Electricity economics

The electricity industry is undergoing the deepest transformation of its history, driven by decarbonisation, decentralisation and digitalisation: New technologies from solar photovoltaics to batteries and the Internet of things reshape how electricity is produced, transported, traded and consumed. Wind and solar energy are at the center of change. Understanding this revolution requires understanding the deep links between electricity systems and technologies, economics and markets, as well as regulation and policy. Good energy policy requires a sound understanding of the fundamental physics and economics as well as the institutional and legal framework that shape power systems and markets. The goal of this course is to equip students with this knowledge. The focus of this class is on economics and markets; to a lesser degree it covers technology.

The centerpiece of this class is the economics of wind and solar energy. After a crash course in power plant technology and electricity systems engineering, we will discuss the drivers of cost of electricity, with a particular focus on renewable energy and the cost revolution that has made wind and solar energy cost-competitive with fossil fuels. We will then develop tools to assess the economic value of electricity, based on a rigorous assessment of electricity markets. Students will learn methods to derive an optimal long-term electricity generation mix and to evaluate the economics of wind and solar energy. A particular focus will be the “market value” of wind and solar energy (average revenue). We will see why the value of renewable electricity drops as its share in total electricity supply increases and discuss the (unsettling) implications of this outcome for the long-term economics of renewables and learn what can be done to mitigate the value drop. Apart from the economics of electricity generation, the course will discuss the fundamental principles of electricity grids and options to integrate renewable energy into existing power systems (electricity storage, network expansion, flexible power plants), with a particular focus on batteries and the rise of “prosumers”. We will also discuss the regulation of network operators and the design of retail tariffs, examining the incentives implied in tariff design choices. These are the relevant issues not only in Germany’s Energiewende, but also in upcoming EU legislation and a number of emerging economies.