FORESIGHT Spring/Summer 2023 - teaser

MARKETS Who should manage the system?

POLICY Europe stands at a crossroads

MARKET REVIVAL

FINANCE CfDs winning hearts and minds

TECHNOLOGY

Demand-side's silent contribution

FORESIGHT Climate & Energy SPRING/SUMMER 2023

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FORESIGHT Climate & Energy ISSN 2446-094X

The electricity sector has come a long way since many of the rules that govern it were written. Distributed energy resources, battery storage and electric vehicles had not yet appeared on the scene when the regulations and frameworks that dictate how power is produced, transmitted and consumed were put in place.

The rules were also designed with the sole aim of ensuring security of supply in a way that also guaranteed a pro t for generators, with the need to slash greenhouse gas emissions an afterthought at best.

There have, of course, been tweaks made here and there as new technologies emerged and made inroads into the energy mix, but the rulebook has ultimately become outdated. It no longer re ects the needs of the 21st Century’s energy landscape nor the vision for a decarbonised economy by 2050.

Russia’s invasion of Ukraine in early 2022 put Europe’s lawmakers on high alert and sparked talk of a signi cant overhaul of the rules and regulations as energy prices spiked.

However, major market changes such as those touted tend to spook investors. Any considerable upheaval could delay the energy transition while those who hold the purse strings gure out the best place to put their money. Therefore, smaller upgrades to the market design will instead help the market make business plans for zero-carbon energy sources.

And the markets can be powerful when the stars align. The signicant cost reduction of renewables through technology advancements and e ective regulation is a testament to that. The sharp rise in power prices seen in the wake of Russia’s invasion of Ukraine has made clear the need to incentivise cheaper and cleaner green energy.

This is the central message you will nd throughout the pages of the 16th special print issue of FORESIGHT Climate & Energy. By installing market frameworks for power purchase agreements or contracts for di erence, investors will be able to con dently back clean power projects. Similarly, crafting market regulations speci cally for storage capacity will help bolster the business case for solutions of all shapes and sizes.

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We also look at whether a change in the way electricity prices are set is needed so that consumers can bene t from cheap renewable energy. And we delve into the role the demand side can increasingly play in the transition if the rules are in place to allow it. Incentivising exibility on the part of consumers and promoting digital technologies around the edge would mean valuable clean energy can be used more e ciently.

The electricity market can no longer be designed purely around pro t and security of supply. It also needs to facilitate the transition to zero carbon.

David Weston EDITOR-IN- CHIEF

A QUESTION OF MARKET CONTROL

With ever more diversi ed grids, questions over who should operate them are growing

PAGE 6

A CONTRACT MAKES

ALL THE DIFFERENCE

Governments are examining why CfDs are so e ective in encouraging renewables investments

PAGE 32

EUROPE STANDS AT A MARKET DESIGN CROSSROAD

Discussions on redesigning the market range from evolutionary to revolutionary

PAGE 14

MARKETS POLICY FINANCE

GOVERNMENTS BID TO FIX AUCTION DESIGN

Authorities need to tempt developers back to renewables auction rounds

PAGE 24

BUSINESS

LIVING ON THE EDGE

Improving energy use at the edges of the grid could avoid expensive physical upgrades

PAGE 42

THE BIG PICTURE

REWILDING OUR WORLD

Estonia’s peatlands are being restored to provide a service to the country’s citizens once more

PAGE 40

TECHNOLOGY

THE RISE OF THE FLEXERS Rules on how the demand-side can help in the energy transition are taking shape

PAGE 50

MARKETS BRACING FOR A STORAGE STORM

The rules around storage need to catch up with the market’s demands

PAGE 58

THE NEXT INDUSTRIAL REVOLUTION

China and the US will dominate the storage market, impacting growth and regulations elsewhere

PAGE 66

A QUESTION OF MARKET CONTROL

Grids need to accommodate a host of new and variable low-carbon assets, but who should manage how they operate and what they get paid remains a thought exercise despite the changes already happening

Early March 2023 saw a buzz ripple through energy circles as the European Commission prepared to release new proposals on electricity market design. Mention of power purchase agreements, contracts for di erence and subsidy limitations in a leaked version of the proposal was “music to my ears”, renewables nance heavyweight Jérôme Guillet wrote on his Substack blog.

Lars Stephan of US-based battery rm Fluence praised the draft for having, “The strongest legislative language of the European Commission yet on the need for exibility and the important role of energy storage for the integration of renewables.”

Meanwhile Kristian Ruby of the European electric utility industry body Eurelectric was more cautious over the proposed market reforms. Some of the measures discussed in the run-up to the proposal could be “poison for investor con dence”, he said.

Having endured sky-high power bills for much of 2022, few European consumers would doubt that the continent’s electricity markets are due for reform. However, few outside of the power sector could imagine the complexity of the system that delivers electricity to their businesses and homes—and the intricacies of how that energy is priced.

Modern electricity provision depends on two interlinked systems. One is the infrastructure that ensures electricity supply always matches demand. The other is a nancial market that prices every kilowatt-hour based on the availability of energy at a given point in time. Both systems can be thrown o kilter, a ecting the other in the process.

GRID CHALLENGES

Imbalances on the physical network can lead to blackouts, while those on the nancial side can result in unexpectedly high prices. Grid operators try to avoid such imbalances, but doing so is becoming more di cult as generation moves from dispatchable thermal plants to variable wind and solar power.

Hence the need for a rethink, which in Europe was further emphasised by events in 2022.

It would have been a tough year even without Russia’s invasion of Ukraine, analysis by energy insight rm EnAppSys shows. Drought depleted Nordic hydro reserves, forcing Norway to limit its renewable generation and import more energy from its neighbours than usual.

The drought also sapped the rivers used for nuclear plant cooling. France’s signi cant nuclear eet, already a ected by scheduled outages, was forced to scale back operations further with output dropping even lower than it had when the lockdowns induced by the Covid-19 pandemic slashed demand.

The issues “caused the nation’s day-ahead prices

to rise to record highs,” EnAppSys says, “resulting in a switch in the position of the French market from being one of the largest exporters of power in Europe to being a net importer.”

GAS PRICES

It was against this backdrop that Europe also faced the loss of Russian gas supply, vital for winter electricity production. Prices on the Dutch Title Transfer Facility gas market hit a record of €308.18 per megawatt-hour in August 2022, EnAppSys says. The price of gas is signi cant because wholesale electricity markets in Europe operate on a marginal pricing model.

In this model, di erent forms of generation enter the system based on how much they cost, with the

lowest-cost technologies—typically solar and wind— being given priority. Provided they cover all that is needed, electricity prices stay low.

However, if demand goes up then the wholesale price rises to accommodate more expensive forms of generation. When gas hit record levels, then electricity prices in areas burning gas also shot up.

PRICE CAPS

This happened in many European nations, forcing lawmakers to implement arbitrary price caps that Eurelectric’s Ruby slammed in a social media post. “Politically agreed revenue caps are not only di erent per technology,” Ruby said. “They are also di erent per country, creating serious distortions of the internal market.”

Coming on top of in ation and “other market interventions”, the caps were denting investor condence, he said, with 2022 European wind turbine orders down 47% on 2021 levels. “A disruptive reform would cloud the horizon further and lead to a multi-year slump in investments,” Ruby wrote. “If the internal electricity market is permanently damaged, that could be the beginning of the end for the entire internal market.”

Ruby’s hyperbole may have been coloured by the need to protect the interests of Eurelectric’s utility members, which have plenty to lose in a shakeup of electricity market rules. However, his downbeat view

“A disruptive reform would cloud the horizon further”

Gas price volatility

Gas prices in Europe in 2022 varied considerably more than previous years, sending repercussions across the energy sector

of market conditions was appropriate, with the situation of 2022 highlighting a range of challenges.

Facing the loss of Russian gas, the European Commission rushed out the RePowerEU legislative package to speed up renewables permitting and foster investment in clean energy.

Yet at a time when Europe should have been racing towards a low-cost, low-carbon economy, governments were unable to ll renewable energy auction quotas and the EU failed to greenlight a single o shore wind farm in the whole of 2022.

These problems are not all the result of electricity market design, but the extraordinary events of 2022 highlighted tensions that are growing as European grids move to a model dominated by intermittent distributed generation. Such tensions are not unique to Europe but will ultimately emerge in all established electricity markets as they go through an energy transition.

TWO VISIONS

A central challenge for such markets is how to go from managing a few generation assets that can be turned on and o more or less at will, to dealing with, and rewarding, thousands of market participants delivering intermittent supplies. To complicate matters further, the energy transition is blurring the distinc-

tion between buyers and sellers.

Electricity markets increasingly need to recognise and reward consumers who, for example, take part in demand response programmes (page 50) or sell excess generation from distributed energy resources (DERs) such as solar panels. How markets might do this was summarised by American researchers Lorenzo Kristov, Paul De Martini and Je rey Taft in a 2016 paper titled “A Tale of Two Visions: Designing a Decentralized Transactive Electric System”.

The trio contrasted two views of market control. “One vision is based on a centralised, whole-system optimisation performed by the transmission system operator (TSO), which may also operate wholesale spot markets,” they said. “Under this model, the TSO needs detailed information and visibility into all levels of the system, from the balancing authority area down through the distribution system to the meters on end-use customers and distribution-connected devices.”

The other vision, “Involves a decentralised, layered-decomposition optimisation structure, for which optimisation at any given layer of the system only requires visibility to the interface points with the next layers above and below. The choice of which vision to aim for in any jurisdiction will have major implications for specifying the complementary roles

POLICY

Changes need to be made to how electricity markets are managed so that they can handle the pace of the energy transition, but there is li le consensus about what tweaks are actually required

Europe stands at a market design crossroad

The global energy crisis sparked by Russia’s illegal invasion of Ukraine shed light on a di cult problem: cheap clean electricity prices are being in ated by more expensive fossil fuels.

Decoupling a ordable renewables from costly gas-powered generation has become a top political priority as a result, prompting politicians to demand that market rules be changed so that energy systems can be insulated against future unforeseen global events.

Ideas on how actually to do that have ranged from the radical to the restrained as governments attempt to protect their national interests. Energy experts and the sector itself are sounding a note of caution though, insisting on evolution rather than revolution.

RADICAL SIGNALS

The European Union (EU) is embarking on a reform process that was rather unthinkable at the start of 2022, given that top o cials had previously ruled out tinkering with the legislative architecture that underpins the whole market.

However, after months of increasing energy prices, protracted talks about capping gas prices and governments committing huge chunks of budgets to energy subsidies, this was one of the solutions that garnered political support.

“The EU electricity market system does not work anymore. We have to reform it. We have to adapt it to the new realities of dominant renewables,” European Commission President Ursula von der Leyen said in June 2022.

That u-turn and von der Leyen’s strong language suggested at the time that the Commission would propose a radical overhaul of the markets.

However, as price spikes attened out towards the end of 2022 and early 2023, and as political pressure waned, it became evident that rather than that radical overhaul, the EU executive branch would just propose targeted improvements to the current arrangements.

MUTED ACTION

ACER, the EU’s energy regulators agency, carried out a full assessment in mid-2022 of how the market was

Route ahead

Regulators and lawmakers have to make a number of difficult choices to design an effective market

TEXT Sam Morgan PHOTO Anatoliy Shostak

functioning and found that the current design is t for purpose and “worth keeping”.

This was ultimately re ected in the Commission’s plan published in March 2023, in which it suggested that EU member countries should assess exibility (page 50) needs and set national targets for demand-side response (page 42) and energy storage (page 58.

Long-term contracts like power purchase agreements (PPAs) and contracts for di erence (CfDs) (page 32) will be made more attractive by market-based derisking guarantees. CfDs will only be mandatory if public money is involved.

More revolutionary changes to the rules will have to wait until the next Commission takes over in mid2024 after pan-European elections have been held in May of that year. The political makeup of the European institutions will then dictate how ambitious a full reform can be.

Governments and members of the current European Parliament are assessing the plan that is now on the table and will try to shoehorn their own suggestions into the mix before attempting to broker a nal deal before the end of 2023.

What the Commission says and what members of the European Parliament want only go so far, as the

real weight of the decision will be imposed by the Council of 27 member countries, many of whom have voiced jarringly di erent demands.

FOOD FOR THOUGHT

When the Commission launched its review, some governments wasted little time in outlining what they thought the reform should involve. Among those to propose more radical suggestions was Greece.

The Greek proposal said that the best way to shield cheap renewables from expensive gas prices would be to split the market into two separate pools based on the type of energy generation provided. Low-carbon and renewable energy sources would be grouped together and managed by state-backed CfDs, while on-demand resources would make up the other pool.

“It is evident that a market designed to apply marginal cost pricing does not t the purpose when the system is dominated by low carbon and zero marginal cost resources,” the proposal read.

“This leads to a systematic market failure: marginal costs persistently stay above total average costs and there is no way to make them converge, which is exactly what a well-functioning market must do,” the note added.

Michael Pollitt, a professor of business econom-

New direction Commission president Ursula von der Leyen (above) signalled significant changes to electricity market design were required

PHOTO European Union

Divide and conquer

ACER has recommended spli ing Germany's single bidding zone into a number of different bidding zones

electricity markets that the EU must meet its 70% cross-zonal capacity target by 2025 in order to boost the amount of power that can be shared between countries.

“It really is a no-brainer to increase interconnection and the capacity for trade. The crisis has shown that interconnection is really valuable, as are shared resources,” says Pollitt from Cambridge University.

He adds that the Commission should have more oversight of interconnection and grid targets, plus each country’s energy and climate plans, known as NECPs, should be scrutinised more closely to make sure that interconnection is made a priority.

NECPs are due to be updated and assessed over the course of the next 12 months, as governments have to demonstrate how they will meet the raft of new and updated energy and climate targets that have recently been written into EU law.

ACROSS THE CHANNEL

The United Kingdom is also reviewing its market rules. In March 2023 the government published the results of a consultation that it intends to use in the ongoing reform process.

Surveyed replies broadly supported changing the rules to provide better protection from high energy costs and easier access to more renewable energy capacity but there was little consensus over the best way to do it.

The vast majority of survey responders supported the UK’s target of fully decarbonising the grid by 2035 but the replies did not agree on whether the government should consider splitting the wholesale market or implementing nodal or zonal pricing.

There were enough dissenting voices for the government to rule out several options though, including local imbalance pricing, decentralised reliability

Point of view

UK advisors do not see the need for separate markets

POLICY

Governments bid to x auction design

There is no getting away from the fact: 2022 was a terrible year for renewable energy auctions in Europe. Lawmakers pressed for a rapid buildout of clean energy to replace the loss of Russian oil and gas resulting from the war in Ukraine. But as auction after auction yielded disappointing results it was clear investors were not playing ball.

The auctions’ failure to deliver much-needed renewable energy capacity has put industry groups on alert and led to questions over whether a current focus solely on economic criteria is too restrictive. To meet Europe’s climate targets, “We need to get the auctions lled,” says Christoph Zipf of the industry body WindEurope.

Auctions are certainly not being lled. In Italy in 2022, the year kicked o with more than 3.3 gigawatts (GW) under the hammer. This was capacity left over from seven previous auctions rounds held under a

2019 decree called FER1. According to press reports, only 306 megawatts (MW) of utility-scale solar and wind were handed out, marking the eighth Italian contest in a row that was undersubscribed.

Italy would go on to hold another lacklustre auction later in the year, o ering more than 1.9 GW and securing just over 413 MW.

Soon after, Spain held a technology-neutral auction for 3.3 GW and awarded just 50 MW. The asco came after the Spanish government failed to attract a single bid for 220 MW of concentrated solar power capacity, despite having a national integrated energy and climate plan that calls for 2.5 GW of the technology by 2025.

It was not just Mediterranean countries that failed to meet auction expectations. December 2022 saw Austria putting almost 900 MW on the block but awarding a little over 444 MW. Croatia, France, Greece and Poland also held undersubscribed auctions.

WANING INTEREST

The lack of response primarily a ected the onshore wind and solar capacity. It seems developers were put o entering the tenders due to a combination of longstanding permitting challenges and overly aggressive cost assumptions on the part of lawmakers.

Waning interest in government auctions is a problem because they are seen as the main route for European Union (EU) member states to secure the renewable energy capacity that Europe needs to accomplish its climate goals.

Having largely phased out early subsidy schemes such as feed-in tari s, European governments now predominantly procure renewable energy through reverse auctions that often use a contracts for di erence or CfD (page 32) pricing model.

CfDs encourage clean energy investment by giving investors access to a secure, xed, long-term revenue stream. At the same time, the generator is free to sell any electricity produced outside of its CfD arrangement. Such sales, for instance through spot markets or corporate power purchase agreements (PPAs), may be more pro table than CfDs but are also more volatile.

In recent years, renewable energy groups have tended to bid low in government auctions with the aim of securing a CfD that can act as a basic revenue stream, to be later topped up with other sales.

RISING COSTS

This has helped countries such as Portugal to achieve record-low rates for solar energy and has encouraged authorities to keep reducing the strike prices below which auction participants are expected to bid. The situation works well as long as wind and solar energy keep getting cheaper to produce, but this did not happen in 2022.

Instead, supply chain problems and in ationary pressures saw the cost of onshore wind rise 7% and xed-axis solar climb 14% year on year, according to June 2022 gures from the analyst rm BloombergNEF. “These developments led to the average wind turbine being 30% more expensive than it was two years ago,” adds Zipf.

Despite the rising cost, renewables remained far cheaper than fossil fuelled generation last year—but it no longer made nancial sense for many renewable energy developers to bid for the contracts on o er in European auctions. In Spain, the authorities do not seem fazed, despite having handed out less than 6.4 GW of the roughly 10.1 GW o ered through auctions in 2021 and 2022.

“The result of these auctions does not a ect the course set out in the National Integrated Energy and Climate Plan,” says Xira Valdés Villazón of the Span-

ish Ministry for the Ecological Transition and the Demographic Challenge. “Other technologies, such as [solar] self-consumption, are developing more quickly than expected and the government has room to secure a perfectly manageable renewable electricity system with lower prices than now,” she adds.

MARKET OPTIONS

Figures from APPA Renovables, a Spanish renewable energy association, show the country installed a record 8.3 GW of renewable capacity in 2022. Plus, the Spanish administration has already permitted 28 GW of renewable energy this year, giving it more than enough capacity to meet its annual targets, Valdés says.

What is happening instead is that project owners are steering clear of government auctions. “Developers believe they can get a better return for their investments if they sell their energy directly on the market [merchant] or through PPAs,” says Valdés.

The auction calendar is there to provide certainty for investors. “But that does not mean it is necessary to allocate all the installed capacity in each auction,” she adds.

Capacity that is not awarded in an auction can be carried over to the next one, she adds, and the Ministry can opt to add more auctions to the calendar if needed—something that happened in Spain in 2021

and Italy in 2022. “For the energy transition, we need to install renewables irrespective of how they make money,” says Valdés. “The auctions the government organises look to provide certainty to investors without preventing other ways of generating revenues.”

Not everyone buys into this thinking, with the Spanish business paper El Economista warning in November 2022 that Spain’s auction problems would see the country failing to meet most of the clean energy objectives it had set for 2030. Rolling spare capacity over from one auction to the next may help overcome a temporary mismatch, “But if you don’t solve the underlying problems, it just gets ridiculous,” Zipf says.

Furthermore, even if Spain can meet its renewable energy installation targets thanks to plants funded through merchant sales and corporate PPAs, that does not necessarily mean other EU markets could follow suit. In terms of PPAs, “the Spanish market is

“If you don’t solve the underlying problems, it just gets ridiculous”

Targets threatened WindEurope's Giles Dickson (right) believes renewables targets will be missed if auctions are le unfulfilled

established and works well,” says Zipf. “Some other markets have hardly seen any PPAs yet.”

NEW MEASURES

Although a corporate appetite for clean energy supplies is leading to more and more PPA activity, WindEurope has told the European Commission that a credible auction scheme is essential to the energy transition.

The Commission has taken steps to improve matters. Its REPowerEU strategy, rushed out after Russia invaded Ukraine in early 2022, aims to reduce the EU’s reliance on Russian fossil fuels by boosting clean energy output.

One of the main ways it aims to do this is by simplifying and speeding up project permitting, which has long been recognised as a major problem for European renewables deployment. “A wind turbine project onshore takes on average about ve years to get a permit in Europe, which of course is too long,” says Zipf.

Red tape was seen as dragging down auction results even before pricing became a serious issue. A case in point is Italy’s FER1 auctions, where bidders

were deterred by slow-moving bureaucracy. “Italy is Europe’s prime example for how bad permitting leads to low renewables build-out,” WindEurope boss Giles Dickson said in a February 2022 press note.

“Neither the EU’s renewables target for 2030 nor Italy’s national targets for wind energy count for anything if there aren’t enough permitted projects that can bid into the auctions,” he said. “The latest undersubscribed auction shows once again that Italy urgently needs to x its permitting arrangements. No other European country has more problems in permitting new wind farms than Italy.”

PERMITTING IMPROVEMENTS

The REPowerEU package aims to overcome such challenges through a package of measures, such as setting a two-year permitting deadline for green eld projects and one year for repowering work. The regulation should also help permitting procedures become more robust, so approvals are harder to overcome through legal challenges.

“The European Commission has now said the expansion of wind energy is a matter of overriding pub-

FINANCE

Finding the most efficient way to pay for the energy transition is not an easy affair—but lawmakers worldwide seem to be increasingly converging on contracts for difference as the mechanism of choice to fund emerging technologies

A contract makes all the di erence

The Big P icture

Once a vital source of warmth and energy, Estonia’s damaged peatlands are now responsible for roughly a third of the country’s carbon output. However, as this photo shows, restoration and rewilding efforts have enabled some of these bleak but beautiful areas to perform a climate-friendly service through carbon sequestration. Peatland bogs cover around 3% of the Earth’s surface, but contain twice as much carbon as all the forests put together, according to the World Economic Forum. Le to its own devices, the world can heal itself.

PHOTO Bernhard Lang

Seeking cheaper alternatives to expensive and time-consuming physical upgrades, grid operators are increasingly turning to digital solutions. While some projects are already underway, slow-changing regulatory frameworks mean the rollout is sluggish

LIVING ON THE EDGE

Grids were not designed for power to ow away from the ends, or edges, via lots of distributed energy resources (DERs), such as solar and wind farms. Expansion in electri cation, from new modes of transport to heating and beyond, requires the installation of many more thousands of electric vehicle (EV) chargers and heat pumps over the coming decades. This will ramp up the demand for clean electricity to ow around the edges of the grid where the end users are located.

Meanwhile, more storms, droughts and other types of climate change-induced extreme weather patterns place additional demands on the pylons, poles, wires, substations, transformers and other

physical assets that carry power. Having a system with multi-directional power ows will help increase its resiliency and security.

Decarbonising power supplies, where renewable and low-carbon electricity makes up the majority of electricity transported across networks entails a huge shift in terms of where on the grid energy is produced—from the transmission system to the distribution grids. BloombergNEF, an energy analytics and research group, estimates the share of power injected into Europe’s distribution grids will increase to 66% by 2050, up from 27% in 2022.

It is no wonder, then, that digital technologies and specialised software have become an increasingly essential tool for managing modern grids.

THE RISE OF THE FLEXERS

The ability of consumers to adjust their electricity demand in response to price signals and system operator requirements has a fundamental role to play in the energy transition. Financial incentives and a regulatory framework that values demand-side flexibility assets are essential to limiting investments in the grid and backup generation

When the UK’s National Grid Electricity System Operator (National Grid ESO) rolled out its new Demand Flexibility Service in the winter of 2022, over one million British households signed up with their electricity suppliers to change the time they used appliances like dishwashers and tumble dryers and to recharge their electric vehicles (EVs) to o -peak periods.

The new service allows the UK electricity system operator to access additional exibility resources when national demand for electricity peaks during the winter. Participating consumers, sometimes referred to as “ exers” in the British press, are informed the day ahead and receive nancial incentives like rebates or energy credits to encourage them to use electricity o -peak. This in turn reduces the need for the system operator to resort to traditional exibility assets like gas peakers to prevent the risk of blackouts.

Demand-side exibility can be used to shave the peaks o electricity demand, while also helping to shift load to times when the power supply is overabundant and prices on wholesale markets are cheap. This typically coincides with moments when renewable energy supply is high, so it may also come with the bene t of lower curtailment of wind and solar plants resulting in fewer greenhouse gas emissions.

Flexing demand will become increasingly important with the growing electri cation of the heating and transport sectors, notes Alex Schoch of Octopus Energy, a UK-based utility. “We are moving from a world in which net energy load is decreasing because of energy e ciency into one in which it is increasing. Most of this transformation is happening in the consumer space,” he says.

COST SAVINGS

Heat pumps in houses and electric vehicle charging will add to electricity loads but can also be used exibly. Homes can be pre-heated in o -peak hours, provided they are well-insulated, and EV charging can be programmed for times when electricity prices are low and power is green.

Behind-the-meter rooftop solar and battery storage can also contribute to system exibility, as can energy communities generating, storing and consuming power locally.

Between €11.1 billion and €29.1 billion could be saved each year between 2023 and 2030 in distribution grid investments in the European Union with full exploitation of demand-side exibility, according to a 2022 study carried out by DNV, an independent assurance and risk management provider, and Smart

Energy Europe (smartEn), an association promoting digital, decentralised and decarbonised energy solutions.

On top of that, the report estimates €71 billion in annual direct savings to consumers, €2.7 billion in annual cost savings from avoided peak generation capacity, a decline in renewable curtailment of some 15 terawatt hours (TWh) and 37.5 million tonnes less in annual greenhouse gas emissions.

NO SENSE OF URGENCY

For the potential of exibility on the demand side to be maximised, however, the regulatory framework and market design are key.

Sabine Erlinghagen of Siemens Smart Infrastructure notes that the need for exibility is becoming more pressing as the growth of distributed energy resources (DER) accelerates, “But there is not yet enough sense of urgency from a regulatory or a market design perspective,” she says.

The energy transition will go faster and, “[Be] much more economically viable if you take advantage of exibility both to avoid overinvesting to put copper in the ground as well as to lower the bu er you need to operate the grid,” she adds. Combined with software (page 42), exibility allows the system operator to run the grid closer to its physical limits, Erlinghagen explains.

There are already “a lot of good enabling frameworks at a European level” for demand exibility, starting with the 2019 EU Electricity Directive, but implementation in national legislation is lagging, states Michael Villa of smartEn.

Villa notes that there are still few electricity suppliers that o er dynamic price contracts to their customers while system operators “are not using the exibility of market operators but are thinking in terms of investments to bolster the grid,” he says.

“The biggest challenge is to ip the entire energy system on its head,” says Octopus Energy’s Schoch. “The market rules and regulations are still very much oriented to central power generation and consumers being passive bill takers.”

“There is not yet enough sense of urgency from a regulatory or a market design perspective”

Shape, shift, shed or shimmy demand

There are a number of ways to move demand load away from peak times to help the system run more effectively

PRICE CUES

While power prices on the wholesale market rise and fall during the day, many end users do not have tari s that are tied to these uctuations, giving them little incentive to use electricity when the cost of providing it is lower.

Travis Kavulla of NRG Energy, an integrated power company in the United States, highlighted in a recent paper the missing incentives in regulatory policy for active demand-side involvement in the electricity sector, not only for consumers but also for their suppliers.

Kavulla notes that the rate-making process in the US has generally eliminated the nancial advantage to utilities of reducing the power consumption of consumers when it is most expensive to serve them, given that these utilities simply recover the cost of service in electricity bills.

VISIBLE INCENTIVE

At the same time, competitive retailers may also see their ability and incentive to activate demand limited, Kavulla adds. While these retailers are exposed to marginal price signals for energy, this is not always

the case for transmission, distribution and generation costs.

“The lack of retailer exposure to providing a retail customer with electricity service will diminish the retailer’s incentive and ability to activate demand— even if the incentives for energy supply itself are well aligned,” he says.

When it comes to consumers, Kavulla points out that time-varying rates have not worked when people have been required to opt-in, as take-up has been scant. “[Customers] should either take service under a time-varying rate as a default option or should be supplied by a provider that does have the nancial incentive and ability to activate the customer’s demand in relation to the dynamic wholesale market on the customer’s behalf. Someone, somewhere, must face clear incentives to actively manage demand in order for it to happen,” he argues.

The state of California has been a leader in moving towards time-varying rates. A new load management standard from the California Energy Commission (CEC) in e ect starting April 1st, 2023, requires the state’s largest power utilities to develop retail electricity rates that change at least hourly. The util-

SOURCE: Lawrence Berkeley National Laboratory

Shi Shed Shimmy

The power of flex

Direct consumer benefits of demand-side flexibility compared to a no DSF scenario

Instead, capacity auctions have tended to be biased against demand exibility, for example, with larger bid size thresholds that are easy for generators to meet but which create additional cost and risk for aggregators. Long lead times before contracts go into e ect also make it di cult for aggregators to sell participation in a capacity mechanism to businesses and households.

OVERRIDING THE MARKET

From a regulatory point of view, Erlinghagen of Siemens stresses the importance of establishing the conditions under which a distribution system operator (DSO) would be able to override the functioning of the market in order to ensure grid stability.

“The use of a heat pump or the charging of an EV can be made dependent on the price level, but it’s also important to know when a DSO would interfere with this,” says Erlinghagen. With the establishment of clear conditions, she notes that consumers would also bene t because system operators would be able to allow more electric vehicle charging stations, rooftop solar and other DER to connect to the grid.

ALIGNING INCENTIVES

Although demand exibility can reduce the need for grid investments, utilities have long been incentivised to make capital expenditures, passing on costs and an agreed rate of return to end users in their electricity bills. Regulators are looking at how to change this.

Incentives for investments in non-wires alternatives like demand exibility are “already in EU leg-

islation but have not been implemented”, says Villa. Article 32 of the EU’s Electricity Directive states that DSOs should be “adequately remunerated” for the procurement of exibility services.

The National Association of Regulatory Utility Commissioners (NARUC) in the US has examined how performance-based rate-making can be used to enable greater use of demand exibility to better align a utility’s business decisions with policy goals.

Performance-based rate-making approaches “can include moving nancial motivations away from investing in capital expenditures to exploring demand-side opportunities that reduce or shift electricity consumption,” says NARUC. It points out that this can be achieved through nancial incentives for achieving various demand exibility-related goals with rewards tied to metrics other than the utility’s volumetric electricity sales.

As Hawaii aims for 100% renewables by 2045, the state's Public Utilities Commission moved from a costof-service mechanism to adopt a performance-based rate system in June 2021.

“The performance mechanisms… include various metrics related to the advancement of demand exibility, including grid investment, transportation electri cation, asset e ectiveness, customer engagement and interconnection experience,” said Leo Asuncion of the Hawaiian commission.

“By collecting a robust data set and establishing transparent and well-de ned metrics, our regulatory framework creates clear expectations for the utility,” he added. •

SOURCE: DNV, smartEN

Decoupling the cost of clean energy from expensive gas prices is a difficult but achievable task, if there are enough green electrons in the right place. Storage has a substantial role to play in order for that to happen

MARKETS BRACING FOR A STORAGE STORM

More renewable energy in the mix means, on the whole, a greater need for power storage capacity. Currently, all of the green electrons cannot always be absorbed by grids or used by consumers as they are produced.

Some of this clean power can be used to produce next-generation fuels like green hydrogen or e-fuels but it will still be storage capacity that will play the most important and sizeable role in future energy systems.

Pumped hydro—which uses excess electricity to re ll a reservoir behind a dam before releasing the water through a turbine when power is needed—has been the go-to large-scale storage option for many countries. But the obvious limits of hydropower, such as costs, environmental concerns and geographical constraints, mean that other forms of grid storage are rapidly coming into contention to be crucial energy transition linchpins.

Battery storage in particular is set to enjoy a boom

as installation costs come down, policies converge around maximising clean energy output and regulators slowly but surely get their act together.

GRID SUPPORT

According to the International Energy Agency’s 2023 report on electricity markets, battery installations rose nearly 100% in China last year, compared with 2021. The United States saw an 80% increase, while in Europe it was around 35%.

The technology’s ability to store clean energy is its most obvious value but additional factors like grid balancing services are also needed, particularly as power systems move further away from being designed around peak loads.

Jarand Rystad, the founder of energy research rm Rystad Energy, told FORESIGHT’s Policy Dispatch podcast that “batteries will revolutionise the grid” and that storage goes hand-in-hand with solar power production in particular.

“The business case going forward will be inte-

Ba ery bank

Ba ery storage sites, like this one in the UK, need be er market dynamics to become investable

TECHNOLOGY

The major economies of China and the US have identified storage capacity as an industrial priority and are redesigning their markets to incentivise growth. The rest of the world’s economies are trying to compete but will instead need to ride the pair’s coa ails to benefit

The next industrial revolution

The global energy economy must eventually be based upon renewable energy if the world is to have an even chance of limiting the global temperature rise to 1.5°C—and grid-connected storage will play a vital role.

The grid-connected storage market—or “front-ofthe-meter storage”—is complemented by customer-sited storage for individual residences or commercial buildings. Industrial consumers can use storage to cut consumption peaks and provide backup power if there is a blackout. Meanwhile, vehicle-to-grid storage is also set to become more popular.

The power stored in batteries is dispatchable,

sometimes almost instantaneously, which is not the case with gas- red peaking plants, which have traditionally supplied dispatchable power and storage advocates hope to replace.

Elsewhere, batteries can provide ancillary services or frequency control services—the so-called FCAS market—which still is a niche use, says Kashish Shah from Wood Mackenzie, a market research group. These services will be required more often by grid operators as they manage increased variability on a grid caused by greater renewable energy penetration.

Shah also notes a newer service that grid-connected storage can provide, inertia, which is standard

Levelling up China and the US are throwing their weight behind storage technologies

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