Abstract
We investigate the impact that two German energy reforms—phase-out of nuclear power plants after the Fukushima incident and expansion of renewables due to fixed feed-in tariffs—had on neighbouring countries’ consumers. The unilateral German reforms generated substantial negative and positive impacts, respectively, in neighbouring countries with the highest overall effect of German policy found in France, not Germany; an annual negative impact on consumers of 3.15 billion €. We also find significant differences in market integration between neighbouring countries by calculating ratios between the estimated policy decisions’ impacts before and after controlling for interconnector congestion.
Our vision is of an integrated continent-wide energy system where energy flows freely across borders, based on competition and the best possible use of resources, and with effective regulation of energy markets at EU level where necessary.
European Commission (2015), A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy, Brussels (Communication from the European Commission to the European Parliament, the Council, the European Economic and Social Committee, the Committee of Regions and the European Investment Bank. A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy. COM (2015) 80 final, February 2015, p. 2.).
The article is a reprint of Grossi, Luigi, Sven Heim, Kai Hüschelrath and Michael Waterson (2018), Electricity Market Integration and the Impact of Unilateral Policy Reforms, Oxford Economic Papers 70 (3), 799–820. This paper was previously published under the terms of the “Creative Commons CC BY license”.
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Notes
- 1.
- 2.
- 3.
- 4.
Using a dummy variable approach, Grossi et al. (2017) investigate the impact of the phase-out on the German market itself. They find prices in Germany have increased—most significantly in hours of low demand (caused by a shift in the merit order), with only a small price increase in hours of high demand, (caused by increased market power). Davis and Hausman (2016), a related exercise with some parallels, finds comparable price effects of an unexpected nuclear power plant closure in California. Using a semi-parametric regression approach to identify the marginal generation unit each time-period before and after the event, they find the closure created binding transmission constraints, causing short-run inefficiencies and potentially making it more profitable for certain plants to act non-competitively.
- 5.
In 2014, the EEG surcharge was 6.24 ct/kWh. However, energy intensive industries are widely exempted from paying the surcharge.
- 6.
Capacity in these areas has been growing rapidly, boosted by EEG support. According to the German Ministry for Economic Affairs and Energy (2014), in late 2011, wind capacity reached almost 30 GW with photovoltaic power capacity at about 25 GW (out of a total system listed capacity of 175 GW). In sum, in the year 2011, more capacity had been added through renewables (wind: 1.9 GW; solar: 7.5 GW) than had been removed by the nuclear phase-out.
- 7.
It should be noted that we control for the simultaneous generation from renewables in the neighbouring countries in all regressions and thus capture parallel developments therein.
- 8.
We are grateful to an anonymous reviewer for suggesting a discussion in light of (strategic) trade theory.
- 9.
Specifically, while producers in the trading partners’ countries are expected to increase profits due to less cheap nuclear plants in Germany, the respective consumers are likely to face reductions in consumer surplus due to higher market prices.
- 10.
German and Austrian markets are fully integrated and therefore considered as a single market. Although Germany and Belgium are neighbouring countries, they currently are connected only through loop flows. However, according to Jauréguy-Naudin (2012), the TSOs of the two countries were considering the construction of an HVDC line with a capacity of 1000 MW. Furthermore, the existing (small) interconnector between Germany and Sweden is excluded due to data unavailability. Spain’s interconnector with France is very limited.
- 11.
To avoid problems of quadratic transformation, the temperature indices are converted into degrees Fahrenheit, which always take positive values within our data. Source: Authors’ calculations.
- 12.
Dickey-Fuller and Phillips-Perron tests clearly reject the null hypothesis of a unit root in the underlying price and load series; test statistics reported in Table A.2 in the online Appendix.
- 13.
Unfortunately, we do not observe Scandinavian reservoir levels which would also be relevant, in particular we would expect them to have an effect on electricity prices in Denmark. Nordpool publishes such data but only since 2015.
- 14.
We define congestion as the existence of a price difference between Germany and a certain neighbour in a certain hour.
- 15.
In our empirical analysis below, we exclude such cases by assuming a state of congestion only as soon as the price difference exceeds 1 €/MWh. Our results are found to be also robust to price differences of 1%, 5% and 10% or 0 €/MWh.
- 16.
See Table A.1 in the online Appendix.
- 17.
While most countries use some form of feed-in tariff, some decided to introduce quota obligations, tenders, exemption from energy taxes or instruments as part of which a fraction of the revenue of general energy taxes finance renewable energy sources. See Ragwitz et al. (2012) for a detailed comparison of European renewable support schemes.
- 18.
Although demand is often considered as perfectly inelastic, recent demand-side management activities aim at reacting to price signals and therefore question the assumption of perfectly inelastic demand. The Durbin-Wu-Hausman test for endogeneity will support this view later.
- 19.
Temperature can be thought as an instrument because hotter temperatures increase electricity demand through the need for cooling, while colder temperatures require more electricity for heating purposes. The squared term captures a possible nonlinear relation.
- 20.
The full set of regression tables is available in Tables A.4–A.11 of the Supplementary Materials.
- 21.
The only, minor, exception is Poland.
- 22.
The computed integration indices are surprisingly similar to the price correlations reported in Table A.1 in the online Appendix.
- 23.
The coefficient measures the correlation between values in the first and the second row of Table 4.
- 24.
The huge difference in terms of market integration across countries—for instance between Poland and the Czech Republic—might be surprising against the background of similar mean prices for Poland and the Czech Republic. However, the mean price similarity is rather coincidental as can be seen in Figure A.1 in the online Appendix.
- 25.
In discussing the results, where we write of “consumers” we mean both domestic and industrial consumers, unless we qualify the word. Of note, the costs for German consumers are even higher than computed in Table 5 as German consumers also have to pay a so called “Renewable Energy Surcharge” (in German: EEG-Umlage).
- 26.
The slight differences in the estimates for Germany found here compared to those reported in Grossi et al. (2017)—focusing on Germany only—result from several differences in the data set and the estimation method. First, data availability issues constrain us here to the observation period from 2010 to 2012, while Grossi et al. (2017) include the year 2009 in their analysis. Second, our estimations here are run on daily data while Grossi et al. (2017) go down to hourly level. Third, we were unable to include river-related control variables here as they were not consistently available for all countries. Fourth, we instrument for cross-border congestion while Grossi et al. (2017) argue it is exogenous in the case of Germany. Last, the estimation approach followed here is system-wide GMM including all neighbouring countries while Grossi et al. (2017) estimate the effects for Germany in isolation.
- 27.
We treat Germany and Austria as separate markets here (with an average actual hourly load of 54.85 GWh for Germany and 7.46 GWh for Austria in our observation period).
- 28.
Figure A.2 in the online Appendix illustrates the different load patterns for Germany/Austria and France.
- 29.
Technically, we measure industry benefits from renewables in Germany here because German customers have to pay the costs resulting from the difference between the fixed feed-in tariffs for renewables and the wholesale price, the so-called EEG surcharge, as a part of their electricity bills. Industry, by contrast, is mainly exempted from paying the EEG surcharge.
- 30.
Analogously, unilateral policy reforms made in a small country likely will have no impact, even in the implementing country.
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Acknowledgements
We thank Ulrich Laitenberger, Philipp Schmidt-Dengler, Frank Wolak, Oliver Woll, the editor James Forder and two anonymous referees for helpful remarks and Bastian Sattelberger for excellent research assistance. The paper has benefited from presentation at the 2015 CRESSE conference.
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Supplementary Material
Supplementary material is available online at the OUP website. This comprises an online Appendix and the data replication files. The data used in the paper are bought from commercial providers and are not publicly available. Independent researchers, however, can be given access to the data required to run the do-file at ZEW subject to the signing of a data usage contract. The usage contract allows independent researchers to access the data, but not to take the data set away from ZEW.
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This work was supported in part by the Engineering and Physical Sciences Research Council of the UK under grant number EP/K002228 to MW. We benefited from the facilities of ZEW in producing the paper.
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Grossi, L., Heim, S., Hüschelrath, K., Waterson, M. (2019). Electricity Market Integration and the Impact of Unilateral Policy Reforms. In: Gawel, E., Strunz, S., Lehmann, P., Purkus, A. (eds) The European Dimension of Germany’s Energy Transition. Springer, Cham. https://doi.org/10.1007/978-3-030-03374-3_7
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