Wildpoldsried, Germany
The renewable flood is creating havoc in wholesale electricity markets. And this will only get worse, as storage and zero net energy buildings expand, writes Fereidoon Sioshansi, editor of the newsletter EEnergy Informer. According to Sioshansi, the solutions applied today to keep the lights on do not address the fundamental flaws in market design. New solutions are needed. Courtesy EEnergy Informer.
The inexorable growth of renewable generation, pushed by low carbon requirements and mandatory targets such as renewable portfolio standards (RPS) in many parts of the US and pulled by financial subsidies and tax incentives, has resulted in plummeting prices making them increasingly the cheapest source of electricity the world over. Paradoxically, this phenomenal success is now poised to hamper their continued growth, as examined in a lead article, Clean Energy’s Dirty Secrets, in the 25 Feb 2017 issue of The Economist.
As described in the article, the main problem is that the competitive wholesale markets that were introduced in the 1980s and 90s to make sure the lowest cost generation resources were dispatched in the so-called merit order are increasingly breaking down in an age where a growing share of the generation is renewable – that is zero marginal cost. This tends to:
- Lower average wholesale prices throughout the year, as evident by the experience of Germany, for example
- Reduce the number of hours conventional thermal plants are dispatched, eroding their profitability; and
- Reduce or eliminate mid-day peak prices where conventional plants typically made much of their money.
Yet, as everybody acknowledges, these same conventional plants are increasingly needed to serve as backup to variable renewables.
Market operators around the world who are increasingly facing these challenges have mostly resorted to making exceptions to pay certain critical conventional plants to keep them solvent.
Some market operators have introduced formal capacity payment schemes to encourage future investments in conventional generation while others make exceptional or out of merit order payments to existing plants to prevent them from shutting down.
In the US, for example, a couple of states, New York and Illinois, have introduced special provisions to subsidize certain nuclear plants that might otherwise shut down since they do not make sufficient money in fiercely competitive wholesale auctions – it is hard to compete against cheap gas and increasing amounts of zero margin al cost renewables in places where demand is flat or declining.
If increasing numbers of large commercial and industrial customers invest in energy efficiency, distributed self-generation, storage and sophisticated energy management systems, their hitherto exclusive reliance on the grid diminishes
While such exceptionalism has kept the lights on thus far in places like Germany and California, near unanimous agreement is emerging among experts that it is not a cure for fundamental flaws in competitive wholesale markets designed for an era when different cost fossil fuels were competing for dispatch and where renewables were barely a blip on the radar screen. In his latest state of the market report, Joe Bowring, responsible for market monitoring for PJM Interconnection, highlights this – and a number of other issues.
As observed by Malcolm Keay of Oxford Institute for Energy Studies in The Economist article, “The (traditional) utility business model is broken, and markets are too.”
Keay has proposed a scheme where customers must decide in advance if they wish to have a secure supply of electricity at a premium, or if they wish to buy what he calls “as available” electricity when and if it is available at the prevailing price.
Zero net energy
While proposals such as this go a long way to address many of the problems of wholesale electricity markets, even more fundamental re-thinking is needed as the traditional notion of consumers and electricity service are becoming blurred.
Technological innovations are leading to disruptions that question the traditional roles and the rules of the distribution network and the value proposition of service.
For example, if increasing numbers of large commercial and industrial customers invest in energy efficiency, distributed self-generation, storage and sophisticated energy management systems, their hitherto exclusive reliance on the grid diminishes – as illustrated by Apple’s new headquarters, which can virtually manage its own demand. Such zero net energy (ZNE) buildings are expected to become the norm. Starting in 2020 all new residential buildings in California, for example, are expected to meet the ZNE definition, 2030 for new commercial buildings.
The deal is, you buy a Sonnen battery to go with your solar and don’t pay for electricity anymore
The Economist describes an eco-village of 2,600 residents in Wildpoldsried, Germany, which reportedly generates 5 times as much energy as it consumes, making it a clear prosumer, producing more than consuming and feeding the extra generation into the grid and getting paid for it.
California has over 5 GW of distributed rooftop solar, Australia – not a big country population-wise – already has over 1.5 million solar homes, Germany 1.4 million. It is only a matter of time before others follow suit.
Clever start-ups
Add storage, whose costs are expected to take a dip as demand increases, and it is easy to see the emergence of prosumagers – prosumers who have storage. The arrival of storage is likely to lead to unorthodox new business models. One example recently emerged: customers who buy or lease a storage device from Sonnen, a German company, receive free electricity. (See box)
Sonnen: Buy battery, get free electricity
Australia is a sunny place with plenty of open space and an abundance of detached residential homes. With high retail tariffs it already has 1.5 million solar roofs, giving it the highest penetration of residential solar PVs on a per capita basis. Its energy mix, traditionally dependent on cheap and abundant domestic coal, is carbon-heavy, which is another reason why many customers prefer to make their own “juice” from carbon-free sunshine.
This combination of factors has made Australia ripe for experimentation on novel ways not merely to turn consumers into prosumers, but prosumagers, by including distributed storage.
Sonnen, a solar PV and battery maker with considerable experience in its German home market, is reportedly offering free juice to consumers who buy or lease one of its storage devices. If the new offering succeeds, the company promises to disrupt the traditional retail electricity business model.
As reported in Renew Economy, 23 Feb 2017, the new plan, called Sonnen flat, offers free electricity to households using the company’s integrated solar and storage system, “including for any electricity drawn from the grid when the sun goes down and stored energy is used up.”
“In return, Sonnen has access to its customers’ installed battery storage capacity to use as a sort of virtual power plant, to provide grid balancing services to network operators – most of the time, without any discernible impact at the customer’s end.”
According to Sonnen’s Australian head, Chris Parratt, “The deal is, you buy a Sonnen battery to go with your solar and don’t pay for electricity anymore,” adding, “It’s like a mobile phone plan, where the customer purchases the phone up front and gets a plan, if you like. Or, if you use finance, you pay nothing up front, and pay monthly installments instead.”
Pratt said, “That’s the way we see the market going. Eventually your electricity costs will look like a mobile phone plan.”
Renew Economy says the battery storage system will cost in the range of AUS$6,000-25,000 (US$4,500-19,000) installed with 6-9 year payback depending on the size of the battery storage and the solar it is coupled with. The battery storage systems range from 2 to 16 kWh.
The story gets progressively worse for incumbent utilities and/or distribution companies who have traditionally relied on selling lots of kWhs to hapless customers who, until now, had virtually no other options. Developments that promise peer-to-peer trading – when and if it is permitted – and clever intermediaries who can better manage aggregated demand to match variable generation and Bingo! Who needs kWhrs?
Electricity generation (is moving) to the edge of, or off, the grid – (and such notions) are anathema to electricity markets and business models developed for the fossil fuel age
Already clever start-ups are trying to break the bond between the incumbent utilities and their customers by disrupting the traditional business model where customers mostly or exclusively paid for the volume of kWhrs used and little or none for being connected to the network. With the arrival of prosumers and prosumagers, the most valuable component of service will be connectivity to the network and its inherent ability to meet each customer’s variable demand at all times while offering near perfect reliability.
The most salient point of The Economist article is the acknowledgment that “… electricity generation (is moving) to the edge of, or off, the grid – (and such notions) are anathema to electricity markets and business models developed for the fossil fuel age.”
The Economist is spot on by declaring that the action is moving towards the grid’s edge, the intersection of the distribution network and the customer’s premises. A forthcoming book, Innovation and Disruption at the Grid’s Edge, edited by this newsletter’s editor, explores many of the interesting developments taking place at the grid’s edge.
Editor’s Note
This article was first published by EEnergy Informer and is republished here with permission.
Fereidoon Sioshansi is author and editor of many books on technological and policy developments in the utility sector. Hi’s upcoming book Innovation and Dirsuption at the Grid’s Edge, to be published in June 2017.
[This is] a fundamentally flawed diagnosis of the problem. The reduction in average wholesale prices in Germany, for example, has almost nothing to do with the marginal cost of production of renewables and everything to do with a large and growing oversupply of generating capacity – capacity that is categorically NOT needed to “keep the lights on.” The result is that the marginal cost resource is nearly always a very-low-marginal-cost coal plant whether the net demand is high or low. That’s not a problem with market design, it’s a problem with the protection being provided for political reasons for high-carbon, inflexible resources not needed to meet expectations for reliability. Additionally, if prices actually reflected the marginal cost of energy, as they are meant to do in the current market design, they would include the opportunity cost of releasing scarce reserves during hours when the combined demand for energy and reserves exceeds the supply of resources, a situation that occurs far more frequently than is commonly realized. The result would be lower lows and higher highs, in other words more volatility, NOT lower average prices. “Back-up” capacity is nothing more than customary peaking and mid-merit (or “load-following”) capacity that has always been a feature of modern power systems. The difference isn’t that we didn’t need this sort of capacity before, it’s that we need more of it and far less of the inflexible “baseload” capacity that must operate at very high utilization rates to be economic and that has traditionally dominated power generation portfolios. As mid-day peak periods decline, tight market conditions will shift to other periods driven more by the variability of supply than by the variability of demand, but tight market conditions will continue to exist, as long as the owners of generation no longer fit for the purpose of delivering security of supply at the lowest reasonable cost to consumers are allowed – or pushed where necessary – to permanently withdraw that capacity from the market. “Merit order dispatch” has only ever been just partially driven by the marginal production cost of individual units; if one looks at an actual merit order one sees long stretches of very similarly-costed resources interspersed with step changes to the next class of resource, and dispatch within portfolios of similar resources is driven more by locational and other considerations than by strictly comparing one plant’s busbar cost of production to another similar plant’s busbar cost of production. And in any case markets “in the 1980s” were introduced in many cases in circumstances where there was actually quite a lot of zero- or very low cost of production resource in the system – hydro and nuclear. These resources push higher marginal cost resources out on the merit order curve in exactly the same way renewables do today, and at least in the case of nuclear they create their own problems due to their inherent lack of operational flexibility. And again, nuclear plant or hydro plant A has pretty much the same busbar cost of production as nuclear plant or hydro plant B – when demand dips into that segment of the merit order curve the market was designed to provide a perfectly sound means for ordering dispatch – based on locational factors and other considerations beyond simple busbar cost of production that drive the overall cost of meeting the demand for energy and system reserves. These are just a few of the many observations this article fails to recognized in what is a very flawed but far too familiar misdiagnosis of the challenges facing the energy markets.
Good response – agree with most of what you have said. Adding a bit: many/most/all generators sell their portfolio via PPAs/day-ahead/spot – indeed, it is arguable that the big German generators sell more GWh on fixed contracts than via day-ahead/spot etc. the disfunctional market is more to do with over-capacity/hope for better times/massaging politicos (oh please Angie – give me a subsidy – please) etc etc. Pouring fuel on the flames – I see the latest auction results are in for German off-shore projects – oh look EnBW is building a 900MW North Sea wind farm for ZERO subsidy – goodbye coal (& hello gas for back up).
The political reasons for protecting high-carbon, inflexible resources remain quite substantial in Germany. After the planned construction of a 660 MW MIBRAG lignite power plant was cancelled in Saxony-Anhalt in 2015, for instance, the right-wing AfD took over one-quarter of the seats in the parliamentary election that followed a year later.
LEAG has recently decided not to resettle six Lusatian villages formerly intended for mining destruction, opening the question of how these intact hamlets will be sustained in the post-lignite age. Solar and wind farms do not produce sufficient communal revenues, since each turbine is treated as a separate tax entity with a €24.500 annual exemption.
The federal elections in September may be decided in part on the demonstrated ability of the Energiewende to provide local occupational substitutes for labor-intensive lignite mining and power production. Lignite may remain a preferred alternative to renewable energies until more compelling economic alternatives can be developed. Since the AfD is the only German party that disputes manmade global warming, it may win new adherents among voters who share that belief, or who consider any human efforts pointless to arrest the melting of the Arctic.
Very interesting, indeed the challenge of a just transition is central, driving the real underlying problem for the current market design (surplus baseload capacity) and is a problem that changing the market design most certainly will not fix. We have been working alongside Agora to develop and promote just transition policies that should have been built into the Energiewende from the start, since the collateral accumulation of stranded assets was an entirely predictable consequence of that initiative. But to reiterate the point relevant to the original blog post – ascribing the current industry turmoil to a flaw in market design is not only analytically flawed, it’s dangerous. It distracts attention from the actual, glaring cause and it panders to the incumbent industry players whose only interest is in postponing the transition as long as possible.
It would be interesting to learn under what government authority or in whose private interest particular funding is now being dedicated to realizing “just transition policies” in Germany’s mining regions. I was evicted in 2008 under a policy of what could be termed the “just destruction” of a lignite village in Saxony, since that decision was democratically sanctioned by the German Mining Act.
In the future, certain villages such as Mühlrose in Lusatia will be excavated, while others nearby could become model Energiewende communities. It therefore appears essential to determine whether all neighbors deserve equitable treatment, or whether instead personal welfare depends on the geology of one’s property.
Our village contained 40 historically registered buildings, including a 19th century church that was pictured on the website of the International Council on Monuments and Sites. There was no compelling reason for those architectural edifices to be destroyed, unless one subscribes to the belief that miners cannot be retrained to install solar panels and smart meters.
Employment? – German gov’ has failed to get to grips with the energy rennovation of buildings – which is costly in terms of man power – but light in terms of materials – it is also open to interesting financing approaches – none of which the German gov’ (or any other for that matter) is giving much consideration to. Employment in that region could be reasonably easily addressed. As for the AfD – dumb as only right wing groups can be.
Agreed, commentaries like this nearly always overlook the essential role forward contracting and exchange hedging were always meant to play in a healthy market – one where the amount and type of investment in capacity is driven by the needs and desires of consumers, not by the needs and desires of incumbent industry players. I also didn’t tackle his closing errors regarding distribution system operators either. Again, a fundamental misdiagnosis of the problem. Yes self-producers and prosumers are becoming a more important phenomenon and yes consumers will increasingly take control of how much, when and for what they use “the grid” for their energy services. And don’t forget large controllable new electric loads like electric vehicles. The posting implies that the answer is to shift to paying fixed charges for the privilege of connecting to the grid, a proposition that would shift costs to vulnerable consumers, drive unnecessarily cost-inducing behavior by EV chargers and self-producers and prosumers, and hasten the demise of the distribution systems we will continue to need for many years to come. The answer, for those of us who have studied this issue for years and worked with regulators and system operators seeking a sustainable solution, is to begin shifting loads to volumetric time-of-use charging for all but the direct fixed costs of a customer’s connection to the local distribution systems (including billing costs). This should begin with those loads most able to and for which it is most important to respond to such a network charging structure. That would address the lion’s share of the issue for now and would preserve a fair rate structure for all – consumers pursuing these new kinds of energy services, consumers seeking a traditional energy service, and the distribution system operators on which both groups will continue to rely for many years to come, all while driving behavior by the new classes of consumers that will minimize the cost of integrating these innovative new products and services into the energy system.
One thing that is always overlooked in evaluating and guiding the developing electric energy market with its distributed energy resources (DER or microgrids) are the benefits that can be obtained from transcontinental transmission or a macrogrid. This is the big leveler, allowing profitable use of east-west diversity, minimizing excess local generation and battery storage, will provide an energy market for all.