There will be no more baseload power in Germany in 2030 and possibly not anywhere in Europe. There is no business case for new nuclear power in Europe. Renewables, not thermal power, should get capacity payments – and be responsible for balancing. These are some of the explosive messages from a new report from the influential German think tank Agora Energiewende, which represents government, industry and NGO’s. In an exclusive interview with Energy Post, Dimitri Pescia, Senior Associate of Agora Energiewende, explains the thinking behind the new research. “The really important question today”, he says, “is how to finance renewables in the long run. They may never be able to finance themselves in the current market design.”

The EU’s 27% renewables by 2030 target equates to about 50% renewables in the power sector. Variable wind and photovoltaic (PV) power will almost certainly contribute to more than half of that. And in 2014, almost three-quarters of all European generation investments went to wind and PV. So begins the German think tank Agora Energiewende’s newest report, out on 23 June, about the European power system in 2030. Its point? Wind and solar power are transforming the European power sector, and regional cooperation and power system integration are essential to help meet the flexibility challenge this presents.

The report focuses on the Pentalateral Energy Forum region (i.e. the Netherlands, Germany, France, Luxembourg, Belgium, Austria and Switzerland). Commissioned by Agora Energiewende, the research was executed by the Fraunhofer Institute for Wind Energy and Energy System Technology (IWES). Agora Energiewende, jointly sponsored by the European Climate Foundation and Mercator Foundation, was created in 2012 to answer the question ‘how do we manage the clean energy transition?’ (See Box at the end for more information.)

On the back of its new report, to be published this week – and indeed an Energy Post event in Brussels on the same subject during EU Sustainable Energy Week on 17 June – we spoke to Dimitri Pescia, Senior Associate at Agora Energiewende, about the future of 1) renewables and 2) Europe’s energy system. Pescia previously worked on economic affairs for the French Embassy in Berlin and prior to that as a scientific policy officer at the French Ministry for Foreign Affairs. The immediate priority for Europe – and what he expects the European Commission to address in its energy market reform paper in July – is how to adapt the current market to renewables.

“EDF says the same: in 2030 you have no more baseload in Europe”

But beyond that, he said, the big question is how to finance renewables. Pescia proposes capacity payments (but not for thermal power). There is no business case for new nuclear plants in Europe thanks to the upcoming end of baseload in 2030. Renewables should take on balancing responsibilities. He explains how Germany is implementing a capacity reserve to tackle its climate and energy security problems with one masterly stroke.

Q: How big an issue is the integration of renewables into the electricity system today?

A: In Germany, we already have about 30% renewables in the mix – including 15% variable renewables – so the need for flexibility is already an issue for how utilities manage the residual i.e. thermal fleet. This is challenging but manageable. One good example was the eclipse two months ago – the German power system lost about 12 GW of PV in one hour and had to ramp up again 15 GW. In Denmark and Spain you have the same kind of issue due to high shares of PV or wind power.

If you look long term, out to 2030, we see that PV and wind really drive the power sector’s development in Europe. This is technically manageable but it needs an adaptation of the residual fleet. A lot of other flexibility options can be used, in particular through the integration of different European power systems and the benefits of a smoothing effect between weather patterns in different countries.

“The more you put renewables in the system the more they will lower average prices in the wholesale market. By nature they may never be able to finance themselves”

Of course, we know that grid infrastructure is necessary to make use of this smoothing effect. The grid is already quite strong in Europe compared to other regions of the world. Europe already has quite an integrated market and we make use of this flexibility potential. But in future we will need more grids.

Q: What can be done to mitigate the effects of large-scale renewables integration today?

A: The first step should be to use the market as the best dispatch tool possible, with thermal generation, demand-side response and storage being able to react to the variability of renewables. As I said, grid development is also key. Punctual curtailment of renewables, of say 2-3% energy a year, could also be used to decrease the overall system cost. This would increase production costs of renewables by 2-3%, but allow savings of up to 20% on grid costs.

Q: What’s the potential of demand side management?

A: It’s important but you do not really have the market incentive to do it today. And the regulation of the power sector in Germany means the distributor does not necessarily have an incentive to change the consumption pattern of its consumers, adapting it to better fit the needs of the overall system. But the technical potential exists. All utilities are wondering how to capture value at the “distributed edge”. But new business models are still to be developed.

Q: Which power plants do not fit into the future market?

A: The plants that fit are the ones that can adjust their production to the variable generation of renewables. You need high ramping rates for peaking purposes. Gas or hydro power plants are the most reactive and efficient. Inflexible power plants like coal, especially lignite, or nuclear are not the most adapted for this.

Our new study shows nevertheless that integrating 40% renewables in France (today at about 18%) is possible, given the flexibility of its important hydropower assets. Nuclear power can also technically contribute in part to flexibility needs, given its load-following capabilities (on a 1-hour timescale). The nuclear fleet will nevertheless need to be downsized and its operation re-optimized.

Q: How flexible are nuclear and coal compared to gas?

A: Less so. We often have the impression that nuclear is absolutely not flexible. But it’s actually a myth. If you look more closely, especially in a country like France, with a high share of nuclear energy, the nuclear power plants show some flexibility. I would say a nuclear power plant today is not less flexible than a coal power plant. So renewables integration in France can, to a certain extent, use the flexibility of nuclear.

“If a renewable generator is not balanced, it should have to pay the same penalty as normal generators”

But nuclear and coal power plants have high capital costs so these technologies have an economic incentive to run as much as they can. Flexible coal and nuclear are technical possibilities but may not be that interesting economically. Gas power plants on the contrary have lower capital cost and high fuel costs so they can stay in the money, even if they run fewer hours a year.

Q: So coal and nuclear will suffer in the long term.

A: In 2030 you have no more baseload in Germany. Because renewables are so integrated in the market you have days where your whole load is covered with PV and wind. EDF says the same [in its study, unveiled at last week’s Energy Post event]: in 2030 you have no more baseload in Europe. [The summary of this study can be downloaded here. Editor.] This means there is no business model for new nuclear plants in Europe. With flat or decreasing energy demand and more and more renewables, there is no more business model to build a new nuclear plant knowing it is likely to run less than 5 to 6,000 hours per year. Operators like EDF will invest to prolong the operation of their fleet in Europe. Then, I believe they would have no choice than to gradually phase it out and replace it with renewables. They don’t want to do it too quickly; the quicker this goes, the more money they will lose.

Q: What is the relationship between the debates on renewables support mechanisms and how renewables impact the energy system?

A: I think it’s a bit of a wrong debate. Renewables are dispatched by nature with almost zero marginal cost. They produce whenever there is wind or sun. Some people blame the priority access of renewables through a feed-in system in Europe at the moment but actually in any case they would always benefit from priority since they usually produce when the resource is there. For me the biggest question is how to finance these technologies in the long-term. The more you put renewables in the system the more they will lower average prices in the wholesale market. By nature they may never be able to finance themselves – in the current market design.

This market failure is a theme today in Europe but mostly from the perspective of conventional generators who call for a capacity mechanism. These generators say that their thermal power plants do not run enough, which is actually a sign of overcapacity. I believe the really important question is not so much if we need a capacity mechanism today but how we will finance renewables in the long-run in a system driven by renewable developments.

Q: So what should be in the European Commission’s forthcoming proposals on market design?

A: It should focus first on improving the current energy-only market design. This is the no-regret option. We call for more integrated markets, both regionally (between countries) and on different timescales. Today, the different market segments – day ahead, intra-day, balancing, etc. do not reflect enough the value of flexibility. We can and should work towards a more harmonised design of different market segments. For example, we can make better use of regional balancing over cross-border areas e.g. in the framework of regional initiatives like the Pentalateral Forum.

“I think the market needs to be redesigned completely”

Q: Should market design focus also on bidding products, for example?

A: Yes, that’s also what I mean when I speak about shorter timescales. For example in Germany, you now have a product of 15 minutes in the intra-day market. So players can adjust very quickly. Every 15 minutes you can adjust to the fluctuation of renewables production. In France you have a 30-minute product. It should be reasonable to align products so that every country offers a 15-minute product, for example. You can probably go even lower, but it’s a complex process for the market platform and players to be able to cope with all these transactions, so there is probably a trade-off somewhere.

But when we speak about market integration we have to talk also about renewables generators’ responsibilities. If a renewable generator is not balanced, it should have to pay the same penalty as normal generators. In Germany, the majority of renewables generators sell their electricity directly on the market and are balancing-responsible parties. This is an incentive for better forecasts and stronger use of shorter markets. Renewables generators are very active on the intra-day market in Germany because if they’re not balanced, they may pay high penalties.

Q: What else needs to be in the Commission’s proposals?

A: I believe that the Commission is pretty defensive on the question of capacity remuneration mechanisms. Several member states have already implemented some, most importantly the UK and France, and they have done this with a very national focus. The Commission has started a sector enquiry to check if these conform to EU guidelines. In the market reform proposals, I believe there should be some minimum standards for capacity mechanisms so that if a member state wants to go down this route, at least distortive effects are minimised.

Q: But does all this enable renewables to be financed?

A: It doesn’t. The Commission is pushing the market premium approach, so renewables generators would be remunerated partly on the basis of selling electricity on the market. In my view this is a step but it will never solve the issue that with more and more renewables, the selling price will go down (the so-called “cannibalization effect”) and they will not be able to cover their investments. This is why we call for more long-term thinking on how to finance low-carbon assets with low marginal cost. We may have to think about contracts for difference or some sort of capacity payments for renewables.

“There is a fundamental problem in Europe today: member states have sovereignty of both their energy mix and their security of supply standards”

Q: But we’re still talking about subsidies. Is there no thinking yet about what comes after? How the market might be more radically changed?

A: This is a big issue. I think the market needs to be redesigned completely. Shall we for example use the current market solely for the dispatch component and have a new market for financing? Experts do not agree on this issue. We have put forward an EEG 3.0 reform proposal [the EEG is the German renewables support scheme], where we propose that renewables generators get a capacity payment on top of revenues from selling electricity on the market.

Q: There are two markets then, one based on economics, one on politics. But the one based on politics faces the problem of the EU Treaty, which says every country is entitled to its own energy mix.

A: You’re right, there is a fundamental problem in Europe today: member states have sovereignty of both their energy mix and their security of supply standards. It’s always going to be a limit to further integration. But we should harmonise at least some components, such as the way we want to finance renewables.

Q: Does this ultimately result in one integrated, capacity payment-driven market?

A: This issue is controversial. In Germany, for example, the debate is still ongoing, even though many stakeholders believe we do not need capacity payments to keep thermal plants online. In times when there is no wind or PV (i.e. scarcity), prices will go high enough to cover the fixed costs of generators. If you see the green paper that the government adopted a few months ago on a new market design for Germany, a clear priority is to remove price caps, in order to reflect real scarcity.

Still, our policymakers want a safety net, as they would not cope politically with a black or brown-out. So there is a wish to implement a capacity reserve of several GW.  It is actually an extension of the existing grid reserve, which will then be dispatched not only when there are grid problems, but also if there is a scarcity problem. The reserve is there for extreme cases. It’s a political safety net that should not actually be used. And by putting old coal in it, you could solve a part of the short-term CO2 problem in Germany too.

Q: The Commission has said that binding national targets for renewables do not fit well with a single European market. Instead, cooperation between member states will do the job. Do you believe we will see more of this?

A: I do. We had three regional declarations in the last weeks: from Germany and its electric neighbours, the Pentalateral Energy Forum and the Baltic states. In all three, there is a strong focus on making the internal energy market work better, faster, larger. They are also tackling the issue of mitigating the cross-border effect of capacity mechanisms, trying to reduce the effect of different market designs. It’s probably the best level of cooperation at the moment that you can realistically implement.

Nevertheless, binding targets for renewables at member state level [for 2030] would have been good, as they would have reflected stronger commitments from all member states. At least we have a binding target at EU level, which is crucial for establishing a shared long-term vision.

Agora Energiewende: a think tank created to manage the energy transition

Based in Berlin, Agora Energiewende is a project running from 2012 to 2017 with a budget of €15 million and 19 experts dedicated to making the German – and wider – transition to a clean energy system a success. It was led until January 2014 by Rainer Baake, today State Secretary at the Federal Ministry for Economic Affairs and Energy. His role at Agora has been filled by Patrick Graichen, originally Deputy Director, who was granted leave from the Federal Environment Ministry to join the project. At the heart of Agora is the Agora Council, a multi-stakeholder group that meets regularly under Chatham House rules to discuss what concrete actions are needed to move the Energiewende forward. Council members come from national, regional and EU level politics, labour unions and NGOs, power companies and energy-intensive industries, and the worlds of the grid, renewables and even science. Their debates are based on research by Agora experts which is publicly available. Agora is jointly funded by the European Climate Foundation and Mercator Foundation.

Link to the report: The European Power System in 2030: Flexibility Challenges and Integration Benefits