100% renewables

Two or three years ago European think tanks were asking if an electricity mix with a 50%, 60% or even 90% share of renewables was workable. What is threshold above which the electricity grids of Europe would no longer be able to absorb intermittent renewable energies?

Electricity grids have strict ramping constraints, which means the flow of electricity cannot change dramatically from one moment to the next. Solar and wind power introduce intermittency into the grid. We know when the sun will go down, so solar panels’ contribution can be gradually phased out every evening. Different sources of power will have to compensate during the night. Wind speed and direction is less predictable. For countries with a high penetration of wind generation, like Germany or Denmark, what source of power can be called upon to compensate for a sudden drop in wind? Nuclear power plants cannot increase or decrease their output in a timely manner – this takes hours. Efficient Combined Cycle Gas Turbines (CCGT) and other modern thermal generators are fit for the task, but would playing back-up be profitable for these units?

European thermal generators’ annual revenues have suffered over the past few years. The economic downturn since 2008 has had a role to play in this, but competition from renewables is the main source of the discomfort. Renewables generators produce electricity cheaply as they do not have the fuel costs that gas and coal power plants do. Renewables also have priority access to the grid in countries such as France and Germany that are looking to increase renewables’ share in their national electricity mix. This means renewable generators have the right to sell electricity before other producers.

Nevertheless, reliable generation is still required. Thermal generators could charge a heavy premium for electricity during periods of supply scarcity to make up for lost generating hours cannibalised by renewable generators. In this way an increased share of renewables was expected to cause frequent price spikes, as well as negative price events when renewables oversupply the market. Electricity prices would become highly volatile.

Paying thermal generators a ‘capacity’ fee to remain online and ready to increase output at short-notice has been proposed as a solution to their financial troubles.  And if more thermal generators remain in the market then competition between them will help to avoid price spikes.  However, these so-called capacity markets have not found many advocates. France intended to launch an organised market for capacity certificates this year – an initiative that has been put on hold by a European Commission investigation into the competitiveness of the measure.

Yet, more recent research has started to show it is feasible to have an energy-only market with a high penetration of renewables in Europe.[1] The concerns about grid instability and price volatility have not come to pass. Perhaps even 100% of electricity generation could be derived from renewable resources if other conditions are met. What are these conditions?

Firstly, diversity of supply is a tonic. A great number of interconnections crisscross the European continent allowing countries to import or export electricity from their neighbours. This allows surges in renewable supply to be sent elsewhere when needed. In periods of local supply scarcity one country can import from a neighbour. Where supply bottlenecks exist the European Commission incentivises investments in new interconnectors. This can be a slow process but the examples of supply bottlenecks are isolated. For most of the year French and German spot electricity prices converge. This shows that arbitrage is effectively taking place between the continent’s two biggest electricity markets.

Wind and solar capacity has a lower utilisation rate than thermal capacity that only technically need to be offline during maintenance. To ensure reliable electricity production in a system dominated by renewables a greater proportion of capacity needs to be installed – and in diverse locations – in order to increase the diversity of supply.

Disruptive technologies like batteries will eventually be integrated into wind and solar farms to improve control over their electricity output. Battery technology may even compete with thermal generators as back-up for renewable supply disruptions. Other technologies, such as tidal or wave energy, and smart grid management will eventually become commercial as well.

Further, liberalised electricity markets provide utilities and investors with trading opportunities to balance their production portfolios and hedge financial risk. Weather forecasts help to predict the output of a solar farm for the next day. If a producer expects  production to be much higher than initially contracted they can sell excess electricity in an organised, day-ahead auction at a European power exchange. On delivery day, if the producer’s actual output is lower than the contracts sold on the previous day, then they still have the opportunity to buy back the electricity on the intraday market.

European power exchanges are also innovating. New products on these platforms are being tailored to renewable generators’ needs. Previously electricity had to be delivered in one-hour blocks, which does not map onto solar farms’ ramping constraints. The ability to trade with a 15-minute or 30-minute resolution is a relief for traders balancing renewable portfolios. Certificates which guarantee the origin of electricity as renewable will soon be offered on the market too.

Today, a European electricity mix dominated by renewables seems feasible. Renewables’ intermittency has not lead to blackouts or high price volatility. If there’s no new investment in gas and coal-fired generation we may yet witness supply inadequacy in the future. Yet, European cooperation, diversity of supply, new technology and dynamic spot markets may be enough to avoid this fate.


[1] Such as the International Energy Agency’s 2014 report: The Power of Transformation

Another good resource for this topic: Dispelling the nuclear ‘baseload’ myth: nothing renewables can’t do better


The New Zealand test

When machines permitting payment by credit or debit card were first developed New Zealand was one of the first countries within which this EFTPOS technology was deployed. Today one can buy a coffee or even a 50c bag of sweets with their VISA or Mastercard. Most businesses do not have a minimum purchase for which you can use your bank card. Few of us carry cash.

New Zealand’s market is often considered something of a test environment for new technologies. Our small island nation is isolated in the middle of the Pacific Ocean, but we have an advanced economy and large middle class. This, our small population and an open, competitive marketplace makes New Zealand the perfect place to trial new products and innovations. If the product meets a certain need it will rapidly penetrate the market. You will soon know if whether it can be profitable or not – and whether you should launch the product elsewhere in the world.

In May, US company Tesla teamed up with Vector, New Zealand’s biggest electricity distributor, to bring their much lauded lithium-ion batteries to New Zealand homes and businesses.

Like cellphones these batteries do not require heavy investments in supporting infrastructure networks. They permit households and businesses to install PV solar panels whilst managing solar power’s intermittency. The main problem with solar power is that the sun does not shine all of the time. When the skies are cloudy or night falls your photovoltaic rooftop panels stop generating electricity. So households and businesses still need to be connected to the main electricity grid to guarantee their supply, in spite of solar panels installations.

You can resolve this issue by stockpiling electricity during daylight hours to use at night. This seems simple enough. However, batteries boasting the voltage and lifespan needed to supply an average household with enough electricity to keep the lights on have not been brought to market. Basically it is too expensive. Prototypes are also massive in size.

In principle if compact, powerful and affordable batteries hit the market then you would not need to be connected to the electricity distribution network. In fact you or your local community could go off grid.

How many households do not bother to install a landline phone these days? Could new houses avoid connecting to the main electricity grid in the near future? It is only a matter of time before battery technology hits that sweet spot. You can read about how Tesla plans to achieve economies of scale that surmount the current cost problem here.

To take a residence off-grid you would also need a smart monitoring system that conserves energy and warns you to turn off unnecessary devices when the household is running low on juice. Vector is investing in energy management systems that would provide this kind of service. They’ve also been investing in photovoltaic solar power and micro wind turbines. The company is future-proofing its main business – just in case distribution services are no longer needed in New Zealand.

If a decentralised electricity supply model works in New Zealand it will probably fly elsewhere. I still can’t pay for a coffee by credit card in Europe though.

Future electricity grids: the rise of the prosumer

Unlike other commodities such as gas and oil, electricity cannot  be easily stored. It must be consumed almost as soon as it is produced.

Consumer demand follows a fairly predictable pattern. Electricity prices are higher on weekdays when “peaking” power plants come online to satisfy increased demand. The first demand peak occurs in the morning – when a high proportion of the population is getting ready for work or school.  A second peak occurs in the evening when consumers return home and start cooking dinner, or turn on the television.

Conventional power generators such as coal and gas turbines can respond quickly to variable consumer demand by increasing fuel input and ramping up output during the day. Nighttime is a cool-off period.

Intermittent renewables changed this model. We must now factor in unpredictable supply peaks and increased price volatility. In the UK and Germany consumers bear the brunt of these new costs. You can read more about how renewables are shaking up the traditional power model here. 

There are several ways to manage this new supply intermittency and smooth prices.

One is more interconnections. These reduce bottlenecks and diversify supply sources so that electricity-rich areas can service electricity-poor ones. Nations hoping to boost electricity production from renewable sources will need a well-connected grid, as an oversupplied area can experience shortages as soon as the weather changes. New power lines require public support and investment.

Short-term (spot) electricity trading can optimise electricity flows between areas and facilitate price arbitrage. Spot trading services are offered by EPEX Spot in Central Western Europe or ERCOT in Texas, for example. These services also permit renewable energy producers to rebalance their books if the weather forecast was inaccurate and they produce much more or much less electricity than predicted.

Smart grid technology uses real-time information about supply and demand to automatically adjust electricity flows curtailing price peaks (or negative prices). Again public money is needed to roll-out this infrastructure at the national level.

Another means is electricity storage.

Pumped hydro-storage has existed for a long time. It is the only large-scale storage technology used commercially. It involves pumping water uphill when electricity prices are low, then running water downhill, through turbines, during peak-price hours to generate electricity. Pumped hydro projects are nevertheless hugely dependent on local geography and rainfall, as well as regulations regarding water-use.

The lithium-ion batteries used in electric cars pack a lot of energy density for their size. They cost around US$10 000, even for a small vehicle, and can only run for about 175km before recharging. This could be better. Crucially, lithium-ion batteries do not suffer from “memory” issues. Meaning that don’t need to be drained before being recharged.

Battery manufacturers across Asia and the USA are struggling to cut costs and upscale their technology to plug into the electricity grid. Yet, electricity generation is decentralising. Small-scale industrial and household solar production is on the rise. Rather than selling their excess power back to the grid some could go off-grid.

Most experimental batteries would need to be bigger than a house in order to store enough solar electricity to power one household for a day. And they remain prohibitively expensive. However, Tesla caused a lot of excitement last month when it announced plans to market lithium-ion batteries at prices starting from US$3500. It costs a household a further US$5000 or so to install solar panels. Nevertheless, this much-anticipated battery is priced lower than any other technology on the market. The Tesla battery should be small enough and safe enough to install in your basement. Plus, you don’t need to be a rocket scientist to operate it.

How did they do it? It’s not new technology. Rather, Tesla is building a US$5 billion gigafactory in Nevada’s desert, where it hopes to realise enormous economies of scale. While the market is still waiting for a technological revolution – the step-change that would make batteries as portable and powerful as microchips which are continuously delivering ever cheaper computing power – Tesla intends to reduce manufacturing costs for current battery technologies.

There is a sizable market of homeowners prepared to fit out their homes with solar panels, battery storage and adopt other energy efficient technologies. These early adopters need enough cash to  invest upfront, before they reap the benefits in reduced or zero-cost electricity bills in the months and years that follow.

For most middle class homeowners US$8500 is no small fee. Companies such as SolarCity in the US provide another piece of the jigsaw. Financed by high net worth individuals, as well as Google and Goldman Sachs, the company pays for solar panel installations, aggregates the earnings from energy savings and grid buybacks, then sells bonds based on a predicted revenue stream. Such creative financing will hasten the prosumer revolution and eventually take some of us off-grid.

No one technology will solve all the problems intermittent renewable energies have introduced into electricity markets. A patchwork of different solutions looks likely to emerge – with some consumers taking matters into their own hands.

Renewables menace traditional power model

Lots of things are shaking up the traditional power model. A decade ago gas and coal power plants were very profitable. Retail companies, which distribute to industrial and household consumers, bought wholesale electricity at a price that always covered operating costs and got a healthy boost during peak demand hours. Even fairly inefficient power plants could expect to have enough profitable operating hours to keep in the money.

Electricity generated from renewable energy sources has altered this dynamic, most noticeably in Germany where Energiewende policies encourage renewable energy development. The upfront costs of new renewable energy projects are subsidised. Once operational wind or solar parks are given priority access to the distribution grid – they can always market the electricity they produce. Furthermore, the government pays out a “feed-in” tariff. That is, guarantees a certain price for every megawatt hour of electricity generated by a wind or solar farm.

These policies have discouraged private investment that might have brought more competitive renewable energy technologies, ones that do not require government subsidies, to market sooner. Nevertheless, Germany’s goal to get 60% of its electricity from renewable sources by 2050 is on track. The eventual success or failure of these policies is the experiment the entire world is watching.

However, the rapid expansion of renewables has upset the incumbents – traditional thermal power generators that use coal and gas as fuel. Renewables harm their profitability for a number of reasons.

First of all, the average wholesale electricity price is lower. Once a wind turbine or solar panel is installed operating costs are near zero because the wind and sun are both free fuel sources. The price of electricity depends on where inflexible consumer demand matches producers’ supply. The producers with the lowest operating costs are always called on first. Then the price of electricity creeps up the supply curve until consumer demand is satisfied. Every day, every hour, producers receive a price for the electricity they produce based on the last generator called up in the so-called “merit-order.” The graph below illustrates this.


The last generator is always less efficient. This means that its operating costs are higher and it will only generate electricity when the price covers these operational costs. Now that renewables are part of the merit order, we don’t climb as high up the curve as before. On average, prices have decreased, implying the recurrent “last generator” is more efficient than a few years ago.

Second, thermal power plants’ operating hours are down. A lot of electricity is being generated from renewable sources replacing supply previously provided by gas and coal power plants. This point is obvious – money can only be earned when your power plant is online and generating electricity. This adds to traditional power plants’ woes. Prices are weakened, but their sale volumes are also harmed as renewable energy production grows.

Third, renewables are very variable. Already gas power plants have shut down and new projects have been cancelled because they could not survive the renewables’ economic shake-up. However, some days the sun does not shine, or there is no wind, and traditional generators are still needed. This can vary hour-by-hour, minute-by-minute. Only very modern gas facilities are capable of ramping up and down to balance unpredictable renewable production. Although, this is simply not profitable in a weak price climate where operating hours are down. So, these rapid-response power plants are no longer being built. This is called the “missing money” problem.

Fourth: the rise of the prosumer. Households and businesses have been installing solar panels with the hope of decreasing their electricity bills. In some countries, excess electricity that is generated can be injected into the grid earning you cash back from the local electricity retailer. This is how the word prosumer came about. Households connected to the distribution grid were traditionally pure consumers. Having installed solar panels the consumer is now a producer as well. They may even be electricity self-sufficient on sunny days or exceed their own electricity needs, affording them the opportunity to sell back to the grid.

Alone, one solar powered household cannot produce enough electricity to perturb the traditional power model. Yet, the arrival of hundreds and thousands of prosumers on the grid has the potential to be very destabilising as seen with commercial solar generation.

These four issues are part of a bigger problem: electricity infrastructure and markets are inflexible. They were not designed to manage decentralised and unpredictable electricity production. Nevertheless, this is the model we will have to manage in the future. Distribution lines also have ramping limits constraining how quickly power flows can be increased or decreased. Volatile prosumers and commercial wind and solar farms compromise the grid’s technical stability. And we still need back-up for the days and hours when renewable electricity production is low. Managing variable electricity production demands a model where this responsibility is shared by the market players.

Graph was found at www.powermarket.eu

Electricity prices & the solar eclipse

Electricity cannot be stored. When the sun hits a solar panel, or coal is burnt to turn a turbine and generate an electrical current, this energy is delivered to the distribution grid straight away.

Spot markets are where wholesale electricity producers and consumers go to balance their planned against their actual electricity needs. Those needs become clearer the closer we are to delivery, which is why electricity is often traded the day-ahead, or on the same day as delivery to the grid (intraday). This is particularly true for solar and wind power generators since the weather forecast becomes increasingly accurate from 24 hours out.

Solar eclipse

If you are a solar power farm what do you do if your energy source – the sun – goes offline? This is what happened last Friday morning, March 20th, in North-Western Europe. A solar eclipse, lasting around 75 minutes, during which the moon at least partially blocked the sun, had a big effect on solar electricity production.

Germany was particularly affected. Today it gets approximately seven-percent of its electricity from solar energy.

The celestial event affected French-German intraday spot prices between 9:00 and 11:00am. If you didn’t know better you might’ve thought the traders had pressed the wrong buttons on their keyboards! Bids as low as -975.00 euros and as high as 950.00 euros were tendered. To give you an idea prices are normally closer to 20.00 or 40.00 euros on the intraday market at the moment.

The final prices did eventually settle at 40.79 euros for 9:00-10:00am, and 66.37 euros for 10:00-11:00am, but varied a lot within the hour. Some 15min intervals settled at a negative price. This is not so unusual and has been seen before.[i] Nevertheless, the spot market demonstrated strong resilience to price volatility during the eclipse.

Negative electricity prices

When wind and solar generators have really good days electricity prices can drop below zero.[ii] The negative price means the market is oversupplied.  Everyone produced more electricity than expected and they don’t know what to do with it.

A negative price indicates you would actually pay someone else to use the excess electricity you produced. Why? It might be too late to decrease your production. Gas, coal and nuclear power plants need several hours to warm up (or down). Such facilities do not have simply on/off switches.

Avoiding blackouts

Those in charge of maintaining electrical grid stability, Grid Operators, can impose large fines if you exceed what you committed to delivering to the grid. Or if you do not produce as much as promised. Paying someone else to consume your excess electricity is probably a lesser loss than the fines imposed by Grid Operators.

The Grid Operators impose these rules because electrical currents need to be gently “ramped up” and “ramped down.”[iii] They have to plan ahead to ensure electricity flows safely and avoid blackouts.

What’s more consumers are fickle. You wouldn’t have been happy if your computer crashed, or you couldn’t make a cup of tea during your morning break because there wasn’t enough electricity – solar eclipse or not.

No one knew exactly how the solar eclipse would affect production, which explains traders’ erratic behavior. Somewhere else in Europe a more flexible electricity generator – probably a gas-fired power plant – had to quickly ramp up production to replace the eclipsed solar generation and meet consumer demand. Only the most modern and efficient power plants can react this quickly.

A test for Germany

The sudden drop in solar electricity production was an important test of grid stability. If Germany achieves its 2050 goal to produce 60% of its electricity from renewables, then cloudy days will have an affect on the grid as significant as last week’s solar eclipse.

The European Union also plans to increase the share of renewables in electricity production across the continent. In the future enormous swings in solar production could become commonplace.

[i] Take a look at all the prices here.

[ii] Sunny days tend to be windier then average, so solar and wind production peaks can coincide.

[iii] Imagine pulling your hairdryer out of the wall when it’s on full blast. Sparks fly! Multiply that effect by thousands and you can imagine the challenge for Grid Operators.