Blind-alley logics for electricity in Europe

Photo Pierre Audigier / General Mining Engineer / December 3rd, 2013

The European Union has no specific areas of competence when it comes to energy policies. This assertion applies notably to future energy mixes, where decisions today still lie with the Member States. Nonetheless, there are contradictory logics that considerably limit the freedom of any Member State: on one hand, the competitive logic which is the sole competence of the European Commission; on the other hand, that of power source derogations, e.g., on renewable energies. The author throws light on the growing contradiction between these two logics and the pernicious effects it has on the way the European electric system is evolving.

A few years ago, there was a widespread belief that, given the rising global needs for energy, there was room for all sorts of energy sources; the keyword was “complementarity.” So, what is the situation we observe today? On one hand, we note the delays in liberalising the market place. To accelerate this process, the EU has set the objective to create a unified energy market (thus including electrical power) by 2015 on the Continent. On the other, we observe a poorly managed control and development of renewable energies, notably for intermittent renewables and this has led to serious disturbance of the markets, to the point that the latter has lost a primordial feature, to be able to issue “signals” concerning real-time marginal capacity of the system and, consequently, possible new needs to invest.

On Oct. 14th, 2013, Ten electric operators have appealed to the Commission, condemning the current situation and requesting that there be “a workable, simplified and thus harmonised system.” The Commission has announced that it will issue proposals by the end of the year. Hopefully, these will prove satisfactory!

The contradictions have been clearly set out in various studies, by both NGOs and the industry. The focus here will be on Germany’s policy – a pioneer country for the development of renewables.

EU policy, Germany and intermittent energy sources: the impending chaos is unfolding for all to see
We are all aware that Germany has adopted ambitious objectives for its development of renewable energies: 35% of the electric production by 2020 from renewables, mainly intermittent sources; at the same time horizon, because of wind generation, the available power to hand will exceed demand for some 30% time. In the current negotiations, the CDU/CSU party would like to see the fraction target set at 55% and the SPD 75%, by 2030.

Let me however draw the readers’ attention to the implications of the new German energy policy (Energiewende) on the European Commission’s policy and on the electric grids of neighbouring countries.

Renewable energies and the European Commission
The stated priority of the European Commission – and it will be useful to recall that the EC has the initiative to make proposals to the Council of Europe – is to liberalise energy markets, especially the electricity market. The objective of the EU is to instate and implement a unified energy market by 2015.

There is practically no reference in any European Commission papers as to costs or prices, excepting the odd reminder that it is through competitive measures that the pressure to lower costs must be maintained and utility operators encouraged to bring prices in line with costs.

Having said this, derogations have been given in respect to renewables on the grounds that they are deemed part of nascent industrial sectors and that it was appropriate to aid these sectors on the road to maturity. With hindsight, in the 1990s the policy was quite rational. Priorities were given to renewable energy sources feeding the grids and by a policy of subsidised pricing, the feed-in tariff being guaranteed for 20 years. Thus we see that there are two logics in Brussels, and with the increasing fraction and importance of renewables, they are now diverging more and more.

Today the renewable operators are claiming that their products have reached or are about to reach grid parity, a deceiving concept when we are aware that a kWh from an intermittent source does not provide the same level of user comfort as a guaranteed kWh.

The Commission today is pursuing its policy to promote use of renewable energy sources: new grid inter-connections have been provisioned in the EC’s priority investment programme, research projects for energy storage are being financed, etc. The Green Paper, dated March 27, 2013, “A 2030 framework for climate and energy policies” provides an excellent overview of the Commission’s ideas in this area.

Philippe Lowe, Director General in charge of energy questions at the European Commission, recognises that the current situation is not satisfactory. “In those days, renewables needed a little encouragement, therefore it proved necessary to allow renewable electricity to enjoy the privilege of not covering its production costs. Today this is no longer acceptable.” Indeed the Director General has introduced into EC parlance the notion of “the cost of intermittency in the system,” a notion that goes far beyond that of grid parity.

Commissioner Günther Öttinger, known to be close to Chancellor Merkel, says exactly the same; but in his vision, the solution lies in the development of inter-connexions and storage infrastructures.

Germany considers that its national policy to promote renewable energy sources complies with the a common framework for all members of the EU and that it would be logical if part of the EC funding in the budget line “Connecting Europe Facility”, applicable as of 2014, could be devoted to financing the networks. We likewise note that in its 10 year development plan (104 billion euros), the European Network of Transmission System Operators for Electricity (ENTSO-E, which groups together the European Network operators) has assessed at 80% the costs specific to extension and reinforcement of European grids as required by the development of renewable source electricity.

Does the mechanism of paying for production capacity provide the solution? The idea now is that it carries a new risk factor, that of being faced soon with a shortfall of so-called “controllable” power sources. Several countries are preparing such mechanisms already; but the objectives diverge even now. The French prefer to focus on peak production capacity; the Germans on immediately available capacity to back up a sudden ‘loss’ of the need to bring the renewables on line. The Federal German Government has awarded a subsidy to the owners of the new gas turbine station at Irsching to incite them to continue to pursue gas burning production beyond July 1, 2013. The subsidy is estimated at 100 Million Euros/year. In Germany alone, operators are on the point of placing 7GW of gas turbines in mothballs.

Another difference is that the French mechanism includes a secondary market and addresses all production and all power shaving entities whereas the German approach consists of not minimising costs and addresses mainly those infrastructures that are under the threat of a near-future closure. This is not the same thing, and some experts see an impeding danger of part re-nationalisation of Member States’ energy policies. After a long period denying the obvious, the Commission is now attempting to remedy the situation but, to be frank, they are coming aboard too late. The Directorate General for Competition intends to publish a set of guidelines by the end of the year to regulate State subsidies. But no matter how we view this, these constitute new derogations.

Renewable energies and Germany’s closest neighbours

By end-2012, Germany had installed 60 GW of intermittent energy sources (30 GW in wind generators and 30 in solar panel arrays). By 2020, the capacity of intermittent energy sources in Germany will probably exceed 90 GW and by 2030, 120 GW; in 2030, 120 GW. Minimum or base-demand is approximately 32 GW, the media, demand 55 GW and peak demand around 82 GW (Source: Report of the Monopolkommission, Energie 2013).

Such a development has led to considerable and somewhat random electric power movements, hence requiring a sizeable development of networks. For Germany’s closest neighbours there are at least three consequences.

Firstly, when Germany has an overabundant production of electricity from intermittent renewables and supposing that the grid inter-connexions allow it – as we saw earlier – development of then networks, inter-connexion is a high Federal Government priority – the excess is shifted to the neighbouring grids who must absorb the over-production – under Single Market regulations. It already was the case before. Now, given that production units are based mainly in Northern Germany and consumption concentrated in the South, the loop flows, reinforced by domestic German power bottlenecks, cross the Netherlands, Czech Republic and Poland complicating the power trading transactions and grid management in the transit countries.

Cuxhaven, northern Germany

Even if the overall electric consumption has risen to a slight degree – the plans of the German Government are to stabilise and even reduce national consumption – the neighbouring countries must be prepared to absorb considerable amounts of fatal electricity incoming from Germany. The Czech Republic decided to build a phase-shifting transformer (PST) in 2016, for the purpose of pushing back the unwanted electricity exported in this manner from Germany. Other countries, such as Poland and the Netherlands, mentioned above, and more recently Slovakia, are seriously considering following suit, to protect their national grid stability and with the ‘inevitable blessings’ of Kirchhoff’s law, France would not remain unscathed.

Secondly, development of intermittent energy sources leads to very high levels of investment in the grid infrastructures in addition to the investment in new classic power stations to replace ageing equipment. Politicians tend to adopt the attitude that “relief logistics will follow”. But the truth is that nothing follows. The causes are wellknown. On top of which we must integrate the fact that the extremely long lead time to implement such equipment is independent of the cost factors and represent new challenges in Germany, in France and elsewhere for that matter. Contrary to what could have been expected only a few years back, planning and building large (VHV transmission lines and towers) infrastructures exceed those needed to implement production investments. Hence the problem of “time warp” which can lead to what economists call “failed costs” (i.e., investments that prove partly unproductive from the outset).

Thirdly and last point here – given the degree of grid coupling that exists today – the price on the French wholesale market strongly correlates with that in Germany. On several instances, it was even negative, dropping to less than 200 €/MWh on June 16, 2013. This can be explained by the fact that the controlled power stations prefer continue to produce electricity, even if the intermittent power is available in quantity, so as to be ready to shift back to a high output in the event for a sudden grid loss of the intermittent sources.

Negative prices? When you feed in to the grid from an intermittent source, you benefit from a priority access (your offer costs nothing), the source merit plot moves to the right, tending to push the equilibrium price down. And this is a threat to the profitability factor of oil/gas/coal-burning stations and even of nuclear power stations. But these stations will continue production even when the prices are lower than the marginal cost, so as to be in a position to rapidly resume high level production if the intermittent sources suddenly drop. Hence, for certain operational hours, we have negative pricing.

And as new intermittent sources are deployed and connected, the frequency of such occurrences can only increase. This seriously questions the economic model for controlled powers stations and the very principle on which market theory is based, viz., that the prices observed in the market-place are to be seen as signals designed to inform investors as to the system’s margin and, consequently, as to whether investments are required. From what we have seen above, the only information from wholesale energy pricing relate to the prevailing weather conditions. Development of intermittent energy sources in France and other inter-connected countries come as additional problem areas.

A growing divide between short-term and long-term visions
Short-term coordination is the responsibility of ENTSO-E, with the prospect of a unified energy market in place by 2015. Groups of experts are currently working on 6 new “network codes,” agreed management procedures for network operational management which, to simplify the presentation, could see a Portuguese operator selling his production to a Danish buyer using the same procedures as if he were selling the product to his neighbour. The resulting and improved fluidising of the marketplaces will procure, so the EC economists tell us, overall savings of up to 5 billion euros/yr.

At the same time, the needed long-term investments are nowhere to be seen; the vital coordination needed to ensure supply safety simply does not work. As we have just shown, the marketplace has stopped issuing relevant signals.

All parties concerned by these problems are now calling for a new “market design.” But the sands are running out and all we see are new derogations that will be superimposed on former derogations. In Brussels, there are 3 Directorate Generals that share this responsibility (for Competition, for Energy and for the Environment). The EC, because of next spring’s elections will soon start hibernating. The conclusion is that there in no way can we foresee any rapid decisions being made. The optimists hope that the March 2014 Council summit will enable the Member States to find a solution.

Europe’s optimum mix is very- different from the summation of the national optima among the interconnected countries and the gap only continues to grow, notably in Germany as the over-production capacities resulting from the arrival of new wind farms and solar arrays and when these two intermittent sources produce a high power output (good winds, good sunlight).

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