Renewable energy is today the low-cost option for power generation. With a market-driven energy transition, it’s essential that energy markets are developed, both to handle the effects of the rapid rise of renewable energy and to facilitate the transition to a clean energy future.
In the last decade, a combination of government support schemes and easy access to capital has fueled renewable energy investments and supported innovation and cost reductions. From 2005 to 2010 clean energy investments grew from 88 to 276 billion USD per year, and since 2010 the level has been above 300 billion USD per year according to Bloomberg NEF[1]. With a 20% cost reduction experienced for every doubling of cumulative installed capacity for variable renewables, wind and solar energy is fast becoming the low-cost electricity source of choice in many regions. So much so, that according to DNV’s Energy Transition Outlook[2] half of the world’s energy supply will come from renewable energy in 2050. Within power supply, wind and solar will make up about 70% of the generation, as shown below. However, to realise our ambitious targets for a clean energy future, governments and industry need to work together to ensure our energy markets are prepared for this change.
The move to a subsidy free future
One of the greatest steps facing the energy market is the move away from the subsidies in many markets, which boosted the initial uptake of wind and solar energy. One market which is proving that renewable energy can rival traditional generation in cost and investment opportunity is the Nordics. In Norway and Sweden, the wind energy market continues to attract investment for new projects despite subsidies being phased out.
The Norwegian regulator recently released a forecast up to 2030 estimating a doubling of Nordic wind power[3]. The leading hydro power company Statkraft[4] reports that wind power is the main low-cost option for new generation capacity in Norway, and the company has put wind and solar to the fore in a revised global strategy. Lazard[5] regularly publishes a comparison of the cost of generation for different technologies, with their last analysis showing that renewables beats coal and gas in the US for new investments. It also showed that it will often be less costly to build new renewables than to cover the running cost of existing fossil fuel fired power generation. This demonstrates that the energy transition is forging ahead based on markets and economics.
Future proofing the market for fluctuations in power supply
The great benefit of renewable energy is that it’s provided by an infinite source, the weather. However, this also presents a challenge. The fluctuating nature of renewable power generation can drive down the value of the energy, for instance if there is a period strong wind and therefore high electricity generation and the demand side is not flexible enough to make use of the heightened generation.
Zero-or negative prices and curtailment of power supply is already seen in some markets. Therefore, we need to continue to develop the energy markets. We need to build grid connections and integrate markets across geographies, to make the system less vulnerable to changing weather impacting solar and wind power generation. But building transmission grids is costly, and we need to look at other alternatives to balance electricity supply and demand.
Sector coupling, i.e. integration between heat, storage and electricity markets is further helping to find opportunities for reaping the economic benefits of low cost renewable generation. When electricity prices are low this can be used to fill up storage, charge batteries and produce heat, and if prices peak we can tap into energy reserves from the reservoirs, hydrogen storage and batteries or benefit from the lasting heat. Short fluctuations in generation and prices can also be met with adjustment in demand. For example, I need my electric car battery to be charged before I go to work, but I am very happy to charge this at night time, when prices are low, rather than during peak times in the evening when prices are high. Decisions like this will soon become commonplace as battery electric car uptake grows. In Norway 10% of the passenger cars will soon be electric, with close to 50% market share for new cars as shown below. The transport sector is increasingly a massive volume of moving batteries and a potential for smart charging.
Source: DNV/OFV[6]
The need for flexible markets
Previously a metal smelter was an ideal power customer as it typically represented a high and stable energy demand, as it matched the ideal production profile of large-scale base load thermal generation. Now this situation is reversing, and an attractive power customer is the one that can adjust demand to the available electricity generation from wind and solar. This goes for both large and small-scale energy users. We need to stimulate flexibility to quickly adjust energy demand, storage and generation to keep our power systems in balance and the lights on at all times.
New markets for flexibility are emerging, supported by the ability to exchange and process real time information and transactions. Together with six other key players active across the smart energy industry, DNV has developed the open Universal Smart Energy Framework[7] to outline the roles and systems for flexibility markets. This has inspired new platforms, like NODES market[8] founded by Nord Pool power exchange and Agder Energi, to create an open, integrated market place available to all flexibility providers and grid operators.
Markets allow us to optimise across technologies
Our energy system is increasingly complex, and it’s becoming impossible to dictate the ideal mix of technologies for the future low-emission electricity supply system. A high proportion of wind and solar in the power supply creates the need for increased use of market mechanisms to have a long-term sustainable energy transition.
The energy transition is not about choosing technology, it is about making use of the markets to realise benefits and capture costs of pollution and emissions. Well-designed markets are technology neutral. They are arranged so that the service is defined by the need it meets, not by the technology by which that service is provided. As an example, the UK transmission system operator ran an auction in 2016 for: “enhanced frequency response”, which required the ability to export or import power within one second in response to sudden frequency deviations. Generators, demand aggregators, flexible load and energy storage suppliers all bid into the auction.
Regulators have a vital role in allowing markets to develop and function across technologies, whether it be for electricity generation, ancillary services, heat, transportation, emissions, demand flexibility or storage. Well-designed markets and efficient prices are required to reach optimal solutions, and allowing prices to fluctuate give the right signals to the players about what actions to prioritise. Regulators need to step up from trailing technological changes to create sustainable efficient markets for the future.
The energy transition is forging ahead driven by cost competitiveness into a subsidy-free future. Wind and solar power fluctuate with the weather, and we need to future proof the market to handle this challenge. Creating flexibility in energy demand, storage and generation, and connecting markets across geographies and energy technologies is essential. It is too complex to dictate the optimal system balance or choice of technologies, and it is only through clever market design and allowing markets to work that we will let all players contribute to the most efficient low-cost and low emission path of the energy transition.
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[1] https://about.bnef.com/blog/clean-energy-investment-exceeded-300-billion-2018/
[2] DNV Energy Transition Outlook – https://eto.dnvgl.com/
[3] NVE Power market analysis 2018-2030 – http://publikasjoner.nve.no/rapport/2018/rapport2018_84.pdf
[4] Statkraft – www.statkraft.com
[5] Lazard publication of LCOE calculations – https://www.lazard.com/media/450784/lazards-levelized-cost-of-energy-version-120-vfinal.pdf
[7] USEF – https://www.usef.energy/
[8] NODES – https://nodesmarket.com/