1 THE RENEWABLE POWER DILEMMA Making electricity grids fit for wind and solar power REPORT OF A SCIENCE BUSINESS SYMPOSIUM Supported by
2 The symposium was held at the European School of Management and Technology in Berlin. Built in 1964 as the seat of the National Council of the GDR (Staatsrat), the building became the temporary office of the German Chancellor after German unification and later became home to the ESMT. Words Wendy Cooper Editorial Direction Gail Edmondson Design Giulia Biasi Photography Hans-Christian Plambeck BigStock Photo ESMT Science Business Publishing Ltd Supported by
3 EXECUTIVE SUMMARY Europe is determined to lead the world in the shift to green energy. A key policy goal in the European Commission s 2050 Energy Roadmap is an electricity system based nearly entirely on renewable energy sources. From fields of windmills in Scotland to solar panel installations across Spain, billions of euros in public and private investment over the past 15 years have kick-started the transition to a low-carbon economy. In 2012, 14 per cent of Europe s electricity came from renewable sources, up from just over eight per cent in and the Commission wants renewable energies to account for 27 per cent of gross final energy consumption across Europe by But rising volumes of renewables pose a dilemma. Wind and sunshine are not always available when we want them, or where we need them. Since electricity is expensive to store, and power from wind and solar are variable, balancing supply and demand poses a problem. Tools to deal with minor variability exist, but as volumes of renewables rise above 15 per cent of supply, new ways need to be found to keep the system in balance. At a Science Business symposium on 18 March 2014, researchers, industry experts and policymakers debated the challenges to integrating a steadily rising volume of wind and solar power into the electricity grid, the technology solutions and policy recommendations. The symposium was the eighth in a series of highlevel academic policy debates on energy research and innovation supported by BP. A key message from the half-day debate: Europe urgently needs to focus on energy market integration and building greater flexibility into its energy system. As low-carbon power generation increases, combined with new demand technologies, Europe faces the threat of wide-scale degradation in asset utilisation at existing power plants. To evolve toward a balanced and cost-effective lowcarbon energy system, policymakers need to implement radical changes in market design, shifting from the present member-state centric approach to a Europe-wide approach. Flexibility - in the form of flexible energy generation, demand response, storage and new network technologies - may offer the EU a potential prize of 50 billion annually in energy cost savings in Currently, however, that prize remains out of reach, because the market is geared to rewarding utilities for total volume of energy produced and there are no incentives to invest in flexibility. Participants agreed that the integration of large volumes of renewables - and the electrification of segments of the transportation and heat sectors - will require substantial investments in the electricity grid, as well as new technologies. While R&D investments will deliver some solutions, the obstacles to forging a low-carbon energy system are not only technological, the group concluded. From left to right: David Eyton, group head of technology, BP; Martine Gagné, head of Strategic Research Centre, Rolls-Royce plc; Stephan Reimelt, CEO, GE Energy Germany; and Giovanni De Santi, director, Institute for Energy and Transport, Joint Research Centre, European Commission 3
4 The legacy of Europe s highly centralised 20th-century energy system has stymied the development of new business models adapted to renewables. A number of technologies to resolve the renewables dilemma already exist, experts noted, but our understanding of the energy system as a whole remains inadequate. What s needed is a better appreciation of how markets, policies and regulations influence the technologies and infrastructures necessary to integrate renewables successfully into European grids. Among the recommendations is a call for better, more objective and comprehensive research to inform policymaking, and more R&D on integration issues, including smart grid technologies. Europe also needs to create appropriate incentives for investment in flexible plant capacity. Since the value of electricity not only depends on when it is produced, but where, the EU must allow electricity prices to differ according to not just time but also location. Such locational marginal pricing will likely be critical to the successful functioning of a pan- European system incorporating renewables. One European country in particular has become a key test bed for integrating renewables. Germany aims to generate 80 per cent of its electricity from renewable sources including wind, solar and biomass by 2050, and its Energiewende (or energy transition) is widely viewed as a possible blueprint for others looking to cut greenhouse gas emissions, enhance energy security, and boost energy efficiency. Yet the Energiewende is in trouble - not least because of its ongoing failure to contain price increases to consumers. Germany has shouldered the cost of much of the global technology learning curve for photovoltaic solar power. With German consumers now paying the highest 4 electricity prices in Europe, the Energiewende risks losing their once enthusiastic support. Indeed, the German experience to date suggests that although people everywhere want secure, affordable and sustainable energy, rarely is it possible to deliver all three in any one location at a politically acceptable cost. As the EU makes course corrections to its own energy road map in the coming years, it can benefit from the experience of pioneering countries and regions. The US, for example, has instituted locational energy pricing across multiple states and multiple ownership models. Denmark has developed an interconnected energy network incorporating both heat and power, a pioneering move, which enables the efficient management of a variable energy supply from renewable sources. The long-term prize is a common European energy market. But that ambitious outcome will remain elusive until policymakers find ways of enrolling consumers in the development of a low-carbon energy system, participants said. They need to be convinced that the cost of renewables, which in the short term, as the German case demonstrates, can be quite high, is justified. Policymakers should shield the public from the more volatile aspects of market behavior, and speed the implementation of a more integrated EU energy market. This report summarises the half-day of debate at the Berlin symposium, which included recommendations for European policymakers. It highlights the key generation, transmission and distribution challenges, and the need for a systems approach to creating a true market for trading flexible energy generation, the technology and pricing options, and market incentives to accelerate the transition.
5 POLICY RECOMMENDATIONS Take a whole systems, pan-european approach to the integration of renewables and the creation of a flexible energy market Fund comprehensive, objective research to better understand the relationships between markets, policies, regulations, technologies and infrastructure Recognise the value of flexibility and define associated products that can be traded Start to reward investment in flexible, integrated, cross-border energy generation and transmission systems Stimulate investment in smart technologies to improve the balance of energy demand and supply and asset utilisation Improve transparency by introducing locational, marginal pricing, which reflects the value of energy at a specific location when it is delivered Enable consumers to benefit from sharp energy price fluctuations prompted by a rising proportion of renewable wind and solar power by being flexible in their energy consumption patterns Communicate better with consumers to help them understand the long-term value of renewables integration Frank Behrendt, professor for energy process engineering and conversion technologies for renewable energies, TU Berlin (left); and Simon Müller, energy analyst, system integration of renewables, Renewable Energy Division, International Energy Agency (right)
6 I. The Renewables Integration Challenge Small shares of wind and solar power are relatively easy to integrate into the existing energy grid. Electricity demand is, of course, variable and any power plant can experience unexpected outages. But when wind and solar generate a small proportion of total electricity, fluctuating flows can be addressed by forecasting and planning to avoid hot spots and support grid stabilisation. Many individual European countries including Denmark, Ireland, Germany, Portugal, Spain, Sweden and the UK (where nuclear remains part of the mix), already are generating more than 15 per cent of their total annual power needs from renewable sources, and Denmark has surpassed 30 per cent from wind power alone. Integrating larger shares of variable renewable energy, however, is another story. In Germany, where billions in government support schemes have promoted heavy investment in wind and solar power - without the needed investments in flexibility - intermittent flows of power are creating imbalances of supply and demand. On windy days when too much power is produced for the grid to accept, wind turbines in the north must be shut down or disconnected from the grid because there is no way to get the power to southern Germany where it might be used. And when power from wind farms or solar panels ebbs, utilities must use coal-fired power plants to meet market demand. As Germany moves closer to its planned phaseout of nuclear power in 2022, the urgency to improve grid integration will grow. Investment in energy research and innovation is vital to developing medium-term solutions. But government policy can play a big role reducing the current mismatch 6 between electricity supply and demand caused by intermittent flows of wind and solar power. The Parisbased International Energy Agency (IEA) argued in a recent report that it is possible to integrate up to 45 per cent of variable renewable energy sources annually without significantly increasing power system costs in the long run. However, governments must first embrace a system-wide transformation. And for Europe, this includes establishing a truly integrated European energy system. A Europe-wide system would smooth variability, increase capacity and provide a much deeper pool of flexible resources, according to the IEA. But these benefits will only result if the market framework is in place to allow them. And that remains some way off. The European Commission is searching for the synergies to support a single European energy market and promoting a whole-system approach to energy policy. But we can t tell how fast a single European energy market will be created, says András Siegler, director for energy at DG Research and Innovation at the European Commission. To achieve its goal of a competitive, secure and integrated energy system, the Commission aims to provide substantial support for innovation, for example, for research into demand-side approaches and pilots, a range of grid stabilisation initiatives, and safe storage technologies. However, as Siegler also acknowledged, the development of storage technology has been rather evolutionary.
7 II. The German Experience: A Cautionary Tale G ermany s ambitious Energiewende (or energy transition) has turned Europe s largest economy into the world s biggest energy laboratory. The policy, which was launched in 2011, rejects the nuclear option completely, aiming instead to generate 80 per cent of Germany s energy from renewable sources (wind and solar) by That makes the Energiewende one of the boldest renewable energy transformations ever attempted, and a potential blueprint for the successful integration of variable renewable sources of power, Europe-wide. However, the German government has yet to find a cost-effective solution to integrating renewable power. This year German consumers will be forced to pay billions of euros more for electricity from solar, wind and biogas plants than the market price of electricity. And as renewable energy subsidies contribute to ever higher power prices, the German public, once enthusiastic supporters of Europe s biggest, greenest energy initiative are rapidly losing confidence. The Energiewende has deteriorated into a cost discussion, said Stephan Reimelt, President and CEO of GE Energy, Germany. Consumers are asking if we re doing the right thing. CO2 emissions, for example, are actually up (by 2 per cent), because of the shift away from nuclear power, and the use of cheap coal instead of gas (which has half the CO2 footprint of coal) to balance the erratic nature of renewable energy sources. Indeed, due to 20 billion in annual subsidies for renewables, German consumers are paying twice as much for electricity as they did in 2000: the highest prices in Europe. Furthermore, the distribution grid is under significant strain, especially in the south of the country. The Germans continue to debate how to resolve these problems. Some, for example, are lobbying for an end to the feed-in-tariff scheme, which is designed to encourage investment in renewables but for which German consumers are paying a heavy price in the form of higher energy levies. Others would like to see incentives to invest in a decentralised distribution grid - the key, they argue, to achieving a proper balance between demand for energy and its supply. Meanwhile, there has been some progress. Primary energy consumption in Germany is falling. That s thanks in part to milder winters in recent years. But renewables too are playing their part. In fact, wind, solar, hydro and biomass now account for 25 per cent of overall German power generation. The policy s original purpose was threefold: to cut greenhouse gas emissions, to enhance energy security, and to increase energy efficiency. On all three counts, however, it has to date largely failed to deliver major gains. 7
8 III. Achieving Flexibility T he variable flows of wind and solar power pose two dilemmas. First, while they displace fossil fuels, their ability to displace overall capacity in the energy system is limited. Second, as Europe seeks to electrify heat and transport systems in order to decarbonise them, it risks demand peaks that are disproportionately higher than the total increase in demand. The upshot: an enormous (and costly) requirement to add capacity. In the UK, for example, beyond 2030, You re fundamentally doubling the electricity infrastructure asset base for the same amount of energy delivered and that s very expensive, said Goran Strbac, professor of electrical energy systems at Imperial College London, and a member of the steering committee of the SmartGrids European Technology Platform, a European Commission initiative. If, on the other hand, Europe moved from a member-statecentric to a Europe-wide approach, and investors gained access to the revenue streams that flexible, integrated, cross-border energy generation and transmission systems promise to deliver, it could save as much as 50 billion a year, Strbac estimates. In an era of austerity that s not exactly small change. Indeed, the achievement of a flexible energy market in Europe should be policymakers top priority. In low-carbon energy systems, the value of flexibility will significantly increase, Strbac said. Flexibility needs to be rewarded. At present the markets do not reward flexibility and smartness and flexibility are not recognised as products that can be traded. Goran Strbac, professor of electrical energy systems, Imperial College London Participants broadly agreed that the key to success is to stimulate investment in flexible power generation. But current market mechanisms are inadequate. Indeed, in some countries such as the UK, they continue to favour investment in asset-heavy solutions the more you build, the higher the profit instead of rewarding the more efficient use of existing assets. As Europe evolves toward a low-carbon energy system, the value of flexibility will need to increase significantly, Strbac said. At present the markets do not reward flexibility and smartness and flexibility are not recognised as products that can be traded. There is significant evidence that the benefits of smartness and flexibility will be critical for a cost-effective evolution to a low-carbon system, he said. However, the present market undervalues the From left to right: Goran Strbac, professor of electrical energy systems, Imperial College London; member, Steering Committee, SmartGrids European Technology Platform; and Dominik Möst, chair of energy economics and public sector management, Department of Economics, TU Dresden 8
9 Georg Menzen, head of division for energy research, Federal Ministry for Economic Affairs and Energy, Germany; member, EC Steering Group on Strategic Energy Technologies (left); and András Siegler, director, Energy, DG Research and Innovation, European Commission (right) flexibility and there are no incentives to invest in flexible technologies. Neither do we have a full enough understanding of the energy system in its entirety. The whole system must be looked at in more detail, Martine Gagné, Head of the Strategic Research Centre at Rolls-Royce plc, told the symposium. We ve been bringing on renewables without thinking about the system implications. Integrating renewables cost-effectively and Europe-wide is largely a balancing challenge: the balance of demand and supply needs to be met in real time. Currently, however, the lack of flexibility is limiting the system s ability to accommodate low-carbon energy generation, threatening curtailments. Better demand-side management could help smooth the peaks and troughs. And several symposium participants suggested that smart technologies hold the key to improvement in both balancing and asset utilisation. There are currently 450 smart grid projects across Europe, representing a total investment of just over 3 billion. But most projects are scheduled to end in 2017, said Giovanni De Santi, director of the Institute for Energy and Transport at the Joint Research Centre of the European Commission. We need to provide a more comprehensive and comparative analysis of the current legislation across the EU as the basis for next-generation legislation, De Santi said. To support future EU policy decisions on grid We need to provide a more comprehensive and comparative analysis of the current legislation across the EU as the basis for nextgeneration legislation Giovanni De Santi, director of the Institute for Energy and Transport, Joint Research Centre, European Commission integration, the research community also needs to develop science-based approaches able to capture the complexity of the interactions in electricity systems, he added. Energy storage too, which is currently expensive and rather wasteful, could play a greater role in solving the challenges posed by renewables. First, however, the European Union should start viewing electricity generation, transmission and distribution as a single, holistic system, and overcome its currently siloed approach. 9
10 IV. Can we get pricing right? E nergy pricing poses a significant challenge for national policymakers - especially given the complex network of energy subsidies across Europe. In Germany, for example, renewables are a central plank of the Energiewende. Yet from time to time, when too much power is being generated from these sources, they need to be turned off (or curtailed) - a tough sell to the German electorate, which has endorsed a massive subsidy programme in favour of renewables. Plainly, governments need to do a much better job of explaining the complexities of renewable energy generation to their electorates. Furthermore, several speakers told the symposium, policymakers need to convince consumers that because the value of energy in different places will differ at different times, locational marginal pricing will be critical if a pan-european system incorporating renewables is to function successfully. Having the same price zone masks subsidies. If you put locational marginal pricing in, you immediately see them. Simon Müller, energy analyst for the system integration of renewables at the Renewable Energy Division, International Energy Agency Müller, energy analyst for the system integration of renewables at the Renewable Energy Division of the IEA. If you put locational marginal pricing in, you immediately see them. Having the same price zone masks subsidies, said Simon Frank Behrendt, professor for energy process engineering and conversion technologies for renewable energies, TU Berlin; and Lars Waldmann, grid expert, Agora Energiewende, Berlin (right) 10
11 V. Towards a Systems Approach Matthias Beller, director, Leibniz Institute for Catalysis and vice president of the Leibniz Association (left); and Mark O Malley, professor of electrical engineering, University College Dublin (UCD), and founder and director, Electricity Research Centre (right) systems approach to resolving the renewables A integration challenge is critical - it s the key to persuading investors that flexibility really can deliver value. But as Mark O Malley, professor of Electrical Engineering at University College Dublin, and director of Ireland s Electricity Research Centre, told the symposium, We need very careful market design and a systems approach, not just knee-jerk reactions. Right now, institutional issues and a lack of joined-up thinking continue to hamper progress toward closer coordination, he said. Take, for example, the sticky issue of balancing electricity supply and demand across borders. There s a need for coordinated transmission to accomplish this, but transmission is currently in the hands of a multitude of different providers, all pursuing their own interests. We need to unbundle ownership of transmission assets from operations, the IEA s Simon Müller told the symposium. But the distribution grid also needs to be balanced. And the European Commission s tendency to keep transmission and distribution in separate boxes is holding up harmonisation of Europe s diverse and complex national networks. The forthcoming integrated roadmap of Europe s Strategic Energy Technology (SET) plan, which is designed to accelerate the development and deployment of costeffective low carbon technologies, will have an emphasis on energy systems integration (ESI) and is clearly a step in the right direction, participants agreed. But Europe also needs to fund better, more objective overall analysis in order to understand current complexities better. For example, Europe may be underestimating how flexible its energy systems already are, O Malley said. He also thinks that demand-side management may be an overrated tool. Unless you can couple heat and electricity, which would create real volume, as the Danes are in the process of doing, the synergies are just too small, he told symposium participants. Whole-system research is the only way to test such hypotheses - the key to significant potential savings in infrastructure build and operational efficiencies, O Malley said. 11
12 Benefits of EU wide market integration (versus member state centric approach) Area of Market Integration Savings in bn/annum Integrated EU Energy Market 9-34 Integrated EU Capacity Market Integrated EU balancing Market Integrated EU renewable policy Goran Strbac, professor of electrical energy systems, Imperial College London Electricity generated from renewable sources % of gross electricity consumption EuroGeographics Source of Data: Eurostat Graph shows electricity produced from renewable energy sources as a percentage of the gross national electricity consumption for It measures the contribution of electricity produced from renewable energy sources to the national electricity consumption. Electricity produced from renewable energy sources comprises the electricity generation from hydro plants (excluding pumping), wind, solar, geothermal and electricity from biomass/wastes. Gross national electricity consumption comprises the total gross national electricity generation from all fuels (including autoproduction), plus electricity imports, minus exports. 12
13 VI. CONCLUSIONS For the European Union, a move toward greater flexibility - in the form of demand response, flexible power generation, storage and expanded networks - offers a potential prize of 50 billion a year in saved energy costs. But an absence of market mechanisms and an inadequate understanding of the whole energy system are thwarting efforts to win the prize. Nations need both to balance their grids, in part by removing internal bottlenecks, and also by integrating internationally. The long-term goal is a common power market across the European Union. However, this does not mean that electricity will be priced the same everywhere. Germany is something of a renewable energy integration lab, testing the impact of rising levels of wind and solar power. The centralised energy system of the 20th century, however, is ill adapted to the transition, and policymakers across Europe are watching to see whether the Energiewende can overcome the systemic challenges it faces and meet its goals. A key question for policymakers is how to include consumers in the development of a new, more decentralised power system. Domestic users should be protected from market volatility. There also needs to be sufficient investment in flexible capacity to assure supply as the level of renewables use rises. To develop new solutions, Europe will need to invest in R&D and new renewable energy technologies. It must also develop a better understanding of how renewables interact with wider energy systems. Governments also need to find ways of remunerating flexibility. There may, for example, be a case for splitting asset ownership from system operation. The basic laws of physics are at work in the renewable energy debate, David Eyton, group head of Technology for BP, told the symposium. The nature of energy markets is defined by the relative cost of storing and transporting energy products, and their market value. Hence, the markets for oil tend to be global, while for gas they are regional. But markets for electricity, which is expensive to transport and store, are priced by the minute in narrowly defined locations. People want secure, affordable and sustainable energy. Technology can help make energy systems safer and more efficient, as well as helping to lower carbon emissions. There is, however, a tension between decentralised sourcing and centralised control. Some of the greatest 13
14 opportunities lie at an individual level. But bringing their populations with them is politicians overwhelming challenge, Eyton observed. To date, they have been focused more on the companies that supply and distribute energy than on the individuals who consume it. Wind and solar have made huge progress - and the benefits are global. Developed countries such as the US and the member states of the European Union, with large power systems that are growing slowly if at all, can accommodate intermittent renewable power at relatively low cost; developing economies total investments will be even higher, even if the incremental cost of going for renewable power is relatively lower. Moreover, the Levelised Cost of Energy (LCOE), which calculates the cost of generating electricity at the point of connection to the grid, is not an effective way of comparing the cost of supply from different power generation sources, because it ignores the cost of intermittency - a function of the existing power system, the nature of demand, and the markets in which industry competes. study in which the power plant developers of flexible generation power plants also operate renewables installations. In the interest of cost competitiveness, Spain s power plant operators have developed a more integrated and efficient approach to grid management. What s key, says Rolls-Royce s Gagné, is making sure the management incentives are aimed at a total system approach. The long-term prize of a common energy market may seem a long way off. But smart policies and a wholesystem approach can accelerate the transition to a decarbonised electricity system. Europe still needs, however, to overcome the political barriers. We need a paradigm shift, said the IEA s Müller. A shift toward thinking about value, rather than just pushing down generation costs. As Europe struggles to develop a systems approach to renewables integration, it has much to learn from the US experience, as well as from energy system (or policy) innovators within Europe, such as Denmark, Spain and Ireland. Spain in particular makes for an interesting case Stained-glass windows from the former National Council of the GDR (Staatsrat). 14
15 Copies of the individual reports from this series of Science Business symposia on energy research and innovation policy are available at: The Energy Difference 12 STEPS TO GETTING MORE EFFECTIVE, MORE EFFICIENT ENERGY R&D POLICY The Energy Technology Roadmap The Energy Technology Roadmap BIOFUELS: THE NEXT GENERATION HOW TO PLAN EUROPE S ENERGY FUTURE How innovation can brighten Europe s energy future Report of a Science Business symposium Report of a Science Business symposium Supported by Supported by Report of a Science Business symposium Supported by 1 The Energy Difference 12 STEPS TO GETTING MORE EFFECTIVE, MORE EFFICIENT ENERGY R&D BREAKING THE DEADLOCK GETTING CARBON CAPTURE AND STORAGE TECHNOLOGIES TO MARKET Report of a Science Business symposium Supported by GAS: TOO MUCH OF A GOOD THING? ACADEMIC POLICY SYMPOSIUM, BRUSSELS, 1 OCTOBER 2013 Supported by A symposium series supported by 15
16 197, rue Belliard, box 12 B-1040 Brussels, Belgium Tel: Fax: