There are two major issues on which the future of the energy sector hangs, notes EP editor Karel Beckman: 1) how far will the renewables revolution go in combination with climate policy; 2) how will growing geopolitical tensions, especially relations with Russia, affect markets? Karel asks whether we need capacity schemes, indicates how utilities could get back on a growth path and how (not) to deal with Russia.
From the United States comes the big news that – finally – the utility sector is waking up to the opportunity of electric cars!
In June, the Edison Electric Institute, the association of the US electricity industry, came out with a report that shouts to the heavens that “electric utilities need transportation electrification” to “remain viable and sustainable in the long term”.
Battered by the rapid spread of solar power and stagnant demand, electric cars are the single greatest opportunity for electric utilities to get back on a growth path, says EEI: “Stagnant growth, rising costs, and a need for even greater infrastructure investment represent major challenges to the utility industry. (…) Today’s electric utilities need a new source of load growth – one that fits within the political, economic and social environment.”
According to the EEI, that new source is electric transport, which would not only be good for electric companies and the climate, but would also reduce the need for oil imports and improve energy security.
This seems such a no-brainer for the hard-pressed electricity sector that the only question that comes to my mind is: why did it take so long for them to come to this obvious conclusion? Why are they still not taking action?
To be sure, a number of electricity companies, both in the US and Europe, have been actively promoting eletric transport. But, as EEI points out, what has been missing, on both continents, is a convincing, broadly supported, enthusiastic, well-financed sector-wide push to make electric cars really the wave of the future.
Lacey also notes that according to a study from the Electric Power Research Institute two-thirds of consumers “wanted their utility to provide information on charging station locations and pricing”.
What more arguments do you need as an electricity supplier?
Unfortunately, rather than jumping on such golden opportunities, the electricity industry seems more preoccupied sometimes with defensive matters. Such as how they may profit from capacity markets.
German utility RWE announced on 14 August it would close another 1,000 MW of generation capacity by 2017, taking its total non-utilised capacity to 9,000 MW, with CEO Peter Terium warning that “this does not bode well for security of supply, to which wind and solar can make little contribution”. Terium “expressed his support for a market design which compensates companies that keep secured generation capacity on tap”.
According to Terium, “with a capacity market that is non-discriminatory and open to all technologies, Germany could create an economically feasible basis to continue to operate indispensable generation facilities – and thus supplement the expansion of renewable energy.”
“This does not bode well for security of supply, to which wind and solar can make little contribution”
RWE CEO Peter Terium announces closure of another 1,000 MW power capacity
Terium’s colleague Johannes Teyssen, CEO of rival electricity producer Eon, around the same time also issued a plea for a capacity scheme to ensure that “conventional generating power” would “stay operational” to supply power at times when there is not enough wind or solar power. He said this idea is “supported by the entire German energy industry”. Both Teyssen and Terium spoke at the publication of their companies’ interim results.
So does this make sense?
In the EU, the UK is probably farthest advanced when it comes to organising collective back-up capacity in its power market. As Energy Post Brussels correspondent Sonja van Renssen reported in this must-read article, the European Commission in July approved a new capacity market scheme proposed by the UK government – the first time the Commission has done so since the new EU guidelines on energy and environment state aid entered into force on 1 July.
As Sonja writes, National Grid, the UK’s transmission system operator (TSO), will run annual, centrally-managed auctions to obtain the level of capacity required to ensure generation adequacy. Auctions will not only be open to new and existing generators, but also to “demand side response operators”, storage operators, and new interconnectors. The Commission has ruled that the UK scheme “embraces the principles of technology neutrality and competitive bidding to ensure generation adequacy at the lowest possible cost for consumers, in line with EU state aid rules.”
However, as Sonja reports, the UK scheme has run into a lot of criticism, from groups like ClientEarth (an organisation of activist environmental lawyers), the Regulatory Assistance Project (RAP, a global, non-profit team of power and gas experts), E3G (a non-profit think tank), the Smart Energy Demand Coalition (SEDC, representing the demand response industry) and WWF. They argue that a market-wide capacity mechanism is unnecessarily expensive and say that keeping a “strategic reserve” is enough to guarantee uninterrupted power supplies. They also worry that the scheme will extend the lifetimes of coal-fired power stations in the UK which they would like to see closed down.
So who is right? The truth may of course lie in the middle.
Clearly there is lobbying involved on the part of the energy companies, but that does not mean the variability of renewables is not a genuine issue. If you have time one day I recommend you watch this amusing and instructive lecture by Professor Paul Younger of the School of Engineering of the University of Glasgow, which he gave on 22 May of this year. (Thanks to the reader who alerted me to this. If you are going to watch the video, you may like to skip the 6-minute introduction.)
Younger, who raises the pertinent question: “Energy: can we really have it all – secure, low-carbon and cheap?”, focuses mostly on Scotland, but his basic message applies to many other European countries as well. He warns that Scotland is set to lose baseload and dispatchable capacity on a large scale and is quickly headed for a situation where power supply cannot be guaranteed anymore.
Younger is not the only one to issue such warnings. For examples, this report from FAA Financial Advisory notes that “one German transmission operator saw [grid] interventions grow from 2 in 2002 to 1,213 in 2013.” And it should be noted that Germany and Denmark, who have among the highest renewable energy penetrations in Europe, solve a lot of their balancing problems by exporting excess wind and solar power to neighbouring countries. What if the neighbouring countries catch up with them in renewable energy?
Nevertheless, there is another side as well. Critics of renewable energy – and the proponents of capacity markets – may be liable to underestimate the resilience of markets and the ability of people and systems to adapt to new situations.
To begin with, we should not forget that balancing has always been an issue for grid operators. There have always been lively balancing markets, and indeed, as one might expect, in a country like Germany this market has in recent years become highly dynamic and lucrative. An extremely enlightening article published by news agency Bloomberg on 25 July (revised 30 July) notes that “twenty power companies, including Germany’s biggest utilities, EON and RWE, now get fees for pledging to add or cut electricity within seconds to keep the power system stable, double the number in September [last year], according to data from the nation’s four grid operators. Utilities that sign up to the 800 million-euro ($1.1 billion) balancing market can be paid as much as 400 times wholesale electricity prices, the data show.”
Oops, so Eon and RWE are already making money providing backup capacity – although of course only when that capacity actually gets switched on.
“Wind and solar power are even more expensive than is commonly thought”!
Editorial comment from the Economist
A representative of Vattenfall, one of the big players in Germany, is quoted as saying that “Today we earn 10 percent of our plant profits in the balancing market”. There are even entrepreneurs who specifically target the balancing market. As Bloomberg reports: “Jochen Schwill and Hendrik Saemisch, both 33, set up Next Kraftwerke GmbH in 2009 to sell power from emergency generators in hospitals to the power grid. Today, the former University of Cologne researchers employ about 80 people and have 1,000 megawatts from biomass plants to gas units at their disposal, or the equivalent capacity of a German nuclear plant.”
“That was really the core of our founding idea,” Schwill is quoted as saying. “That the boost in renewable energy will make supply more intermittent and balancing power more lucrative in the long run.”
The Bloomberg story notes that new participants are now flooding into the market, a development welcomed by the German grid regulator (the Bundesnetzagentur). That may be bad news for the incumbents, but the article also notes that RWE has invested as much as €700 million on technology for its lignite plants to convert them from baseload units to much more flexible stations ( “as flexible as gas plants”). So, it seems out that Germany already has a well-functioning capacity (or balancing) market, without any “capacity scheme”.
However, critics might say, doesn’t all this raise the costs of electricity production terribly?
That is certainly the viewpoint of Charles Frank, a senior fellow at the Brookings Institution in the US, who published a paper in May, entitled “The Net Benefits of Low and No-Carbon Electricity Technologies”. Frank baldly stated that “nuclear, hydro, and natural gas combined-cycle have far more net benefits than either wind or solar”. According to Frank, the major reason for the high costs of solar and wind is precisely their variability, and the consequent need for backup power.
Frank’s paper got picked up by the influential people at The Economist, who, on the basis of his paper, concluded in a comment on 26 July that “wind and solar power are even more expensive thant is commonly thought”!
The Economist added that Frank’s findings “have profound policy implications” – and that governments should stop “boosting certain kinds of renewable energy”.
Again, however, things may not be quite that simple. Frank’s paper and The Economist’s comment drew the ire of famous energy expert Amory Lovins, Chief Scientist of the Rocky Mountain Institute, who on 1 August published a scathing counterattack (which he modestly called an “initial critique” of Frank’s paper).
For anyone involved in the renewables/capacity market debate, this is a must-read paper. Lovins makes a great many important points. For example, he points out that relying on centralised generation can cause much greater capacity problems than relying on distributed renewables, if a number of big power stations fail simultaneously. (Ask the Belgians: they may be faced with a big shortage of power this coming winter becauses two of their nuclear powers stations are out).
“Bulk storage or backup by existing fossil-fueled plants are the costliest ways to provide grid flexibility”
Amory Lovins, Scientific Director Rocky Mountain Institute
He also raises the pertinent question: “why analyze capacity value when almost nobody needs new capacity”? Mmh, yeah.
But his most important argument, in the present context, is that “integrating variable renewables into the grid” is not a simple on-or-off issue as many critics of renewables imply. He writes that the “most widespread fallacy in today’s discussions is this notion that reliable grids with variable renewables require bulk storage or backup by existing fossil-fueled plants”. These, he says, “are the costliest ways to provide grid flexibility”.
Lovins lists six other, cheaper ways of providing flexibility: end-use efficiency, demand response, backing up variable renewables with other variable renewables, backing up variable renewables with dispatchable renewables, distributed storage of heat or coolth, and distributed storage in “intelligently interconnected electric vehicles”. (There they are again, our electric cars!)
Whether Lovins is 100% right or not (and it is worth checking out this 2012 study from the National Renewable Energy Laboratory in the US if you are interested), time will tell. Perhaps the most important point to note here is that the capacity discussion shows that the renewables revolution has entered its second phase. The most pertinent issue is not anymore how to boost renewables – but how to integrate them into our energy systems.
Or perhaps we should phrase the issue even more broadly: the question is really how renewables are transforming our world.
Indeed, here is where renewable energy/climate policy meets geopolitics, for it cannot be denied that for most countries solar and wind power are “domestic” sources of energy that by definition improve their security of supply. (See this illuminating article by Rick Bosman and Daniel Scholten which we published earlier.)
Nor can it be denied that recent events in the world have put security of energy supply (especially of oil, gas and uranium) on everyone’s front burner. With much of the Middle East a war zone and the EU and US imposing economic sanctions on Russia, we have entered dangerous times, certainly in the energy sector.
However, it should also be clear that no amount of renewables (or US exports of LNG or oil, for that matter) is going to save us – or the world – if we enter upon another global war.
“I can imagine a world where a leader like Putin could try to make a cyber-attack against the Houston Chronicle so they drop a columnist”
Amy Myers Jaffe, Executive Director for Energy and Sustainability at the University of California
In this respect, certainly the most inane commentary I have read on our deteriorating relations with Russia is an article published on 27 July by the well-known US energy expert Amy Myers Jaffe, Executive Director for Energy and Sustainability at the University of California. Echoing Hillary Clinton’s accusation that Vladimir Putin is guilty of “energy fascism”, Myers Jaffe writes things like: “I can imagine a world where a leader like Putin could try to make a cyber-attack against the Houston Chronicle so they drop a columnist. I doubt it would be successful (we are Americans and we will stand up to that kind of fascism) but honestly, like Hillary, we need to show that we aren’t afraid.”
This article would be funny if it was not so scarily infantile. Putin is bad enough as he is, there is no need to turn him – or international relations – into a caricature. (People who accuse others of “fascism” – and “bullying” and cyber attacks and shooting down aircraft – might at the very least take a look at the record of their own country sometimes or the allies they support with money and weapons.)
At any rate, at Energy Post we will try to cover the geopolitics of energy in a more nuanced way. On 18 August, we already published a highly informative comment by Anders Aslund, senior fellow at the Petersen Institute, on the implications of the “Yukos ruling” by the Permanent Court of Arbitration in The Hague in July (and Aslund is no friend of the Russian government). In September we will also pay attention to the role the Energy Charter Treaty might play in future international energy relations. (The case which the former Yukos shareholders won against the Russian government at the Court in The Hague was based on the Energy Charter Treaty.)
We will also soon publish an analysis of the nuclear power situation in Ukraine, written by Zuzanna Novak of the Polish Institute of International Affairs (PISM).
And there is a lot more to come on Energy Post. We have articles and news coming up on issues such as stranded assets, low-carbon vehicles, trade relations (the Transatlantic Trade and Investment Partnership, TIPP), the Hinkley Point saga in the UK, nuclear power’s great failure (and how to remedy it), South Stream, energy storage, methane leakage, and much more besides.
Actually, when I read through this list, it strikes me that all these subjects are related somehow either to climate-and-renewables or to geopolitics-and-trade! These are really the two pegs on which our energy future currently hangs.
I hope I have provided you with some valuable thoughts and links in this context.
On a final note, I would like to recommend a great new (free) international energy publication: World Energy Focus published monthly by the World Energy Council (WEC). Do sign up for this if you are interested in international energy affairs. (Full disclosure: Energy Post is involved in producing the World Energy Focus, although under the editorial responsibility of WEC.)