On reflection: Power transition needs pan-European market

EUROPE: As the share of renewables on Europe's grids increases and fossil-fuels start to be phased out, questions surrounding integration, intermittency and grid stability need to be addressed. We can learn from Germany's experiences and a number of current pilot projects.

(pic:Ikon Images/Alamy)
(pic:Ikon Images/Alamy)

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The energy market in Germany has proved a true test bed for policy implementation given the many changes it has witnessed recently. In the past two years, the country has taken the decision to exit nuclear generation while moving to an ambitious target of 70GW of renewable energy, comprising wind and solar PV capacity.

These policies have resulted in structural imbalances in the transmission network from north to south, the mothballing of combined-cycle gas-turbines (CCGTs), a 30% drop in the base-load electricity price and sky-high consumer electricity bills.

The main lesson learned from Germany's experience is that the energy sector requires a long-term strategy and, for that, it needs a stable policy framework. Governments need to provide long-term regulation that creates an even playing field for all decarbonised power-generation. This must be based on the true cost of dependable electricity supply. They should also provide visibility on renewables targets, efficiency improvement and carbon-reduction objectives. Plus, politicians must look to redress the EU Emission Trading Scheme, which is failing to provide a meaningful price for CO2 emissions.

The European power market is being held back by questions around regulation, scalability and replicability. Investment in a new grid requires new business models, which will emerge from current pilot projects focusing on demand response, storage and distribution control.

The challenges that have to be addressed — competitive electricity, reduced environmental footprint and energy security — call for urgent action. We do not yet have all the tools in place to incentivise and deliver all the investment needed, at the necessary pace.

Although the rapid rise of renewables in Europe has so far not threatened grid reliability, the ongoing mothballing of CCGT plants and coal-plant retirements planned under the EU's Industrial Emissions Directive mean we will soon have exhausted the 40% reserve margin. With ever more renewable energy in the system, the overall stability of the grid will be undermined. We could enter the danger zone as early as 2016/17, or even sooner if the economy picks up rapidly in the EU.

Addressing the utility issue

It has been proven that "energy-only" markets do not function properly with a high level of renewables penetration. Electricity market prices should take into account both energy produced and dependable capacity components in the traded kilowatt hour. Resolving this question is the most urgent priority. Utilities should be compensated for providing the underlying base power needed to ensure a more reliable source of energy. A capacity market is one of several potential solutions, but national initiatives would need to be closely coordinated at EU level to avoid another layer of regulatory complexity that could potentially further undermine the situation.

A number of pilot projects are looking at business models to help develop new contractual frameworks for renewables integration and minimise integration costs and delays from network reinforcement. The integration of distributed energy resources aggregation also offers a potential alternative to traditional generation.

It is still too early to be able to say with certainty how these issues will be solved. The technical and regulatory issues are similar in every country, but the answers are likely to differ because of the differences in energy mix and societal models. We believe that true pan-European market based solutions should be favoured over additional and scattered regulatory measures.

Philippe Paelinck is vice president for portfolio and strategic positioning at Alstom, and a POWER-GEN Europe advisory board member. For more inforemation, please visit powergeneurope.com

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