Retrospective and Prospective Analysis of Policy Incentives For Wind Power in Portugal
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Concerns over climate change impacts, goals to increase environmental sustainability, and questions about the reliability of fuel supply have led several countries to pursue the goal of increasing the share of renewable energy sources in their electricity grid. Portugal is one of the leading countries for wind electricity generation. Wind diffusion in Portugal started in the early 2000’s and in 2013 wind electricity generation accounted for more than 24% (REN 2013b). The large share of wind in Portuguese electricity production is a consequence of European Union (E.U.) mandates and national policies, mainly feed-in tariffs. Discussions on the appropriate policy design and level of incentive to promote renewable energy adoption and meet further renewable capacity goals are ongoing in Portugal, namely in what concerns the level and duration of feed-in tariffs that should be provided to independent power producers. This, in turn, raises the question of whether the past feed-in tariff levels were well designed to achieve the goals of a larger penetration of renewables in the Portuguese grid. The policies to induce wind adoption have led to a growth in wind installed capacity and share of electricity generated by wind in Portugal from less than 1% in 2000 to approximately 24% in 2013, but questions arise on their cost-effectiveness and whether alternative policy designs would have led to the same goal. vi The Portuguese wind feed-in tariffs are a guaranteed incentive which has varied between $85- $180/MWh over the last 20 years (ERSE 2011), and remained approximately constant since 2001 at $101/MWh. They are currently guaranteed for 20 years of production or 44GWh of electricity generation per MW installed (Diário da República 2013) - the longest period among countries with high wind electricity share. They do not incorporate any digression rate besides inflation, and are guaranteed for every unit of electricity fed to the grid. There are no power plants that have already been decommissioned despite being in operation for more than 20 years, favoring from new, detailed and hard-to-follow agreements in the legislation. All wind parks that are currently in operation have received feed-in tariffs since they connected to the grid, and are expected to keep receiving them at least until December 2019, and up to December 2036 - depending on year of connection and agreement under the most recent legislation (Diário da República 2013). The 2020 renewable energy goals in Portugal include having 6.8 GW of installed wind capacity, which implies the connection of 2 GW in the next years. If no further grid investments are made and wind capacity increases up to 100 MW to the connection point that we analyze, total annual electricity spill is likely to range the 20% to 40%. If the connection grid policy is designed to allow for wind spill, already ‘occupied’ connection points will be available to new entrants, lowering the total investment costs for new wind parks and increasing their profitability. This thesis is divided in three main parts: a first introductory section, a retrospective study of wind power in Portugal and a prospective analysis of the Portuguese wind power sector. The introductory section is a brief overview of the global renewable status, described in Chapter 1. Chapter 2 and Chapter 3 compile a retrospective study of wind power and the policies that have incentivized wind diffusion. We include in the discussion some references to the future wind vii power goals, but the results and policy recommendations are directed towards the existing connected wind power capacity. Chapter 2 is a qualitative piece that describes in detail the motivation behind the Portuguese wind power diffusion, the policy changes over the last 20 years and the mechanics of the remuneration mechanism, i.e. the feed-in tariff formula variables and the actors of the wind power sector. We compare the Portuguese feed-in tariff with other European feed-in tariff designs and conclude that the incentive is one of the highest in Europe, contributing to the current Portuguese electricity system deficit of about $2 billion. If feed-in tariffs keep being fixed and do not incorporate any market variation, and renewables are prioritized to meet electricity demand, feed-in tariff net support per unit of electricity might be higher when the wind blows the most because moments with high penetration of renewable power might be correlated with low market prices. We find that wind power penetration is correlated with net exports to Spain. This might result in a net cost to Portugal and a subsidy to Spanish electricity consumers per unit of electricity traded. In total terms, the resulting subsidy is higher when the wind resource is larger as well, as the total amount of electricity that is exported increases. In Chapter 3 we estimate the profits of wind power producers connected in Portugal between 1992 and 2010, and we recommend specific policy reforms that would lower spending in the form of wind feed-in tariffs. In particular, we assess four scenarios to decrease the level and/or period of the tariffs. We find that under the 2005 legislation - in which feed-in tariffs are granted for 15 years, all existing wind parks have positive NPVs varying between $0 and $12/MWh, when considering a 20-year lifetime. In fact, most of existing wind parks can stop receiving the feed-in tariff now (July 2014), and instead participate directly in the Iberian electricity market and still be profitable. Moreover, under the 2013 feed-in tariff reform that aims at decreasing the viii electricity system deficit, total spending will increase and wind parks will have larger profits than under the 2005 legislation. The motivation of keeping a high feed-in tariff comes from the need of liquidity that wind producers can provide immediately to the electricity system, which is required at this moment to comply with the E.U. economic agreements signed during the recession. Nevertheless, the environmental and energy dependency benefits of the Portuguese wind sector could have been achieved with as much as 25% less spending. Later on, we move to analyze future wind power additions. Chapter 4 compiles a prospective analysis of the wind power sector in Portugal. We focus on new wind parks that will connect to critical lines of the distribution grid in two regions of the country, as part of the national 2030 wind power goals. In particular, we assess the implications of a 100% guaranteed availability of grid power capacity. We find that from the investor perspective, it is more profitable to bear some risk of wind power curtailment, because of the avoided costs that would otherwise be incurred to upgrade the grid. We also find that since there is ample room in the distribution lines to connect more wind parks, very few grid upgrades can allow to highly increase the distributed wind capacity with a low risk of wind curtailment. Moreover, even in scenarios with ‘high curtailment’ of 5% to 20%, projects are profitable. Thus, the Portuguese government should consider a policy where the guaranteed feed-in would be removed, and further assess the possibility of limiting profitability of the existing and new wind projects by introducing curtailment. This work compiles two perspectives: first, a temporal perspective, in which past and future assessments of wind power diffusion are described. Second, a perspective on policy characterization, in which we present an assessment of two characteristics in the feed-in tariff design: the level/period of the tariff and the conditionality of prioritizing wind power over fossilix fuel resources with absence of risk of wind power curtailment. The level and period-related policy recommendations are considered for the existing wind parks, and are addressed mainly in Chapter 3. Considerations about grid capacity and introducing a risk of wind power curtailment are considered for subsequent wind power capacity additions, and are mainly considered in Chapter 4. In addition, notice that Chapter 3 focuses on avoiding excessive profitability of wind power parks while in Chapter 4 we analyze wind and grid capacity additions under the perspective of wind investors. Nevertheless, as we also find in Chapter 4 that profits are excessive, we do make recommendations that limit wind investor’s revenue. Portuguese decision maker should give serious consideration to revisions to the Portuguese feed-in tariff policy design. Most of the existing Portuguese wind parks to not need a feed-in tariff to be profitable. A value associated with the risk of wind power curtailment for subsequent additions should be incorporated in future policy design. We expect that this work will contribute to the Portuguese renewable policy in particular in light of Portugal’s 2020 and 2030 wind power goals.