A high and stable CO2 price gives a long-term incentive to reduce emissions on the electricity market. This may mean that it would become cheaper to meet energy needs by producing electricity from comparatively low-emission technologies such as gas instead of producing electricity using more emission-intensive technologies such as coal. This fuel switch could lead to a significant reduction in emissions. During periods of peak demand, it is more expensive to generate electricity, causing wholesale prices to rise as a result, which then also causes a rise in the profits of the storage facilities. As a result, there would be more of an incentive to invest in renewable energies, as the energy produced can be sold at a higher market price.’
During the period investigated for the study, the average price for Co2 generated by the EU Emissions Trading System was only 7 euros per tonne (€/tCO2), which only led to a 9 percent increase in profits for operators of pump-storage hydroelectric plants. ‘Without targeted CO2 pricing, the yield would have fallen by much more than 25 percent,’ warns Liebensteiner. For an emissions certificate price of 25 €/tCO2, which is equivalent to the current level, the statistical model designed by the researchers would result in an increase in profitability of almost 32 percent. Setting a price for CO2 emissions can therefore counteract the unwanted effects of directly subsidising renewable energies, provided it is high enough.
‘We know that from a political point of view it is not feasible to stop subsidies for renewable energies in favour of a higher CO2 price, as, for example, feed-in tariffs are guaranteed for decades,’ summarises Haxhimusa. ‘However, we would urge politicians to concentrate more on CO2 pricing in their climate policies, as it is an effective measure to effectively reduce emissions at the same time as ensuring the profitability of key energy storage facilities as well as investments in them.’