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China’s expensive wind curtailment-Unleashed value from down regulating power plants

by Laust Riemann, Special Consultant, DEA

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The massive renewable energy development in Denmark during the last decade puts the share of renewable energy at record breaking 40% in 2014. Despite such a high share the curtailment of renewable energy is practical none existing. The key reason for this is well-developed interconnectors to surrounding countries and not least – one of the world’s most flexible power plant fleets. What would it take for China to eliminate curtailment and how large welfare gain could be harvested?

Continued large curtailment challenges in China
China is continuously challenged by high level of renewable energy (wind and photo voltage) curtailment. NEA recently reported wind curtailment in first half of 2015 was 15 % with many provinces reporting curtailment between 20% and 30%. The curtailment not only represents a very large social welfare loss on an overall system level, but is also poses a high uncertainty on the investment return for both current and future investments in wind and photo voltage parks in China. This can ultimately challenge the momentum of the build-out of RE in China.

Value of down regulating power plant production
Instead of curtailing the renewable energy production the needed flexibility can to a very large extend by supplied by increased flexible power plant production. From an overall social welfare perspective the gain from power plant down regulating instead of curtailing free renewable energy is the sum of saved variable coal-fired production costs at the power plants as well as the saved negative externalities such as emission of NOx, SOx, particles and CO2-gases.

In monetary terms if a down-regulation of 1 GWh could be provided by saved power plant production instead of curtailment of renewable energy the overall social welfare gain (even without including the negative externalities) is in the level of 150-250.000 Y. Rising variable coal based power production costs – either through emission taxes or direct costs – thus increases the total gain. The estimated wind curtailment for the first 6 months of 2015 is approximately 17,000 GWh. This represents a very large social welfare loss through the unnecessary production at coal-fired power plant in these circumstances. Assuming an average variable coal based production cost of 200 Y pr. MWh the total social welfare gain that would arise from avoiding curtailing of wind production is in the rough level of 3,500 million Y – just for the first 6 month of 2015.

Eliminating curtailment – a market design challenge
The welfare gain from ensuring down regulating is provided by power plants instead of curtailing wind production is obvious – however, the challenge is how to make it happen. This challenge is twofold. One challenge – as described in this article -is the technical challenge of how the power plants can provide sufficient flexibility in from of low minimum load, high ramping rates, quick start-up time, bypass potential etc. in order to supply the needed production flexibility. The second challenge is how to design the power market and regulation in such a way that power plant producers are motivated to supply the needed down regulation instead of renewable energy is being curtailed.

Europe’s market design with time dynamic power prices and production set by the marke777t based on a least cost merit order ensures all renewable production is consumed first while the rest of the consumption is met by production from large and small thermal power plants and possible import from surrounding price areas. In the figure the consumption and production (MW) for the last 6 hours (from 6 pm to 12 pm) in Denmark on August the 13th 2015 is shown. As shown – as the wind production increases and consumption decreases the thermal production is within few hours reduced from around 750 MWh to around 200 MWh through significant down regulation on the thermal power plants.

In the current Chinese power market where power plant producers are guaranteed a fixed off-take of production and fixed power price the challenge is to somehow gradually dismantle this setup even though the power plant producers anything else will lose some profits from the foregone production. If China designs a ‘least cost merit’ order market similar to the European renewable energy curtailment will be eliminated and the thermal power plants will have strong economic incentives to obtain increased flexibility in order to improve and maximize their earnings. This might be the medium to long term objective. In the short term intermediate market designs ensuring some redistribution between the thermal and renewable producers – of the gained social welfare loss from reduced curtailment – could be used to smooth the necessary market design transition process for the power plant sector. The exact market design towards creating stronger incentive among the thermal power plants to offer more flexibility is still undecided, but the very large overall social welfare gain from reduced curtailment is however indisputable. This should be a strong enough argument in itself to make necessary changes to the current market design to reduce renewable energy curtailment.