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 Sionshansi, editor of the newsletter EEnergy Informer. According to Sionshansi, 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.
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.
This article was first published by EEnergy Informer and is republished here with permission.
Fereidoon Sionshansi 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.