Political Shocks and Efficient Investment in Electricity Markets

Professor Felix Muesgens, Brandenburg University of Technology

Investment decisions in electricity markets are driven by different factors: (expectations of) fuel price developments, investment and generating costs, demand, and the remaining power plant portfolio in the market. This paper presents a fundamental power market model captur-ing many essential features of investments in power markets. The partial equilibrium model minimizes the total costs of the electricity system. It looks both at long-run and short-run de-velopments. On the one hand, long-run investment decisions for the commissioning of new thermal power plants as well as possible early decommissioning of old thermal power plants are taken into account. On the other hand, a two-hourly dispatch of both thermal power gener-ation technologies and (pump) storage plants is calculated. The model includes 10 European countries and allows for power exchange between neighboring countries whose power net-works are connected. Different types of generation technologies are aggregated into vintage classes. Furthermore, technical requirements such as minimum load requirements are incorpo-rated. Startup and shutdown costs are integrated as well as unavailabilities of power plants. The model is formulated as a linear problem.

We derive not only the optimal future generation technology mix and a two-hourly dispatch from the model. Due to the concept of shadow prices in linear programming, future power price predictions can also be extracted – under certain assumptions. Combining these predict-ed power prices and the two-hourly dispatch, the costs and revenues of a power plant can be determined.

We apply this model to compare the effect of recent political shocks in Germany, i.e. changes in nuclear power policy, which had a considerable effect on the power plant portfolio and the expected revenues for investors. To begin with, a nuclear phase out was decided in the year 2000 (the corresponding law became effective in 2002). Then, a new government coalition extended the running times of nuclear power plants significantly in the second half of 2010. After the recent events in Fukushima, a phase-out from nuclear energy by 2022 was decided in the first half of 2011. This paper aims at determining the effect of both changes on the prof-itability of other power generation technologies using the example of a specific combined cy-clic gas turbine project.

The analysis shows that against common believe the situation before the extension in 2010 and the current political situation are very similar. This is not only the case for the power plant portfolio but also for the actual generation and the resulting power prices. If the extension of running times, however, would have stayed effective, electricity prices would have been lower. In addition, more power would have been exported. The lower electricity prices would have led to a significant decrease in the profitability of the combined cyclic gas turbine under investigation. This illustrates how the unpredictability of political decisions in the energy market can be a risk for investment decisions which should not be neglected.