Industry leaders and analysts came together at the Bloomberg New Energy Finance (BNEF) Future of Energy Summit in London in late September to discuss what needs changing, and why.
Albert Cheung, BNEF’s head of global analysis, told delegates: "What got you here, won’t get you there," borrowing the title of a business book.
"In June this year, we noticed the world had achieved 1TW of wind and solar installations. That’s the same amount of generation capacity there is in the whole of the US, and it is similar to all of the coal in China. This took 40 years to get to. We think the next terawatt will happen in the next five years," Cheung said.
But with this influx of variable energy, the market dynamics are shifting. "We’re starting to see how the power market might start to operate in very different ways in the future," he said . "In Germany, about 2% of hours in the year have negative prices."
During a weekend of negative pricing in Germany in October 2017, nuclear, lignite, wind and solar all continued to generate, Cheung noted. "So you have a problem with flexibility on the generation side. You have a problem with market incentives, and you have also have a lack of storage.
Need for flexibility
"These instances of negative power prices, these glimpses of the future, are the power market crying out for flexibility," he said.
"In 2018, we are facing two different questions about decarbonising the power sector. One is about flexibility. Which combination of technologies will actually be able to provide the flexibility the system needs? And the other is about market design. How do you design the market that actually encourages this optimal set of investments in clean energy and flexibility?
"The way these power markets operate over the next 20 years is an open question," Cheung argued, adding that the assumptions we have about how things have operated in the past deserve scrutiny.
"The industry achieved a huge amount in the past decade, driving costs down and scaling up, but there is no reason why the same rules of thumb, the same old assumptions and market designs, will take us to 80% renewables and beyond," Cheung concluded.
Earthquakes and headaches
The challenges of a more flexible energy system also provide opportunities. Speaking on an energy executives panel, Enel CEO Francesco Starace said: "There’s lots of value in [the] energy transition. I think it all has to do with the time in which the transition takes place, which direction it is going, and how you accompany this transition."
"It has been an earthquake what has happened in the business model for renewables in the last five years. It is a completely different world. It is a question of changing the business model of power generation, understanding that there is no more renewable and thermal generation, there is just generation," Starace said.
"During this transition there is a lot of value creation in managing the phase-in and phase-out, and changing the business model," he added.
These new business models are causing the big energy firms headaches. "We are moving from a tariff-driven system to [one that is] much more competitive… You need to find somebody who will buy your electricity because there will no longer be a tariff or [support] system," said António Luís Guerra Nunes Mexia, chairman of EDP Renovaveis.
Starace’s notion that the line between thermal and renewable generation is blurring was shared by others. Philippe Sauquet, president of gas, renewables and power at France’s Total Group, said renewables are "part of the solution".
"Investing in renewables is something that is very logical as a continuation of what we have been doing over the past 40 years. What has changed recently is the acceleration of the market," he said.
Total is part of a wave of traditional oil and gas firms investing in renewables, recently acquiring a majority stake in Direct Energy, France’s third-largest electricity supplier and owner of over 500MW of renewables.
A key consideration that underpins how renewables will interact with the market is the formation of the grid system. "If you couple [the competitive market] with decentralised renewables, we are going to have fun. Utility-scale and decentralised renewables will have new dynamics and you [will] need to anticipate this," said Mexia.
Tom Rowlands-Rees, BNEF’s head of decentralised energy, expanded on this. Common convention backs a centralised grid, but with more renewables, especially small-scale generators, feeding in, the argument for it is weakened.
Government support for centralised grids is also wavering because the economies of scale, which had dictated its growth, are no longer as strong, Rowlands-Rees explained.
In Europe, in 2012 the average kilowatt hour of electricity was generated in a 900MW plant, Rowlands-Rees told delegates. Today, it is more like 800MW, due to increased capacity from — usually smaller — renewable-power plants. By 2050, the average kilowatt hour of electricity will be produced by plants of 30MW, he said, citing BNEF forecasts. "This is a very dramatic shift we’re seeing," he said.
We will still need a central grid network to transmit nuclear power, Rowlands-Rees added, but we will not depend on it. "When you need something, you pay for it, when you depend on it, you invest," he said, questioning whether we will still be dependent on central grids by 2050. If not, why would governments invest in them?
"When people are asking what the grid of the future of the grid will look like, don’t ask, ‘will it be decentralised?’ Ask, ‘will it be centralised?’" Rowlands-Rees concluded.