The Seven Potholes on the Road towards 100% Renewable Energy

So what needs to be done to finally get the new energy system on the road? What are the obstacles the energy industry is facing in 2023 and onwards? In short: What are the biggest potholes on the road towards 100% renewable energy with regards to the electricity market design?

1. Preserving Sufficient Incentives to Invest in new Renewable Energy Capacities

Incentives for the construction of new solar and wind power plants are sufficient today because, on the one hand, national subsidy or support schemes continue to lay the basis for a long-term return on investment, and on the other hand because solar and wind power plants are increasingly being built without the helping hand of support schemes and subsequently refinanced on the free electricity market. But what about power plants whose marginal costs are not so low and which are used correspondingly less frequently? Where is the money to come from to refinance such power plants or storage units? At this point, the energy industry has been divided into two camps for many years. One favours the energy-only market, which only assigns a value to electricity that is actually produced. The second favours a capacity market in which, in addition to pricing the megawatt hour produced, the capacity held in reserve - the megawatt, so to speak - is also priced in order to solve the missing money problem.
 

2. Self-Cannibalization of Renewable Energies

Even today, on windy and sunny days, everyone can observe that electricity prices react with great sensitivity to a high feed-in of solar and wind power: They drop quickly. Only when wind power and photovoltaics produce less electricity later on do prices rise again. Due to the low operating costs of solar and wind power - sun and wind are free of charge - wind and solar plants are destroying their own prices, one could say hyperbolically. If they produce a lot of electricity, they earn less per megawatt hour compared to the average of all other energy sources, which can be wonderfully seen in the difference between the monthly German market values for solar and wind on the one hand and the corresponding values for bioenergy and hydropower on the other. At the moment, high electricity prices and the subsidies for renewable energies ensure that this trend is not particularly significant. However, should this dynamic of self-cannibalisation one day unfold in a non-subsidised, lower-priced market environment, we will quickly reach a point where the question of refinancing will also arise for solar and wind power plants. All the more so because this cannibalisation will become more drastic the more wind turbines and solar plants are connected to the grid.
 

3. Balancing the Grid in the Short-Term

To ensure that electricity flows when we switch on the reading lamp, turn on the oven or stream a movie, a huge system is needed in the background that not only produces this electricity but also reliably delivers it to us. Along the way, the voltage and frequency of the electricity flow must be maintained so that there is no interruption in supply. Until now, conventional power plants have supplied the reactive power, the spinning reserves and the required amounts of balancing energy. All of this must increasingly and one day completely be taken over by cleantech solutions. On a technical level, the issues have been largely resolved: reactive power can be provided by compensators as well as by renewable energies themselves; rotating masses resp. spinning reserves can also be replaced by synchronous generators or synthetic inertia through batteries, and possibly even by consumers. In the area of balancing energy, virtual power plants have been demonstrating for years that they are capable of dispatching aggregated renewable energies, battery storage and electricity consumers in such a way that the grid frequency is reliably balanced at 50 hertz. What is still missing is a convincing plan for the massive rollout of decentralised flexible units and smart electricity meters for the complete technological switch from existing conventional resources to cleantech alternatives to happen. The question of how the individual system services will be remunerated in the future has also not yet been satisfactorily answered.

4. Seasonal Storage

As mentioned, we have seen a lot of progress in the last few years in balancing fluctuations in the short term - within seconds, quarter hours, hours and days. However, one problem remains in the area of grid stability: if neither the wind blows nor the sun shines for long periods of time, the power supply must also be guaranteed. The often and emotionally discussed topic of dark lulls (or Dunkelflauten as we call them in Germany). Even if the problem will not be as dramatic as feared, as has been studied several times (at Agora Energiewende you can wonderfully visualise future periods of extremely low feed-in of solar and wind on the basis of historical weather data), the fact is that there will always be days or even weeks during which more than 50 gigawatts of missing solar and wind feed-in must be replaced in order to cover electricity consumption in Germany alone. Experts rightly point to the many solutions, from making consumption more flexible to Europe-wide balancing effects in a transcontinental electricity network that will be more closely meshed in the future, to hydrogen power plants. But few market participants seem really relaxed about this topic. A clear path must be taken here that creates peace of mind.

5. Power Transmission and Grid Expansion

The problem is well known: If we replace centralised large-scale thermal power plants with distributed energy resources, we also have to reorganise electricity transport. The answer to this problem so far has been ... more copper. The grid operators are building new power lines, increasingly also for the transnational interconnection of existing power grids. This is certainly good and sound and right, but the conceivable positive effects of a market design upgrade in the area of electricity transport, which can occur even without the construction of new power lines, are too often ignored. Antiquated regulations regarding the exemption of electricity consumers from grid charges often hinder a flexibilisation of electricity consumption. Yet an increase in local flexibility would have positive effects on increasing the share of locally produced and consumed energy and relieve the burden on the electricity grids. The same applies to the discussion about nodal pricing or various price zones within a given geography, which could also enable local or regional matching of supply and demand, or to the use of existing local flexibilities on the generation side, and on the consumer side as well, where local energy communities and smart grids are not really gaining momentum. Incidentally, in 2020, more than 6000 gigawatt hours of wind power were curtailed in Germany by the grid operators because they could not be transferred through the grid. That is the electricity consumption of a city with about 600,000 inhabitants. A master plan to relieve the existing power lines through intelligent dispatch and an increase in local own power consumption does not yet exist.

6. Sector Coupling: Everything will be Electric

A central imperative of the future energy system is increasingly emerging. We must stop burning CO2 emitters. The age of combustion may be at its peak today, but its end is already in sight. The world is going electric. While this development is already becoming more visible in some areas, such as cars or the heating of new buildings, it has not yet really begun in other areas, such as agriculture, air traffic or manufacturing. Electricity demand will naturally increase on the road to the all-electric society, but there is an efficiency dividend in this transformation, especially in the transport sector: Electricity-driven systems have fewer efficiency losses than systems based on combustion, which have high heat losses. An e-Golf requires less than 20 kWh for 100 kilometres of driving. A conventional petrol engine in a comparable car, on the other hand, needs around 60 kWh. There is also a second dividend: The large number of different systems, all based on electricity, makes it easier to network them. But here, too, a vision cast in rules is still missing: today, it is not even possible to feed the energy stored in a car battery back into the electricity grid.

7. Weak Price Signals

In an electricity market liberalised by unbundling, price signals are perhaps the central tool of market design. Prices provide non-discriminatory incentives for efficiency, for innovation and for investment. Nevertheless, this system relies on as many shares of the electricity price not to be fixed (e.g. taxes, subsidies, grid charges). Otherwise, the price signal is just too weak to have an effect. In some countries, only a small share of the retail electricity price is determined by the market at all, sometimes only one sixth. The full power of a market price that steers investments cannot develop in this case. In addition, externalised costs in conventional electricity generation have never been part of the price structure, be it costs for the disposal of nuclear waste or social and economic CO2 costs. In short: although the market price for electricity is the best available tool in the electricity market today, it is still far from having its desired maximum effect.