Master Thesis
Leiden University
THE IMPACT OF THE
ENERGIEWENDE ON ELECTRICITY
PRICES
How did the Energiewende impact day-ahead
electricity prices?
The impact of Germany’s Energiewende on day-ahead
electricity prices
Alexander Radomirov
S1994158
Under the supervision of:
Dr M. van Lent
1Leiden University
Economics & Governance
Msc Public Administration
Master Thesis
11, January 2019
Abstract
Following the nuclear accident in Fukushima, Germany’s energy policy initiated a U-Turn with the ‘Energiewende'. This led to the shut-down of eight nuclear power plants and the significant deployment and development of renewable energy sources (RES) to generate electricity in Germany. This paper aims to examine the impact this policy had on day-ahead electricity prices. By using a regression discontinuity design, this paper finds that the moratorium to decommission eight nuclear power-plants immediately led to a price increase of 23%. Thereafter this paper suggests that electricity generated by RES has increased by 5.1%. Using OLS regressions the impact this has had on price is examined for every year thereafter until 2017. Suggesting that RES have had a substantial negative impact on prices. However, their impact has declined since 2015. The paper also suggests that the most significant factor in electricity price formation appeared to be consumed during the observed periods. Lastly, this paper also examines the impact of the Energiewende on price volatility. Finding that while prices were particularly volatile between 2011 and 2015; volatility has decreased thereafter. Ultimately, this paper also provides an evaluation of the Energiewende as a policy as a whole. Arguing that to sustain environmentally friendly and sustainable sources of electricity further, the regulatory mechanism will be required to ensure that these investments are refinanced in the future and enable a full transition to a pollution-free electricity generation sector.
1 I would like to thank my supervisor, Dr Max van Lent, for his guidance, support and
ABSTRACT ___________________________________________________________________________ 1
INTRODUCTION _____________________________________________________________________ 2
SECTION 1: BACKGROUND _________________________________________________________ 7
1.2HOW ELECTRICITY MARKETS FUNCTION _____________________________________ 11
1.3ELECTRICITY PRICES ___________________________________________________ 12
1.4PRICE FORMATION _____________________________________________________ 14
1.5LITERATURE REVIEW ___________________________________________________ 17
SECTION 2: SUMMARY AND HYPOTHESES ______________________________________ 22
SECTION 3: METHODOLOGY AND DATA ________________________________________ 26
3.1METHODOLOGY _______________________________________________________ 26
3.2DATA _______________________________________________________________ 32
SECTION 4: RESULTS AND ANALYSIS ____________________________________________ 34
4.1SHORT-TERM EFFECTS __________________________________________________ 34
4.1.1 Shutting down nuclear power plants ___________________________________ 34
4.2LONG-TERM RESULTS ___________________________________________________ 42
4.2.1 Changes to the Energy Mix __________________________________________ 42 4.2.2 Impact on Prices __________________________________________________ 44 4.2.3 Impact on Price Volatility ___________________________________________ 50
SECTION 5: DISCUSSION OF RESULTS AND POLICY IMPLICATIONS _________ 54
SECTION 6: CONCLUSION _________________________________________________________ 61
Introduction
The tsunami following the Tōhoku earthquake on the 11 March 2011, which lead to multiple nuclear meltdowns in the Fukushima nuclear power plant in Japan, had far-reaching consequences for nuclear energy beyond its borders. While there were no reported deaths as a result of the short-term radiation exposure (Johnson, 2015), there were significant deaths caused by the earthquake and the tsunami itself (BBC New, 2016). Nevertheless, the nuclear incident was rated a seven by the International Nuclear Event Scale, which runs from 0, indicating unusual events with no safety consequences, to 7, which categorises incidents with widespread contamination and serious externalities for the populations' health and the environment (NISA, 2012). The only other accident to record a seven on this scale was the Chernobyl accident in 1986, while the Three Mile Island accident in 1979, comparatively, ‘only' recorded a 5 (ibid). Compared to the Chernobyl accident, it is estimated that the Fukushima disaster released only about 10-20% of the radioactivity (IAEA, 2011). Thus, while the only comparable disaster was five times as significant and harmful, the Fukushima accident was, nevertheless, a watershed moment for nuclear energy production.
Notably, in Germany, some 10,000 km away, the political consequences of the nuclear meltdown at the Fukushima nuclear power plant were unprecedented. Specifically, on the 14th of March 2011, three days after the earthquake in Japan, Angela Merkel, the German
Chancellor, announced the immediate, and at the time temporary, closure of eight of Germany’s oldest nuclear power plants (Moore, 2012). These closures were ultimately permanent. These also represented the beginning of the end for nuclear energy in Germany, as in its aftermath German energy policy did a 180-degree turn, as it ushered a policy called “Energiewende”. The immediate aim of this being that Germany would become the first major industrial country with a highly efficient energy system based on renewables. Germany would thereby become a pioneer and a model for the feasibility of a system that has a limited environmental impact and does not rely on expensive energy imports (ibid).
The most significant aspects of these policies being the rapid nuclear phase-out and the expanded use of Renewable Energy Source (RES), it is crucial to note that Germany has traditionally had a conflicted relationship with nuclear energy, which, nevertheless, led to a decision to phase it out as a technology. The Chernobyl disaster was a key influence on this relationship, which made nuclear energy notoriously unpopular (CNBC News, 2011). By 2000, Germany was the largest producer of nuclear power in the world; however, there was low public acceptance of this, which motivated then-Chancellor Gerhard Schröder to legislate
3
Fig. 1 - This map of Germany shows the nuclear power plants in 2011, whereby the grey shaded ones are those that shut down following the Fukushima accident. The year in parentheses shows the year of construction. Source: (Groebel, 2013)
for a 2021 phase-out (BBC News, 1998). Nevertheless, this legislation was revoked by the subsequent Merkel government in 2010 which, one year before the Fukushima disaster, made a firm commitment to nuclear energy as a critical component of German energy policy. In the aftermath of Fukushima on the 30 May 2011, however, the same commitment to nuclear energy was retracted following the findings of an Ethics commission comprised of representatives from industry, research, and politics, and a return to the Schröder objective was decided by the same government that provided a life-line to nuclear energy a year earlier (Science.org, 2011). The report argues that this rapid phase-out is necessary to "rule out risks posed by nuclear power in Germany in the future" (Ethics Commission, 2011).
This decision is mostly politically driven the nuclear phase-out and reliance on RES comprise a multitude of significant practical implications. Moreover, this decision by Germany was largely unilateral and had impacts beyond its borders. Peter Altmaier, then Germany's minister for environment, noted that this decision would have unintended knock-on effects knock-on other countries. However, Altmaier justified this by arguing "‘it was not possible to discuss the consequences of such a decision with Germany's neighbours. Now is the time for that" (Houllier & de Menezes, 2015; European Energy Review, 2012). While eight of the eighteen nuclear power plants were irrevocably off the energy grid by August 2011, the remaining power plants were scheduled to be phased out in 2015, 2017, 2019, 2021
and 2022 (see Fig. 1).
Additionally, the Bundesnetzagentur, the independent regulatory authority responsible for ensuring effective competition in network industries, would ensure that shortages were compensated by utilising gas and coal reserves. Increased investments were pledged in both on- and offshore wind energy production as a long-term guarantor for secure energy supply. While wind
energy, in particular, offshore production in the North and Baltic sea, would be reinforced by hydroelectric and photovoltaic as new RES. Lastly, the electricity grid expansion needed to be accelerated to ensure that ultra-high voltage lines provide electricity faster and further within and across national borders. In particular, from north-to-south in Germany, which has traditionally proved challenging given that the majority of RES production was situated in the north, while the majority of consumption and demand comes from the south (Bundesregierung, 2011). Moreover, the nuclear phase-out would also turn Germany from a net exporter of electricity, mainly to the Benelux country, who lacked high-demand variable capacity from conventional power plants, to a net importer from France and the Czech Republic, which could offer Germany the base-load capacities from fossil fuel-based (54.8% or 47.1 TWh) and nuclear (32.6% or 28 TWh) generation (European Commission, 2012). However, the German government didn’t deem the import of nuclear electricity as a long-term alternative, hence identifying the need for modern, highly efficient gas and coal-fired power plants to facilitate the rapid transition to a complete renewable energy supply, as these can compensate for fluctuations in wind and solar energy (Bundesregierung, 2011). To summarise, the Energiewende is comprised of the following measures for the German energy market:
In the short term:
- Turning off eight nuclear power plants
- Replacing the lost capacity of production with fossil fuels and imports In the long term:
- Phasing-out the remaining nine nuclear power stations out by 2022 - Improving electricity transmission systems
- Replacing nuclear energy capacity and conventional capacity with RES for completely environmentally friendly electricity production.
These indeed represent ambitious and novel policy objectives, however, these also entail specific challenges given that it forcefully, and abruptly structurally changes the energy mix, the composition of electricity generated in Germany, which delicately balances supply and demand. Mainly, the integration of renewables has been found to cause congestion, which is considered a shortage of transmission capacity to supply a waiting market, they also challenge security of supply, given their variability, and have therefore been associated with adverse effects on price variance and prices themselves (see amongst others: Gugler, Haxhimusa, & Liebensteiner, 2016; Keppler, Phan, Pen, & Boureau, 2014; Nepal & Jamasb, 2012)
5 According to the IAEA director, Yukiya Amano, the Fukushima accident, disaster: "caused deep public anxiety throughout the world and damaged confidence in nuclear power" (UPI, 2011), the U-turn in German energy policy has also created a global discussion about how to manage risks associated with nuclear power and how to reduce and ultimately eliminate dependency on nuclear power as an energy source. This has been observed with particular scrutiny given that the German government has maintained its ambitious goal to reduce overall greenhouse gas emissions by 40% in 2020 compared to 1990 levels and a virtually carbon-free electricity sector by 2050 by sourcing 80% of electricity from RES (Eurelectric, 2010; Buchan, 2012).
Combining the climate goals and nuclear phase-out, two conflicting objectives, raise fundamental questions about the operation of electrical systems and have therefore immediately been at the locus of multiple studies (e.g. see Ackland, 2009; Bode, 2009; Fürsch, Malischek, & Trüby, 2012). Mainly, the impact of renewables on electricity prices in a variety of markets has been a critical area of interest for research given the prescriptive merit of such studies and the relative importance of RES in the Energiewende’s policy objectives. However, the impact of the nuclear "phase-out" has remained outside the scope of most studies, as it complicates the assumptions considerably of the predominantly model-based studies. Additionally, as nuclear energy has been since viewed as a “thing of the past” in Germany, the focus has been predominantly on the RES (e.g. Würzburg, Labandeira, & Linares, 2013; de Menezes & Houllier, 2015; Kessides, 2010). Nevertheless, given the leadership was taken by Germany to phase-out nuclear energy, it is worth analysing and understanding the short-, medium, and long-term implications of this decision for other countries and German policymakers themselves. Hence, this study will aim to retrospectively assess the impact of the Energiewende, including its short-term shut down of nuclear power plants and the changes to the energy mix, on electricity spot prices in Germany using observational data from 2011 to 2017.
Thus, recognising the research question as “How did the Energiewende in Germany impact day-ahead electricity prices?”, The structure of this paper will be as follows: Section one will provide the relevant background to understanding how the electricity market in Germany functions. It will give a historical assessment of energy policy in Germany, detail the relevant operational functioning of the market and how, in theory, prices are determined. Ultimately, it will summarise the related findings of other research on the Energiewende. Section 2 will introduce the methodology of the paper by summarising the relevant theories and concepts to present the corresponding hypotheses. These will be divided in short and
long-term hypothesis, whereby the short term will focus on the impact of turning off eight nuclear power plants and will thus only consider data collected one year before and after this decision. The long-term hypothesis will set a benchmark by quantifying how the German energy mix has changed, to subsequently evaluate how this has impacted absolute prices and price volatility. Section 3 will then provide more detail on the research methods applied, namely a regression discontinuity design to quantify the short-term impact of the moratorium on prices. The further evaluation of Germany’s long-term implications will employ ordinary least squares regression analysis to provide some further insights into the impacts of the other corresponding policy decisions on prices, namely the development of RES capacity for electricity generation. This section will additionally introduce the data using descriptive statistics and detail regarding the sources and measurement. Section 4, will thus ultimately present the results with some corresponding analysis. This section will be grouped according to the hypothesis into long and short-term results, whereby the short term exclusively covers the impact of the moratorium and the long-term covers the subsequently devised policy to increase electricity generation from RES. Subsequently, sections 5 and 6 set these into the context of policy implications and formulate a conclusion, respectively.
7
Section 1: Background
Having identified the aim and the relevant motivation for this paper in the previous section, this section will develop the context of this paper further by providing the relevant background. To fully grasp the relevant aspects of the impact of the Energiewende on electricity prices, this section will initially provide a history of German energy policy on electricity, and, in particular, its complex relationship with nuclear energy. Subsequently, the mechanisms of electricity markets will be described to define the relevant parameters of this paper. Subsequently, this section will introduce some background of related studies on the German Energiewende, and its impacts within and beyond Germany to set this paper into its context. Ultimately, the primary objective is to summarise previous findings sufficiently to formulate unique hypotheses which will be tested in the later stages of this paper.
1.1 History of German energy policy
The Vorsorgeprinzip, the precautionary principle, has been a dominant credo in German energy policy, and politics as a whole, since the Second World War. Its geographic and political position on global energy politics has meant that security of supply has always been a delicate endeavour. However, this was exacerbated in 2011 when the events in Japan, following the Fukushima nuclear accident, forced the precautionary abandonment of nuclear energy, and thereby threatened a secure supply of electricity, in favour of lower risks of accidents and environmental disasters. Nevertheless, Germany’s relationship with nuclear energy is substantially more complex, with an inherent sense of pre-existing caution towards it (Moore, 2012). The following subsection will detail German energy policy since WWII and how its relationship with nuclear energy has developed since.
Immediately after WWII, German politics pursued a policy of low interventionism and broadly embraced both coal and nuclear energy as sources of electricity. In 1950, 90% of if Germany's energy consumption, unsurprisingly, came from coal. Consequently, this was a significant industry in Germany, employing nearly half a million people, and was primarily located in North Rhine-Westphalia, one of Germany's most potent federal states, given its population and size (Renn & Marshall, 2016). Nuclear energy also started to gain relevance in the 1950s, in the context of the EURATOM treaty, which resulted in the establishment of the Ministry of Atomic Affairs and the Ministry of Research and Technology. This also enabled the realisation of the ten nuclear power plant construction plans in 1973, which were
developed by Siemens and AEG. However, AEG soon discontinued its involvement in nuclear power, as a consequence of public opposition (ibid).
It was only after the oil crises in the late 70s that energy conservation gained significant political traction. Numerous energy packages were agreed at the national and federal level during this period. However, these focused on the development of coal, given its domestic significance, both as electricity source and employer. As a result, seven new coal electricity stations were agreed. Given the high energy prices, there was sufficient political will to agree on the development of twelve nuclear power stations, while planning for further stations in the future also commenced (ibid). At this point, while there was still considerable debate about the safety of nuclear power plants, in context of the Three Mile Island incident, expansion of nuclear energy, nonetheless, provided a suitable guarantor for energy security (ibid). Simultaneously, the saliency of environmental issues through public movements became more relevant and politicised through the establishment of the Green party (Renn, 2008, p. 60). The Green Party and their affiliated movements proved particularly critical of nuclear power at the national level, while protests against coal remained mainly local (Renn & Marshall, 2016). Primarily, these anti-nuclear protests targeted the construction of new power plants.
Nevertheless, until 1986, all parties, except the Greens were in support of nuclear power, and its expansion. Nuclear power and other fossil fuels were the primary sources of electricity in Germany, until the reactor accident in Chernobyl. This had a significant impact on how public opinion viewed nuclear energy and the environment more broadly. Thereby leading to the establishment of the Ministry for Environment, Nature Conservation and Reactor Safety (ibid.). Politically, the Social Democrats (SPD) joined the position of the Greens, shifting towards a sceptical approach on nuclear power. However, the Christian Democrats (CDU/CSU), who formed the government with the liberal FDP, remained committed to nuclear energy, while guaranteeing subsidies for coal productions until the 2010s. Nevertheless, nuclear energy continued to be scrutinised by the opposition parties, and significant conflicts between SPD lead federal states and the national CDU government caused conflicts in issuing licences for nuclear power plants and the development of anti-nuclear power legislation at the federal level (Kern & Löffelsend, 2003). The heightened scrutiny on environmental issues and the realisation of the externalities caused by mining and coal burning eventually resulted in a controversial phase-out of hard coal to be agreed, however, with the realisation that Germany would require lignite (brown coal) reserves to secure its energy supply. The last remaining hard coal mines closed in 2018 following the
9 end of subsidies, which maintained its operation until then (Grüter, 2016; FAZ, 2018). Therefore, until the late 1990s, the following compromise dictated Germany's energy policy: nuclear energy and lignite were supported to secure its energy supply based on economic reasoning, while a phase-out of hard coal in the upcoming millennium was deemed necessary on environmental grounds.
On the other hand, in 1998, nuclear energy policy in Germany experienced its first dramatic political shift after the Greens, and the SPD entered government under Gerhard Schröder. The new coalition government aimed to:
1) mitigate climate change; 2) promote energy efficiency; 3) domestic use of coal and lignite;
4) creating more competitive energy markets; 5) promoting RES;
6) also, creating a level playing field for energy companies within an internal European market (Renn & Marshall, 2016).
These measures also included the phasing-out of nuclear energy as a top priority (IEA, 2007). This was agreed in 2002, limiting the phase-out to a maximum of 32 years, allowing each reactor to produce a fixed amount of electricity. This fixed amount could be transferred between reactors, allowing the extension a reactors lifetime beyond the 32 years (Renn & Marshall, 2016).
Nevertheless, nuclear fortunes quickly changed in 2005, when the decision was re-debated after an election victory by the CDU/CSU. The “Union”, being sympathetic to the industry, nuclear energy was viewed as a bridge technology between fossil fuels and RES. In 2008, the phase-out was prolonged, giving more flexibility to electricity generating companies (Renn & Dreyer, 2013). Ultimately, in 2010 the phase-out was, at least temporarily, scraped all together (Renn & Marshall, 2016).
Having observed German energy policy and Germany's stances to nuclear energy over the preceding decades, it is evident that Germany has had a significant influence on the EU's energy policy and vice versa (Matlary, 1997). Broadly, three significant trends can be identified to have primarily shaped its energy policy, namely:
- Deregulation and liberalisation of energy markets - Climate change
However, in 2011, the accident in Fukushima occurred, which resulted in a response that to shut down its seven oldest reactors and not re-open another that was already out of operation (Renn & Dreyer, 2013).
Additionally, stress tests were conducted on the 11 remaining nuclear reactors (DG Energy, 2011). An ‘ethics committee' was also commissioned to evaluate Germany's future nuclear energy policy. This committee was largely political and did not include experts from the nuclear industry (Ethics Commission, 2011). The committee concluded that the phase-out should occur within ten years (until 2022), promote energy efficiency and install more RES. The committee also recommended a reduction of CO2 emitted in 2015 to 20% of the emission levels of 2005 and that the government should establish an audit committee of the
Energiewende to ensure smooth implementation and bolster public acceptance of energy
policies (Ethics Commission, 2011; Renn & Dreyer, 2013).
Simultaneously, the reactor safety commission concluded that Germany’s reactors were resilient, but that older reactors were vulnerable to earthquakes and, most importantly, all reactors were susceptible to terrorist attacks (Bruhns & Keilhacker, 2011). Nevertheless, in June 2011, the parliament adopted the recommendations of the ethics committee, and all parties voted in favour of the "Energiewende” (Renn & Marshall, 2016). Thereby confirming that the reactors shut down on the 15th March 2011 would not resume operations (Groebel,
2013).
Thus, the 15th March 2011 represents a critical moment for German energy policy as
8 of 17 nuclear reactors were shut down, while its energy policy changed dramatically in the subsequent months. In sum, the following conclusions can be made about nuclear energy in Germany: it represents a wholesome technology for electricity generation with little impact on the climate. Besides, it can provide significant amounts of power based on a natural resource, which is in abundance in the earth's crusts at a low price. Therefore, this technology is an efficient, cheap, and relatively climate neutral source of energy. However, nuclear energy is also viewed as costly and complex, involving highly toxic materials and waste susceptible to theft and misuse. Its high start-up costs are also viewed as less economically attractive when compared to other carbon-neutral electricity sources like wind, water and solar (Kessides, 2010). Ultimately, the latter arguments in favour outweighed the opposing voices for German policymakers. Therefore, the overall result was a unique rupture in the German energy policy and the functioning of its electricity markets. Having, identified how this unique policy change came about, the impact this is had on electricity markets can now be identified.
11
1.2 How electricity markets function
This subsection will aim to identify the mechanisms that determine wholesale electricity markets and, more generally, the interaction between nuclear electricity and other sources with consumers. This will be done to understand the underlying mechanisms, and ultimately the impact, of the decommissioning of eight nuclear power plants, which reduced electricity production capacity in Germany by a quarter (Houllier & de Menezes, 2015). Therefore, the structure of this subsection will aim to address the following: the structure of the German electricity market will be described to distinguish between consumer and wholesale markets, whereby this paper will continue to focus on the wholesale market. Crucially, the price setting mechanism in wholesale markets will be described, which will provide the theoretical framework for the later analysis of the nuclear phase-out.
According to Renn and Marshall (2016), the electricity market is structured similarly to the gas sector in Germany. Renn and Marshall's findings suggest that in 2014, "there were
four supra-regional companies, 56 regional utilities, more than 800 local utilities and about 120 electricity dealers. Supra-regional companies generate electricity (80% of the market), transmit it over regional boundaries and supply electricity to the final consumer”. RWE,
EnBW, E.ON and Vattenfall Europe AG are all considered to be significant energy producers in Europe. This was the result of significant market consolidation after liberalisation during the 1980s and 90s. However, since the Energiewende there are a significant number of “prosumer” (producer and consumer), often individual households generating electricity from solar or wind energy for their consumption and selling the surplus on the wholesale market. This has had a significant impact on electricity supply and demands the self-generated electricity can cover about a third of consumption through distribution on the electricity grid, while another third of consumers can be self-sufficient under the appropriate conditions. This change has been uniquely attributed to the feed-in tariff, or price guarantees and other local subsidies (Sensfuß, Ragwitz, & Genoese, 2007).
Once the electricity is generated from whatever source, it is transmitted to the Transmission System Operator (TSO). In Germany, these are also run by four different companies, and separated, or at least vertically integrated, with retailers and generators. These companies are Tennet, 50Hertz Transmission, Amprion, and TransnetBW. While, TSO's are a vital part of infrastructure these often represent a natural monopoly, and remain highly regulated or under the direct control of the state. Meanwhile, the generators and retailers can operate under no geographic restrictions (DG Competition, 2014). Once
electricity is registered with a TSO it is either transmitted via a direct supply contracts, which make up the lion’s share of electricity market (Garz, Ötsch, Haas, Wirtz, & Zank, 2009), or they are traded over-the-counter on one of the two energy exchanges responsible for Germany, NordPool or the European Energy Exchange (EEX) (Bundesnetzagentur, 2010). From there they are then sold to any given retailer who demands the energy. To give an illustrative example: electricity produced by a wind power station in the north sea operated by RWE will be transmitted through the TSO, Tennent, who have registered the NordPool exchange to find a buyer. Because Bayern Munich has a game on said generic day Vattenfall, who is contracted to supply Allianz Stadium with electricity, realises its contracts are insufficient to meet demand on that day. Hence, it decides to buy extra electricity on the NordPool exchange at the market price for same day delivery. Tennent, then again, connects the electricity produced by a wind power plant in the North Sea to Allianz Stadium in Munich for said delivery. This all happens in a concise period of time and is significantly more complicated in practice, but the underlying market mechanisms remain the same. Fig. 2 visualises this example.
Fig. 2 - Showing how electricity markets operate and how electricity is transmitted. Source: (Groebel, 2013) Note: For simplicity, the up-scaling and downscaling of electricity has been omitted. Own illustration
Thus, the link from generation to the exchange via the TSO represents the wholesale market, while the connection between the exchange and the retailer to the end consumer via the TSO represents the retail market.
1.3 Electricity Prices
Having now identified how the market operates, it is appropriate to examine how prices are determined. Therefore, it is primarily necessary to distinguish between the various types of prices for electricity, and justifying why the focus of this paper will be on the spot or
day-13 ahead market, before taking a closer look at the underlying price-setting mechanisms in the spot market.
Generally, there are three types of prices: (1) to manage risk (2) to manage the system, and (3) to manage physical energy. To manage risk a “forward price markets” are used, which can be compared to the derivatives markets on stock exchanges. Thereby retailers and producers can manage their revenues and operational variability in medium and long-term by buying the option of a defined price at later points in time, enabling operational and financial optimisation (EEX, 2018). Similarly, the electrical system, meaning the physical power supply lines and network congestion (traffic), is managed using balanced prices. It is necessarily a default price only offered to the TSO for the electricity that is generated but not contracted for, which ensures the operational stability and efficiency of the electricity grid (Ofgem, n.d).
The area of interest of this paper, however, is the managing of physical energy. This market has two types of prices the “intraday market” and the “day-ahead” or spot market, which are closely linked. On the spot, or day-ahead, market contracts between sellers and buyers are made for delivery of power the following day, the price is then set, and the trade is agreed. The intraday market, on the other hand, is a tool which supplements the spot market by enabling the necessary balance between demand and supply on any given day. According to NordPool (2018a), the purpose of the intraday market is account for “incidents [that] may
take place between the closing of the day-ahead market at noon CET and delivery the next day. A nuclear power plant may stop operating in Sweden, or strong winds may cause higher power generation than planned at wind turbine plants in Germany. At the intraday market, buyers and sellers can trade volumes close to real time to bring the market back in balance”.
Specifically, however, this paper will focus on the spot market, where contracts between seller and buyer are agreed on delivery the following day. The explanatory example by Nordpool (2018a) reads: "A buyer, typically a utility, needs to assess how much energy
(‘volume') it will need to meet demand the following day, and how much it is willing to pay for this volume, hour by hour. The seller, for example, the owner of a hydroelectric power plant, needs to decide how much he can deliver and at what price, hour by hour. Hourly prices are typically announced to the market at 12:42 CET or later. Once the market prices have been calculated, trades are settled. From 00:00 CET the next day, power contracts are physically delivered (meaning that the power is provided to the buyer) hour for an hour according to the contracts agreed". Additionally, the day-ahead market is more significant
the volume traded on the day-ahead market in October 2018 was 321.8 TWh, excluding the UK, while the total intraday trading volume only totalled 6.5 TWh (Nordpool, 2018b)
1.4 Price formation
The day-ahead market being the market of interest, it is now necessary to address the price formation mechanisms. Given the instantaneous nature of electricity markets and the need to instantaneously balance of supply and with highly variable demand electricity exchanges are at the heart of the functioning of the market (Paraschiv, Erni, & Pietsch, 2014). The exchanges, operate using auction-based mechanisms and, in this instance, collect all offers from all types of producers, and rank these in ascending order of the respective marginal cost of production (Bode & Groscurth, 2007). In other words, according to their merit order, the best (cheapest) being sold first. Hence, all power plants are essentially ranked according to their marginal cost, with RES electricity coming in with close to zero marginal costs and gas and oil power plants with extremely high marginal costs. This primarily provides the merit order or supply curve in electricity markets on any given day. Retailers then bid for the offers from generators until the demanded quantity is met, effectively determining the price of electricity with the last bid for electricity accepted, satisfying demand through prioritisation (Henriot & Glachant, 2013; Wirth, 2013).
Thereby the essential price determining factors on the supply side are the fixed costs for capital and land, and variable operating costs of fuel, labour and maintenance. Generally, there is a trade-off between these two types of costs, meaning that those power stations with high capital costs tend to have lower operating costs and vice versa. Additionally, some generators running on fossil fuels additionally have highly variable operating costs given sensitive underlying prices for their commodities. The implication of this being that those substantial low operational costs run permanently to meet the base demand, while more responsive and more operationally costly power plants are used to meet demand at peak times (Schleicher-Tappeser, 2012). The role RES have here is highly debated as they are highly circumstantial, because of their dependence on weather conditions, and are therefore not entirely suitable to address base or peak demand in the long run as they are ‘unreliable’, meaning that they are only able to generate significant amounts of electricity when the sun is shining, or the wind is blowing. The structure of the merit order or supply curve is illustrated in Fig. 3, showing the various marginal costs of the electricity sources. Thus, exclusively adding RES capacity would essentially, constitute a rightward shift of the supply curve, resulting in a decrease in prices (ceteris paribus)
15 In reality, the variable costs of individual power plants would be used as price determinants in the auction mechanisms. Meaning that RES are sold first, followed by nuclear energy power plants ultimately utilising high marginal cost sources such as coal or gas should it be demanded. Therefore, the constantly changing day-ahead market prices are determined by the highest marginal costs sold (Baran, 2014). As shown in the scenario of Fig. 3, energy from solar, wind, biomass, nuclear and some gas has been demanded to result in the market price (p*). The consequence of this being, that when electrical quantities need to be generated with very short notice, due to the shutdown of some power plants, high variable cost power plants such as coal or gas, need to be utilised to meet demand. The so-called "merit order effect"
thus leads to an increase in wholesale market prices in the event of a very short-term shutdown of the nuclear power plants (ibid.). On the demand side, it is assumed that this is highly inelastic in the short-term nature of the day-ahead market. Sensfuß, Ragwitz and Genoese (2007) argue that “the electricity generated by renewable energy sources has to be
bought by supply companies in advance, meaning that the remaining demanded load that has to be purchased on the electricity markets is reduced correspondingly”. Nevertheless, it is
worth noting that Nestle (2012) argues that these models are based on the assumption that the market operated under perfect competition. Meaning, amongst other things, a homogenous good, perfect information, and a large number of buyers and seller. However, he argues that this is far from being a reality in Germany because the ‘Big Four' (EnBW AG, E.ON AG,
Fig. 3 - Shows the marginal cost of various electricity sources in its merit order. The red line is, therefore, a representation of the market supply curve. While the green line indicates the demand curve on any given day. For simplicity and data availability reasons these were grouped according to their energy source. Source: Own illustration based on data from
RWE AG, and Vattenfall Europe AG) form a de facto oligopoly and are, to some degree, able to influence the market price for electricity according to their preferences. This is a situation not only in Germany but several other electricity markets, as, for instance, the USA (Oettinger, 2010).
Having defined how price formation occurs on the wholesale market, it is worth noting that this is significantly different to the prices faced by end consumers in the retail market. The wholesale market functions mostly like an entirely free market. The retail market price is formed mainly as a result of fees and duties required by the various parties in the supply chain (Baran, 2014). According to Baran (2014), the retail electricity price is composed of the following segments:
Fig. 4 - Showing the composition of the retail electricity price. Own illustration based on Baran (2014)
While Fig. 4 clearly shows that the electricity generation process accounts for a significant proportion of the prices experienced by the end consumers two-thirds, however, are a result of value added costs mostly through taxes. In reality, this means, that while wholesale prices may fluctuate, retail prices can remain unchanged under certain circumstances. Baran (2014) concretely suggests that this results in “a mechanism, which works similarly to a cushion,
which passes on a given wholesale market price increase only to a lesser extent to the customers". For this reason, this paper will continue to focus on the price formation
mechanisms of the wholesale market, as this will provide a better indication of the real impact of phasing out nuclear power.
The demand side of the electricity market is the crucial other mechanism in price formation. Generally, the demand for electricity tends to be considered as relatively inelastic, meaning that a relatively significant change in prices will result in a proportionally smaller change in quantity demanded (ceteris paribus). Accurately determining the shape of the demand curve
17 is practically impossible for a commodity like electrical energy (Strbac & Kirschen, 2004). Two significant socioeconomic factors have been associated with the low elasticity of demand for electricity: Firstly, for industrial users, the cost of electricity makes up only a minimal portion of the total cost of production, while for households, it only makes up a relatively small proportion of disposable incomes. Similarly, electricity is indispensable for commercial production chains and most households in industrialised countries alike. Thus, industrial consumers will not adjust their production to avoid a relatively small increase in their electricity costs. Particularly, in the short run, savings from electricity may be offset by the loss of revenue. Similarly, residential consumers will be unlikely to reduce their comfort and convenience to reduce their electricity bill minimally. Secondly, since its discovery electricity has been promoted as a product that is readily available and convenient. This is ingrained in the culture. Few individuals will conduct a cost/benefit analysis when the light is turned on, or a meal is cooked on an electric stove (ibid. P.74). This property has also been found to be the source of various market failures. Notably, this is the result of inherent separation between wholesale and retail markets (Elberg, Growitsch, Höffler, & Richter, 2013; Cramton & Ockenfels, 2012). Joskow (2006) found that as consumers continue to face pre-defined average prices through standard metering and not smart metering, which is a time-of-use metering structure, which measures consumers real electricity purchases per hour. This inherently hinders any coupling to the real-time spot markets, making incentives to reduce demand in times of very limited supply impossible. Cramton, Ockenfels, & Stoft (2013) concur with these findings suggesting that consumer unfamiliarity with real-time prices hinders rational behaviour reactions, thus, resulting in a highly price-inelastic demand. Having now illustrated the basic market principles of the electricity market and confined the scope of this to the wholesale market, the following section will provide an overview of the related literature.
1.5 Literature Review
The aim the following subsection will be to consider other related findings to the nuclear phase-out and the Energiewende to ultimately situate this research in the related literature. However, to do this effectively, it is crucial to keep the main policy objectives in mind, whereby it is essential that these consist of both short-term and medium/long-term measures. The short-term: turning off eight nuclear power plants and replacing the lost capacity with fossil fuels and imports. In the medium-, and long-term: phasing-out the remaining nine nuclear power stations by 2022 and replacing nuclear energy capacity and conventional
capacity with RES for completely environmentally friendly electricity production. Essentially, this boils down to two areas of interest, firstly the status of nuclear electricity production, and the reduction thereof, and the impact of increasing electricity from RES on electricity price. Therefore, the literature on these two topics will be primarily evaluated.
Firstly, the eminence of nuclear electricity production has traditionally been viewed as the silver bullet for addressing the growing energy challenges (Pacala & Socolow, 2004; Richels, Rutherford, Blanford, & Clarke, 2007). However, the prevalent controversies related to the associated risks have curbed projections of its expansion (Kessides, 2010). In the context of the German nuclear phase-out, for instance, Matthes, Harthan, & Loreck, (2011a & 2011b) argued that the reduced capacity caused by the moratorium could be absorbed by available generating reserves. However, it also found that reduced capacity would largely be based by the already stored gas reserves. These findings were confirmed by the (Umweltbundesamt, 2011).
A similar projection by (ENTSO-E, 2011), the European Network of Transmission System Operators representing 43 electricity transmission system operators from 36 countries across Europe, showed concerns regarding the existing gas reserves as compensating electricity sources during the winter of 2011. It argued that during this season France relies on electricity imports from Germany to meet its electricity demand. Additionally, considering that German gas reserves, which can be considered a stored form of electricity because they can be deployed at any given moment, should it be necessary, were calculated to be insufficient to meet Germany’s demand for electricity, which was anticipated to cause an increase in electricity price.
Regardless, additional studies, for instance by Kunz et al. (2011), focussed on the security of supply in the transmission system after the nuclear phase-out. By simulating a generic winter day following the moratorium and a complete phase with reduced nuclear capacity being compensated by coal- and gas-fired power plants found that during peak hours, imports are needed to satisfy demand. Under the assumptions by Kunz et al. this will, however, not be necessary for the long-term as RES is installed. As a result, Kunz et al. concluded that peak power prices would rise by 5% on average.
In essence, research on nuclear phase-out is minimal and mainly focusses on the technologies that are due to replace nuclear energy rather than the reduced nuclear capacity itself. Consequently, significant research has gone into studying the impact of renewables, which are due to gain heightened priority in the medium/long term.
The general notion regarding the impact of RES on electricity prices is that prices would decrease. Some authors (Bode & Groscurth, 2007; Sensfuß, Ragwitz, & Genoese, 2007), have observed explicitly that increasing RES, in particular, wind power, is negatively correlated with electricity spot prices. More specifically, for instance, Cludius, Hermann, Matthes, & Graichen (2014) estimated that the effect of wind and photovoltaic electricity generation in Germany reduced the electricity price on the day-ahead market by 1.1–1.3 €/MWh between 2008 and 2012. Similarly, (Sensfuß, Ragwitz, & Genoese, 2007) found that in 2006, the price effect resulting from RES was more significant than the subsidies provided for RES as a result of the Renewable Energy Act, resulting in a net decrease in electricity prices. This has broadly been the prevalent consensus regarding RES. The underlying assumptions are that electricity in Germany will mainly be produced by wind generators, which has been found to in high-wind scenarios, given the merit-order curve result in a decrease in wholesale electricity prices (Würzburg, Labandeira, & Linares, 2013). These studies have, however, also found that wind energy has increased price volatility on both the day-ahead and intra-day. This has increased price risk due to the lack of storability of electricity (Paraschiv, Erni, & Pietsch, 2014)
Moreover, while consumers benefit from the increase in RES, conventional power plants, and their operators are the losers of this structural shift. Hence, their profitability arguably decreased as a result of lower electricity prices on the spot market, as these have higher operating costs and operate at a higher marginal cost (Strbac & Kirschen, 2004, p. 174). Arguably, this variability between electricity sources causes higher market volatility, particularly during times of peak demand (Henriot & Glachant, 2013). Additionally, Milstein & Tishler (2009) showed that electricity producers responses to demand fluctuations are reduced investment. These opt to build the new capacity for conventional power-plants, which are more demand responsive. These remain underused for long periods to induce an electricity price spike and are then utilised to benefit from larger profit margins during peak demand. However, the possible long-term consequence of the net decrease in electricity prices has been expected to result in the closure of conventional power plants given their unprofitability in the long run (Sensfuß, Ragwitz, & Genoese, 2007).
More generally, the wholesale electricity market also suffers from a “missing money problem” (Batlle & Rodilla, 2012), which refers to prices being too low to provide sufficient incentives for investment in new power plants. Cramton et al. (2013), hence argue that wholesale markets fail to generate prices that reflect the opportunity cost consumers place on electricity consumption in times of fully utilised capacity. As consumers are unable to
identify situations of scarcity, the Value of Lost Load (VoLL – defined by Tietjen (2012) as the price consumers would be willing to pay to avoid blackouts) cannot influence prices adequately. The result is that merit-order prices with an inelastic demand are too low to cover the cost of production for all power plants effectively.
A further concern of the literature has been the reliability of RES on electricity markets. Because of their intermittent and weather dependent nature, a significant, and at least minimum critical capacity of conventional power plants is nevertheless required to secure uninterrupted electricity supply (Henriot & Glachant, 2013; Smith, Milligan, Meo, & Parsons, 2007). In the long term, the near-zero marginal cost of RES displaces conventional power plants, requiring additional attention to be placed on market design. Hence, Coester et al. (2018) propose that electricity markets should be designed “based on the idea of a
complex of conventional power plants that are optimally adapted to residual load” defined as
the difference between actual power demand and the feed-in of renewables and base load generators as this would be more cost-efficient despite leading to higher average electricity price (see also Wolf-Peter, 2014).
Evidently, research has thus far focussed primarily on the very immediate consequence of turning off nuclear power plants and in the broader energy mix without appropriately concerning themselves with the underlying mechanisms that impact on wholesale electricity prices. Furthermore, the evidence on RES has also tried to be mostly prospective and model-based, which has typically focussed on specific consequences of increased use of RES on certain aspects of the electricity generation sector. Additionally, a significant amount of studies focussing on the impact of RES on energy prices have predated the decision to phase-out nuclear energy, thereby being unable to consider a structurally crucial aspect. Similarly, the period often considered in these studies often actually predates the Energiewende or examines a period shortly after the policy decision. In view of this paper, this period is often too short after the policy to see the real effect of the measures introduced by the Energiewende.
Thus, this paper will aim to take aim to provide a holistic perspective of the short and long-term consequences of the nuclear phase-out from 2011 on wholesale electricity prices. The fundamentally distinctive feature of this paper will be that it considers the period from 2010 to the end of 2017 and will look not only at the impact of the nuclear phase-out in 2011 but will also retrospectively evaluate the effectiveness of policies to compensate this vital part of electricity generation in Germany. Thereby this section has been fundamental in detailing how the sudden German policy decision was made, how the electricity market
21 functions and prices are formed. Ultimately, it has also introduced the relevant related literature, which will provide the building blocks for the methodology and research design which will be discussed subsequently.
Section 2: Summary and Hypotheses
Having identified the area of interest and focus of these papers as the impact of the "Energiewende" on electricity spot market prices, the subsequent section will detail firstly. The summarise the relevant theoretical concepts, which have been previously described to provide the appropriate framework to develop the corresponding hypotheses. Ultimately, the operationalisation and the according to statistical methods will be described.
Considering that the output, or dependent variable, of this paper, will be the price of electricity on the wholesale day-ahead market. The leading theory, which will be applied, will be that of the merit order effect. This, primarily, is considered the primary mechanism of price formation is dependent on the supply curve, while the demand function is largely presumed independent of supply and highly inelastic. The supply curve is subsequently the sequential listing of all electricity producing units in order of lowest to highest marginal cost. The units of electricity are then sold in this order until the last unit demanded is satisfied. Building on the mechanisms described above, amongst others, by Sensfuß, Ragwitz and Genoese (2007) this price formation in the day ahead market would be determined as shown below using the proportion of electricity sources in Germany in 2011 as reported by (Groebel, 2013) and marginal costs by (BEIS, 2016). Displayed in Fig.5
Fig. 5- Showing the supply of electricity in Germany in 2011 using data from Groebel (2013) and BEIS (2016) Own illustration.
23 Having acknowledged this as the most relevant theory of price formation, it is also crucial to note that as seen in the timeline of events described earlier, that the shutdown of the eight power plants was not anticipated given that Fukushima was a result of a natural disaster and the decision to turn away from nuclear power was an unprecedented turning point.
Consequently, one can develop the following hypotheses for the short-term effects of the
Energiewende, in relation to the policy objectives described earlier in this section:
1. The moratorium, shutting down of eight nuclear power plants increased electricity prices because more expensive fossil fuel generators were used to produce electricity
In essence, this would be represented by a leftward shift of the merit order or supply curve. As shown in Fig. 6, when nuclear capacity is removed, a low marginal cost segment is also removed from the supply curve. When this happens more expensive fossil fuels are used as a substitute, and a new supply curve is generated to the left. This also results in an increase in price from P* to P1 and, ceteris paribus. Also, a decrease in quantity demanded from Q* to Q1. However, the demand effect is exaggerated, in this representation and may not even be existent given its inelasticity.
P1
Q*
Q 1 P*
Fig. 6- Showing the hypothetical effect on the supply of electricity in Germany in 2011. Own illustration.
In the long term, the Energiewende would have substantially different implications. This paper hypothesises that:
2. The fraction of renewables increases and the fraction of fossil fuels decrease after the Energiewende is introduced
a. Consequently, causing lower electricity prices and; b. Making these more volatile.
In essence, hypothesis number 2 aims to confirm and estimate the impact of Germany’s RES objective, while hypothesis 2a and 2b aim to identify the impact this has had on electricity prices should hypothesis 2 be confirmed. In essence, however, these two hypotheses suggest that the Energiewende increased the proportion of RES in the electricity generation,
Meaning more cheap electricity is entering the market. This, according to the merit order theory, is the equivalent of a rightward shift of the supply curve to lower prices, as shown in Fig. 7.
Because the latter part of the merit order curve essentially extends for more quantity of electricity as the RES production is increased, high marginal cost fossil fuels are less frequently required lowering the prices from P* to P1. While hypothesis 2a focusses purely
P
Q1 Q* P1
Solar Wind Hydro Biomass Nuclear Gas Hard Coal Brown Coal
Fig. 7 - Showing the impact of reduced nuclear electricity generation capacity. Own illustration
25 on price, hypothesis 2b focusses on the volatility of these. Because RES, in particular, wind and solar electricity generation are particularly dependent on weather conditions, it is likely that should hypotheses 2 and 2a be valid, so will hypothesis 2b. This will also provide an indication of how more or less volatile prices have become as a result of a more significant fraction of RES.
The distinction between ‘short' and ‘long' term is necessary as in short, the aim will be to analyse and crucially isolate the impact of the immediate and surprising decision to turn off a third of Germany's nuclear energy generation capacity. Thereby, a maximum of one year before and after the moratorium will be considered. Similarly, the long-term distinction is necessary as the growth of RES is likely to require a significant amount of time to develop. Hence the long-term hypotheses will cover a time period between 2011 to 2017, given that the policy was introduced in summer 2011, and 2017 is the most recent data that is available.
Section 3: Methodology and data
Having detailed the relevant hypothesis, this section will build on these by providing an introduction into the research design and methodology of this paper, which will detail the types of data used to uncover the causal links described by the hypothesis. Subsequently, this will be supplemented by a description of how each individual hypothesis will be tested. Lastly, to set the stage for the analysis, the complete dataset will be introduced using some descriptive statistics.
3.1 Methodology
Specifically, this paper will aim to retrospectively observe, using large-n daily and hourly data, the causal relationships between various types of electricity generation and prices (Toshkov, 2016, p. 200). The period studied will run from 2011 – 2017, to capture the effects of the Energiewende. The main outcome variable of this study will be the electricity prices on the day-ahead market, while a variety of factors will be used as treatment variables relevant to each hypothesis, and will include a particular focus on nuclear and renewable energy, as the main components of the Energiewende. Similarly, the other sources of electricity and demand will be considered and conditioned for in each tested hypothesis to find, within the means of possible, the true relationship of each source of electricity generation and electricity prices (ibid. 223). Thus, the following variables have been on a daily and hourly basis, whereby the subscript d, denotes daily observations and the subscript h hourly observations:
27
Table 1 - Showing the variables and their specifications used in this paper
Variable Unit of Measurement Categorisation Abbreviation
Average Day-Ahead spot prices €/Megawatt hour – Daily average/hourly value Prices PriceD/h
Total Load (consumption) Terra Watt – daily total & Terra Watt (Tw) – daily total & Mega Watt – Hourly total
Demand LoadD/h
Net imports Terra Watt (Tw) – daily total & Mega Watt – Hourly total
Exports - Imports
ImpExpD/h
Electricity generated from Hydroelectric production
Terra Watt (Tw) – daily total & Mega Watt – Hourly total
RES HydroD/h
Electricity generated from Uranium
Terra Watt (Tw) – daily total & Mega Watt – Hourly total
Nuclear NuclearD/h
Electricity generated from
Brown Coal Terra Watt (Tw) – daily total & Mega Watt – Hourly total Fossil Fuel BrownD/h Electricity generated from Hard
Coal
Terra Watt (Tw) – daily total & Mega Watt – Hourly total
Fossil Fuel HardD/h
Electricity generated from
Natural Gas Terra Watt (Tw) – daily total & Mega Watt – Hourly total Fossil Fuel GasD/h Electricity generated from
Wind Terra Watt (Tw) – daily total & Mega Watt – Hourly total RES WindD/h Electricity generated from
Photovoltaics Terra Watt (Tw) – daily total & Mega Watt – Hourly total RES SolarD/h Electricity generated from RES The sum of all electricity sources categorised as
RES
RESD/h
Electricity generated from
Fossil Fuels The sum of all electricity sources categorised as Fossil Fuel FossilfuelD/h
Thus the following econometric strategies will be employed to assess the respective hypotheses:
1. Following the moratorium of the closure of eight nuclear power plants electricity prices increased because more expensive fossil fuel generators were used to produce electricity, indicated by an increase in correlation coefficients of fossil fuels after the closure
To find the effect of turning off eight nuclear power plants on prices, a regression discontinuity (RD) approach seems appropriate. RD was first devised by Thistlethwaite and Campbell (1960) to estimate treatment effects using non-experimental setting, observing the treatment using a known threshold along an observed “running” variable. Lee and Lemieux (2010) have developed this approach more recently suggesting that it “requires seemingly
mild assumptions compared to those needed for other non-experimental approaches” and
that the RD is not ‘just another' strategy, because causal inferences from RD designs are potentially more credible than those from typical ‘natural experiment' strategies. According to them, this is possible because "randomised variation is a consequence of agents' inability
this strategy is the only viable method if treatment is unanticipated. They continue to compare RD to a "local randomised experiment" as the treatment occurs only if the observed variable X > c (cut-off), the subject is treated, and if X < c, the treatment does not occur (Harvey, 2013). Additionally, all other facts are required to develop “smoothly” to account for the unobserved counterfactual situation (ibid). This intuition is best shown visually as done by Lee and Lemieux (ibid):
Fig. 8 - The illustration showing the representation of an RDD by Lee and Lemieux (2010)
About this they suggest that if all factors, other than the treatment, are moving "smoothly" concerning the assignment, then B′ could be estimated as the value of the observed variable (Y) of an individual receiving the treatment at a different value of the running variable. Moreover, hence receiving the treatment). Similarly, A′′ would be an estimation for that same value of the running variable in a counterfactual state where there is no treatment. Consequently, in Fig. 8 the causal estimate would be the difference between B′ − A′′. This can be computed as:
! = #$− &$$= lim
+→-.[ 01 = 2 + 4] − lim+←-.[ 01 = 2 + 4]
This is the “average treatment effect” at the cut-off (c). This interpretation is possible because of the continuity of the underlying functions to the left and to the right of c.
29 Pricei = α + βi Time + ρi Moratorium + γI Covariates + εi
Where Pricei is the price on any given day of the day-ahead spot market. βi the coefficient of
the running variable, time and ρi the treatment effect using a binary dummy variable for
whether values are collected before (0) or after (1) the issuing of the moratorium. γi demotes the covariates which will be included, while εi is the error term.
Thus, in summary, there are a series of assumptions that need to hold to apply the RD approach according to (Nichols, 2009) these are:
1. Treatment is based on an observable running variable
This condition is satisfied in case of the Energiewende by the time of the policy intervention shutting off eight power plants. Making, the running variable: time.
2. There is a discontinuity at the cut-off of the running variable in the level of the outcome variable.
The cut-off will be the day of the policy intervention of the 14th March 2011. Hence the 15th
March 2011 will be the first day that is considered “treated”.
3. It is not possible to manipulate the assignment variable to affect whether or not observations fall on one side of the cut-off
Besides this being rationally impossible as it is a simple “sharp” decision, this is completely impossible given that the policy to turn off the power plants was unprecedented and unanticipated.
4. Related variables are smooth functions of the assignment variable conditional on treatment. Meaning the only reason the outcome variable should jump at the cut-off is due to the discontinuity in the level of treatment.
While the previous conditions are straightforward, this is probably the most contentious condition. Mainly, because the moratorium and the nature of the electricity markets is instantaneous market mechanism require a reaction in other sources, particularly that of the fossil fuels, which are related subjects of observation in this paper. However, practically, an immediate increase in production from other sources is not possible. Meaning that, while the increased output from other sources is expected, these are unlikely to occur exactly at the same time as there will be an inherent lag in reaction. Similarly, it is also highly unlikely that the nuclear disaster itself caused prices to increase in Germany, as there are no transmission capacities between the two jurisdictions. Nevertheless, the price of liquified natural gas did increase, as trade routes were rerouted towards Japan to compensate for the lost electricity generation in Japan (Crepps, 2011). While this is likely to also translate to German electricity prices, this is likely to be grasped electricity produced by gas as a proxy. In
