Europe’s energy transition has placed the sector under strain. As the industry prepares to convene for POWER-GEN Europe in Milan in June, Power Engineering International invited a panel of experts to debate Europe’s security of supply
• Azad Camyab –
Chief executive, Pearlstone Energy
• Simon Hobday –
Partner, Osborne Clarke
• Rudy Koenig –
Principal, QENIQ Advisory
• Peter Ramm –
Chief Operating Officer, Advanced Power Europe
What is the current state of security in the system?
Rudy Koenig: Precarious might be the right word, though it depends how you define it. In the wider sense I think we’re okay for the time being, but I think many of the things that are currently happening, across Europe at least, are threatening that and not all of those threats are being addressed.
Simon Hobday: Is security of supply “Are the lights going to go out”? Or do we mean “Is there enough fuel to produce power”? I think the two have been slightly mixed up at some levels. We have a challenge in the UK around producing enough electricity, which could cause brownouts or blackouts. But it’s not just about energy production; it’s also key to understanding the value of electricity and when you use it and when you don’t.
So, for example, a widget maker who makes an hourly profit of £5000 ($7300) might be able to save £10,000 in energy costs at a time when power is expensive. If potential savings outweigh projected profits, why would they make widgets at that time? They’d get more value from powering down, conserving energy and manufacturing at a different time.
So, you know, again it’s difficult to look at these things in isolation. From an international perspective, people place a lot of emphasis on interconnectors. But the interconnectors are only a small percentage of the system. You might have five interconnectors, but if each is only one megawatt then they’re the equivalent of a 5 MW power plant. Until we get a much more meshed network across countries then there’s only a limit as to how useful they can be.
Also, interconnectors aren’t a one-way bet. Think about it. If we’re facing a period of inclement weather, we are not going to be the only ones. So, there are two areas of interest around security: on a local level, where people want to know if the lights are staying on, and then there’s the wider fuel source. The two are related but they’re separate.
Azad Camyab: Simply put, it’s not very good. Changes to the regulatory landscape across the continent are taking capacity out of the system. EU Directives, such as the Industrial Emissions Directive and the Large Combustion Plant Directive for example, are taking 15 to 20 per cent of UK capacity out of the market between 2016 and 2020. So credible organizations such as the Royal Academy of Engineering say we’re heading towards a capacity crunch.
In fact, the regulator predicts that the UK’s reserve capacity margin is set to fall to less than 1.5 per cent from 2016 onwards. To put that figure in context, when I joined the market just over 20 years ago this margin was around 23 per cent.
Peter Ramm: We need to be careful when we think about this – and to dismiss renewables as they’re too unreliable. The central question is: how do we keep the lights on a cold winter’s day in February when there’s no sun and very little wind?
With that in mind, I’d say the gross revenue for our dispatchable plants is a bit low, and this is a worry since it leads to pressure to mothball our most reliable power sources. Security of supply will become an issue when we’ve shut these plants down and renewable sources struggle to make up the difference. We’ll find ourselves asking if it was really worth it.
When regulations have that effect you need to build new capacity back into the system, but that’s not really happening. Whether it’s because of the effect of the oil price on CCGTs or on the slow development of nuclear – even if we were to build now, capacity wouldn’t come online until at least 2026, leaving us hugely vulnerable in the meantime.
|Credit: Dong Energy|
What are the vulnerable points?
RK: On the one hand we’ve got the subsidy system, which is driving developments but without an underlying plan. And parallel to that is the so-called digital revolution, which, while it comprises relatively minor changes in production methods, is leading us into a very different future market – one which remains somewhat of a mystery.
So we have that big uncertainty to deal with. And, at the same time, we’re slowly chipping away at what we currently have, in the case of Germany, for example. So, on the one side we’re taking down the old system, and in parallel there’s a new system that we’re not familiar with and can’t be quite sure what it will lead to.
The third thing is that we have a political situation wherein fossil fuels are currently extremely cheap for various reasons, but as it is a commodity market it can change very rapidly, which could have a huge effect on the market from that perspective as well.
SH: It’s that combination of events that no one could predict beforehand. Imagine, it’s a cold period in March for three or four weeks with snow, towards the end of the winter so stocks are low. A plant has to go offline for unforeseen maintenance, rather than it being scheduled in the summer, and then something happens – a blade shatters or a pump blows – and you’re in a situation where you’re already constraining off demand and there’s nothing else to give. For me, that’s the biggest one.
Historically we’ve had the margin to cope, but we don’t at the moment. It will come back, but it’s just not there now.
AC: In a way it’s quite simple. There’s a fundamental mismatch between supply and demand. On the one hand, there have been delays to large-scale generation projects across the continent – particularly nuclear projects. On the other hand, in the UK there’s a mandate to maintain a power balance on the National Grid. But renewable generation, environmentally brilliant though it is, is so unpredictable as to make this very difficult.
PR: There’s a fundamental structural issue at play here, in that we pay for electricity on a megawatt-hour basis when we should be paying for capacity.
Beyond that, the transmission system is the issue, but we’re making good progress on improving the interconnectors between countries and bringing capacity online through offshore wind.
So then we need to consider the weather. Those cold nights in February are getting colder – and this means a greater demand for energy while renewables are at their lowest supply. It won’t be easy to balance supply and demand if our technologies can’t be dispatched.
How is increased renewables penetration affecting this?
RK: Renewables have positive and negative effects. On the one hand they introduce volatility into the market. That can have benefits in the long term but, of course, our market models aren’t set up to really take advantage of those benefits. In the short term it puts a lot of stress on the system due to the volatility of the supplies that they’re bringing into the market.
But, on the other hand, they also cost a lot of money. So they not only hurt conventional supply, they also absorb huge amounts of capital.
We’re almost taking a mortgage out on the future and taking capacity out of the market.
SH: Increased intermittency is driving TGCT and coal to not be economically efficient and putting new costs onto operating networks.
AC: They’re directly affecting it. Promoting intermittent generation that transmission operators can’t rely on has led to a real sense of inertia.
I’ll give you an example. I went to a National Grid conference just before Christmas and the Grid said that, of its 7.2 GW of solar capacity, it can’t really account for about 4 GW. That’s nearly 60 to 70 per cent. Because it’s unpredictable and they can’t really recognize it as such in the system – so that is a real issue.
With energy having become more volatile, the energy landscape has changed for large corporate consumers too. Power is no longer just a commodity. It needs careful and proactive management. So consumers are much more sophisticated, using digital methods to control their usage and protect their reputations.
PR: It’s as I’ve said – renewables are at the centre of the whole issue as we can’t count them towards our capacity when they’re not dispatchable.
What is being done, and should be done, to address this?
RK: You could have the market fix it, but I think that’s unlikely because politicians intervene. The second option is to tackle the three objectives that we always mention in general, which are security of supply, sustainability and affordability.
We’re already doing a lot on sustainability, CO2 reduction and all those climate discussions, so politics is doing a lot in this regard. A lot is being done by politicians with regard to affordability.
Of course, for the time being, there’s not that much they need to do because we’ve got fairly low prices in the energy market, but as soon as they just pick up a little bit they start shouting and complaining that ‘this is unfair’ and ‘we need to protect energy poverty’. So they do a lot on those two items, but security of supply is not something that’s been high on anybody’s agenda since Tony Blair in 2001. That’s something that we need to think about.
SH: We need to be more flexible. This means different ways of looking at supply such as localized usage – and also playing into that is the change of government policy around support for renewables. Across Europe there’s been a reappraisal of priorities.
AC: The supply side is one thing, but you need to match a good robust supply strategy with a good demand strategy.
This needs a modern approach. Take Airbnb. It’s a virtual asset business – they don’t own any properties but can provide flexible accommodation for their customers. This is starting to happen in energy as well, where virtual power plants can leverage the flexible load that people can shift from peak to off-peak demand.
This is new thinking, and regulators are beginning to recognize and promote this. The changing landscape has allowed for exciting opportunities to leverage this load-shifting alongside distributed generation to provide a truly flexible supply.
PR: From a commercial perspective, we need an appropriate pricing signal for dispatchable capacity. This needs to be cognizant of the fact that this is a fully integrated grid with electricity flowing right across Europe. So you need a classic remuneration mechanism to overcome bottlenecks in areas like the Pyrenees, or the relatively weak connection between France and Spain.
People are also talking a lot about energy storage. I suppose some battery storage could work in the short term but it’s a very expensive option. Despite the talk, I don’t really think the technology’s realistically ready to play a part yet – especially not if you want a cost-effective solution, which we do.
To what extent is the system open to cyber security threats?
RK: Well, I suppose there are two kinds: one would be a cyber-attack to our current systems, and I’m not an expert in that but I would assume that our systems are not terribly well-protected.
The other issue is that we are developing a system that is getting ever more cyber-based, and I don’t know that we have a master plan guiding that. In other words, we’re getting into a future without being sure of what that future is – so how can we know that we will be sufficiently protected? It’s a Brave New World type of situation – we face risks we’re not even aware of.
The more digitized our system gets, the more vulnerable we become. For example, cyber threats might have a bigger impact in a decentralized system based upon a smart grid and smart objects on the demand side. That’s before you take into account large-scale centralized attacks.
The trouble with a decentralized system is that nobody has a holistic view of vulnerabilities, and nobody can tell that an organically growing system is in fact growing healthily.
AC: It’s a particular issue on the demand side. Technology’s the enabler of the whole system now, so we need to protect it from cyber threats and terrorism. We need to innovate and to provide regulatory and financing support. But let’s not despair – we’re already making progress. For instance, the UK’s capacity market auctions work on 15-year contracts. Part of the bidding process involves addressing negawatts, or negative watts – or basically looking to provide long-term solutions to these issues.
Are there any additional challenges to security of supply? If so, how can they be overcome?
RK: If we take just one example, our energy system so far has been based on having utilities with strong balance sheets that basically run the energy business. It’s these balance sheets that allow them to make the necessary investments. As we move to a more digital situation, we can see companies such as EON or RWE close to bankruptcy. If, in the future, they are replaced by companies such as Google, Facebook and Amazon, or by telecoms companies, banks, financial institutions and funds, how competent will they be to run a public supply system that depends on an infrastructure that needs to be in place? To what extent are we able control what’s going on there and manage it?
There’s a fundamental change happening to our industry, how it works and how it interacts with the market and the public, and I don’t know how prepared we are for it.
It’s hard to tell because the digital revolution enables new participants to replace old ones. And how we decide to regulate it is crucial because there are potential pitfalls that come with this change as well as the widely touted benefits.
We see the same thing now with Airbnb. How do you regulate Airbnb? How do you regulate a power supplier with a completely different approach?
AC: There are three critical barriers: policy, capital and infrastructure. They’re interdependent, so what we need is to develop a strong, long-term policy framework to ensure that capital is attracted and deployed at scale, so that sufficient infrastructure is established, particularly on the demand side. That’s the key.