HOT|COOL NO.4/16 - "From one generation..."


Furthermore, the allocation of electricity system capacity costs through the way grid tariffs and feed-in tariffs is organised, incites long distance electricity trade at the dispense of short distance cross-sectoral integration. We thus have a governance system that hampers an optimal balance between investment in, on one hand, systems for the integration of heat and electricity and, on the other hand, investments in power transmission lines. The results of this distorted market are welfare losses and growing problems with integration of increasing shares of fluctuating renewable energy technologies. Therefore, there is a need for a set of new policies. The main goal of these policies is to establish a situation where local and regional integration of heat and electricity have equal competition conditions with electricity-to-electricity transmission lines. In the Danish case, these policies could be: A) A tax reform, where tax on wind and solar electricity for heat and cooling are at the same level or slightly lower than present taxes on biomass energy. B) A “user charge” for transmission services that includes the full costs of the marginal transmission service demand so that it competes with local infrastructure solutions. At the European level, C) If EU subsidises investments in transmission lines, similar subsidies for a district heating infrastructure with capacity for integration of fluctuating energy sources should be established. Furthermore, D) it should be recognised by the European Commission that the effect on electricity exchange prices from renewable resources necessitates a supplementing mechanism that internalises capacity costs in the international electricity trade. If capacity costs are not included in the transactions, economic misallocations will be the result. If the European energy system should develop fuel and cost efficiently, the European energy policies must at least provide a ‘plain field’ for the competition between different infrastructure solutions. The research shows that district heating is an important infrastructure that should play a central role in the European aspirations. With the recent heating and cooling strategy, the European Commission is starting to show an eye for this. However, if the European citizens are to enjoy the full potentials of district heating, the dawning attention for the district heating sector should develop into an integrated part of the concrete energy sector regulation. It requires deeper and concrete changes in old policies to adjust the energy system to the new visions.

electricity trade ( 2015). This means that short distance trade finances long distance trade. The full costs associated with international long distance electricity trade are therefore not internalised in the market. The investment costs in electricity grid expansion that the financial transactions in the electricity exchange necessitates therefore becomes an externality. An externality which for example may be held by electricity-to-heat consumers. This mechanism is thus a clear example of the in-built electricity sector bias which characterises theenergy systemwhen assessed in an international perspective. Dynamics between national feed-in tariffs and international electricity trade. Are the full costs of energy production fully internalised in the international energy trade? And to what extent are the electricity exchange price signals able to optimise allocation of energy? A further distortive mechanism is happening through the separation of capacity costs and energy markets. A lot of European countries are financing the built-up of (primarily) renewable electricity production capacity through feed-in tariffs. In Denmark, these capacity costs are currently placed on the electricity bill which must be preferable from an economic point of view. Some other countries have placed these costs on the state budget, which means that electricity production is subsidised and therefore the incentive for energy efficiency is weakened at a national level. When electricity is traded across borders, it is done so at the basis of the spot market prices which only reflects the short term marginal costs. In the long term, the short-term marginal costs of electricity production are pressed towards zero as wind power and photovoltaics replace thermal electricity generation. This development in spot market prices produces a long-term necessity of supplementing mechanisms that can finance production capacity; i.e. the long- term production costs. But while energy is traded internationally on basis of short term costs, national electricity trade includes the long-term costs; that is, market prices plus feed-in tariff. Electricity trade across borders are therefore structurally under- financed under the present regulation. A less efficient heating sector abroad thus gets access to below- cost imported energy while the domestic heating sector must pay the full costs of electricity production from nearby wind turbines. If the underlying national structures are not in place, international energy trade risks not to contribute with efficiency gains, as it should, but instead provides an international, European wide sub-optimisation. Summarising This transition from a district heating system based on fossil fuel CHPs to a system supplied by increasing shares of fluctuating renewable energy meets a set of institutional barriers. In the Danish case, high taxes on electricity (from wind turbines) for heat in combination with subsidies for transmission lines are pushing the system towards long distance electricity trade.

For further information please contact:

Aalborg University Att.: Søren Djørup or Frede Hvelplund Sustainable Energy Planning Department of Development and Planning

Skibbrogade 5 DK-9000 Aalborg


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