value that varies for different world regions. World regions are grouped in three categories, same as in the case of regulation: Group 1 (regions 1-38), with a maximum reduction of 50%; group 2 (regions 41, 44, 48 and 49), with a maximum reduction of 45%; and group 3 (all the other regions), with a maximum reduction of 40%, in comparison with BAU. The electricity demand reductions are assumed to start in 2016 (0% reduction in 2015), and increase linearly until 2050. Figure 5.4 shows how electricity demand changes between BAU and DEC scenarios.
Figure 5.4 Global electricity demand by scenario. The blue, green and red lines represent the global electricity demand for BAU, MID and DEC scenarios, respectively. Electricity demand is assumed to gradually decrease in comparison with the BAU scenario, proportionally to the decarbonisation intensity. The extent of reduction in 2050 in comparison with BAU changes among regions: 50%, 45% and 40% for groups 1, 2 and 3, respectively. The reduction increases linearly with time, starting in 2016.
5.3
Policy instruments beyond modelling
The global character of the FTT:Power modelling approach requires a high level of aggrega- tion. While some regions represent countries, other regions represent large set of countries, such as Rest of Latin America (region 47), Asean (region 51) and Rest of the World (region 53).12 Consequently, it is impractical to define policies at the instrument level in the model. Instead, a stylised approach is used, in which policies are defined in terms of their impact on
the LCOE. As explained in section 5.2, the only policy instrument that is partially defined in the model is the feed-in-tariff, which is assumed to be a premium tariff scheme, with a variable premium proportional to the difference between the price and the levelised cost of electricity. In the case of carbon pricing, subsidies, regulation and electricity demand, no specification of the policy instrument is required.
In reality, however, the type of instrument used for limiting or promoting the deployment of particular types of technology matters. On the one hand, regulatory instruments such as energy efficiency standards and renewable portfolio standards, directly limit GHG emissions by specifying technologies or their performance, as well as promoting diffusion and inno- vation of emerging technologies (IPCC, 2014b, p. 1168). On the other hand, market based mechanisms rely on prices to encourage investment on low-carbon technologies (such as in the case of subsidies and feed-in-tariffs) or discourage investment on carbon intensive technologies (such as in the case of carbon taxes and cap-and-trade systems) (IPCC, 2014b, p. 1155). In all these cases, the specific regional requirements, as well as the local politico-legal landscape, play an important role in the choice as well as the implementation of the policy instruments. A very good example is the case of nuclear energy regulation in Germany. In 2002, the Nuclear Phase-Out Act13 was amended to include a ban on new nuclear power plants. Due to the politico-legal nature of the policy instrument (legislation proposed by an SPD/Green coalition), it is not surprising that in 2010 the policy was subject to further changes by the “Energy concept 2050” (German Federal Government, 2010), presented by the Conservative/Liberal coalition, granting life extensions to several nuclear power plants. Only a few months after the changes were approved, and due to the Fukushima Daiichi nuclear disaster, a new amendment to the Atomic Energy Act was passed in parliament, setting a date for the final shutdown of all the remaining nuclear power plants in Germany (Mann, 2014).
Modelling policy instruments in FTT:Power requires to balance a global representation of the power sector with regionally relevant policy scenarios. On the one hand, the large variability among politico-legal regimes in different regions renders impractical the creation of realistic representations of policy instruments in the model. On the other hand, the use of stylised policies in the model may hinder the relevance of the instruments in the policy analysis. Therefore, in order to provide a clearer picture of what the policy portfolio analysed in this thesis represents in the real world, a translation table is presented below.
13Act on the Peaceful Utilisation of Atomic Energy and the Protection Against its Hazards (Atomic Energy
Act), of 23 December 1959 (BGBl. I, p. 814), as amended and promulgated on 15 July 1985 (BGBl. I, p. 1565), and amended by the Act of 22 April 2002 (BGBl. I, p. 1351) https://goo.gl/xFOigV
5.3 Polic y instruments be yond modelling 85
Policy name FTT:Power implementation Examples of policy instruments in reality Carbon Price. The price of carbon is accounted in the model
as the carbon cost component of the Levelised Cost of Electricity (see equation 4.6).
Carbon pricing can include international, national or supranational cap-and-trade systems, carbon taxation or any hybrid combination of those. In order to match the type of instrument used in FTT:Power, the equiv- alent instrument in reality would have to be applied to the entire electricity sector, with the value of the al- lowances (or the tax) being proportional to the carbon content of the electricity being generated.
Subsidies. Subsidies are defined as a percentage of the investment cost, granted by the regulator to investors, to decrease the LCOE of specific technologies.
Subsidies can be implemented in several ways, includ- ing grants, favourable loans or fiscal incentives such as reduced taxes, accelerated depreciation, tax credits and tax deductions for investors. In order to be equiva- lent to the FTT:Power case, the subsidy instrument in reality would have to be granted at the early stage of construction of the power plant (investment phase), for an amount proportional to the total investment cost.
Energy Demand. Energy demand is defined exogenously in the model, as the amount of energy per year con- sumed at every region.
In reality, electricity demand reduction policies can be implemented through several mechanisms, including the adoption of energy efficiency standards and direct regulation on energy use. One possible case of real policy instrument could be the use of obligatory ef- ficiency standards for appliances installed in houses, offices and commercial building.
Ener
gy
Polic
y
Scenarios
Policy name FTT:Power implementation Examples of policy instruments in reality Feed-in-Tariffs. FiTs are defined as a percentage of the retail
price of electricity, and granted to investors as the difference between the LCOE of a specific technology, and the retail price of electricity, times a premium
Real feed-in-tariff instruments can be divided in two main groups: fixed tariff and premium tariff. In the former, generators receive a fixed remuneration per unit of energy produced, independently of the market price of electricity. In the latter, generators receive a premium per unit of energy produced proportional to the price of electricity, which can be either fixed or variable. In the case of FTT:Power, it is assumed that the FiT instrument corresponds to a premium tariff with a variable premium.
Regulation. In FTT:Power regulation policies control the construction of new units of particular tech- nologies, an can be used to phase out particu- lar types of systems.
In reality, the limitation in the construction of new coal and gas power stations can be accomplished with different types of regulatory instruments. For instance, it could be through emission standards, portfolio stan- dards, authorisation requirements, direct legislation specifying limits and bans, and liability for environ- mental harm, among others.