Dynamics in the IEM #2

Author: Thomas Sattich

The following graphs feature some main aspects of Germany’s energy transition seen from a European perspective: Phase out of nuclear power and renewables on the rise; short time power shortage in Germany after the phase out of 8 nuclear power stations in the wake of Fukushima; intermittency of German wind power, which equals the phase out of 8 nuclear power stations; Denmark as a working example for Germany, based on import-export of electricity in order to keep the network stable.

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Dynamics in the IEM #1

Author: Thomas Sattich

The following graphs feature some main aspects of the EU’s Internal Electricity Market, which is currently developed by European Union leaders: Germany in the centre of the system as main transit country for electricity; growing size of the system over the years as more and more countries get involved; isolated regions; export capacity of France (the “elephant in Europe’s electricity system”); huge tariff differentials.

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Thinkpiece: The impact of EU’s energy transition on the geography of the energy system, industry and transport

Author: Thomas Sattich

In October 2009, the European heads of state and government agreed on an ambitious long-term climate policy objective in order to prevent dangerous anthropogenic interference with the climate system and to ensure that the European Union (EU) plays its part in limiting global temperature increases to 2°C. Moreover, European policy makers decided to bring the European Union on a demanding decarbonisation path, with the  objective to reduce greenhouse gas (GHG) emissions by between 80 and 95 per cent by 2050, as compared to 1990 levels.

 Many decisions taken today influence the EU’s ability to meet these goals. Energy policy is one of the main fields in this regard, as decarbonisation of Europe’s economy in only a few decades implies a major and swift transition of Europe’s energy sector in order to reach almost zero GHG emissions from energy production, transportation and consumption. The electricity sector plays a particular role in this transition, as renewably-generated electricity has largely to replace fossil fuel consumption according to the decarbonisation plans.

The adaptation of Europe’s power system therefore is one of the key elements of the EU’s decarbonisation strategy, and as the energy sector moves towards greater electrification, it faces several challenges and strains. But decarbonisation does not simply represent the replacement of old power generation units with new and more efficient ones, but a new setup for the entire power industry when it comes to 1) energy carriers, 2) supply lines, 3) generation facilities, 4) power transmission and distribution infrastructure and 5) electricity markets.

Energy carriers: Being prerequisite for the generation of electricity, the characteristics of the energy carrier for electricity generation, its availability, transportability and storability determine the structure of the power system. As much as hydroelectric plants are bound by the availability of the elevation energy of water, fossil-fuel power stations require a steady supply of oil, gas and coal in order to be economically viable. Renewables make no exception in this regard, yet the characteristics of the respective energy carriers differ strongly from fossil fuels. Investors, decision makers and land use planning have to take these differences into account when setting up new plants.

Supply lines: Generation units are deployed where the respective energy carrier is best available and where markets are big enough to allow profitable operation. Distribution of generation units therefore will in any case be unequally over a given territory. The transport system can make a difference here, since it helps to supply large spaces, and therefore allows the deployment of generation units close(r) to electricity markets. But as the existing transport system has been set up during the era of fossil energy carriers, its topology may not match the requirements of renewables.

With the switch from fossil to renewable energies the established supply lines therefore will either have to be adjusted to the characteristics of the new energy carrier, or replaced by new ones. In case of renewable energies, such as biomass or biofuel, which share some characteristic with oil, gas and coal, the transition will be gradual, because existing supply lines are adjustable and therefore can stay in place. Yet other renewables, such as wind and solar, have very few characteristics in common with the traditional fuels when it comes to availability, transportability and storability, and therefore make entirely new supply lines necessary.

Generation facilities: The same holds true for power stations. Whereas some plants are adjustable for the use of renewable energy carriers and/or lower carbon emissions, others will have to be phased out and replaced by low carbon stations. Hand in hand with this replacement goes the adjustment of the power system to the characteristics of the new energy carriers, their availability, supply lines and storability; and since renewable energies, especially wind and solar energy, display other characteristics than fossil fuels, their large scale use inevitably has consequences for the functioning and geography of the power system, which also has implications for industry and transport.

Power transmission and distribution infrastructure: Yet not only the functioning and geography of the electricity sector changes with switch to new energy carriers, but also its product. Whereas the fossil fuel power plants allow the flexible adjustment of the power output to the power needs in the system/market, renewable energy plants are much less flexible to such external requirements. In contrast to carbon-based plants, where standardised units of coal, oil or gas make the operators of the power system partially independent from meteorological effects, many renewable energy plants depend on erratically changing elemental forces such as wind and sun.

The high fluctuations of some of the renewable power sources therefore poses problems for systems operators in those regions, where the respective generation units are concentrated; but these fluctuations do not necessarily signify a volatile system as such, if grid management is able to counterbalance the ups and downs in one region with those in others. In order to make decarbonisation possible the power grid therefore will have develop beyond a mere tool for the transmission of the generated electricity to the consumers and become a ‘living organism’ which instantly reacts to state changes. The larger the network, the smarter the operation and the quicker transmission, the better the power network will be able to absorb fluctuations.

Electricity markets: Decarbonisation of Europe’s power system will not only increase the volumes of electricity that can be expected to be generated, transmitted and consumed, but will also affect power markets. Liberalisation, self generation of electricity, new storage facilities and smart metering will increase the flexibility of consumers to react to the changing fabric of Europe’s energy system. Industry will also have to play its part in this transition process and adjust to the new policy requirements and the new characteristics of the power system. Electricity prices and security of supply are major factors in this regard.

These (and other) elements of the energy system interact with each other and pose several questions of technical, economic and political nature for the development of Europe’s power system: What is needed in terms of infrastructure upgrades? Can infrastructure development keep pace with requirements under decarbonisation? What adaptations of the transport system are necessary? How should industry react to the developments in the power sector? Which market players, regions and countries will be winners and losers of EU’s decarbonisation strategy? How do policy developments in the EU (both national and supranational) respond to given challenges and strains?

With a methodological approach based on economic geography and scenario analysis, the author will address these questions, evaluate the interaction of the above outlined factors and extrapolate likely trends in the energy sector. With statistical and qualitative methods the author will first evaluate how EU’s decarbonisation strategy will presumably change the topology of Europe’s power system; in a secondary step, the author will evaluate the link between the power sector on one side, industry and transport on the other. Central to the entire  analysis is the question, how the energy sector’s changing spatial topology will affect the structure of these key sectors of Europe’s economy.

Germany’s Energiewende, the Internal Electricity Market and Europe’s Future Energy System

Author: Thomas Sattich

Originally published as SWP Comments 27, August 2012

Abstract

The neglect of Europe’s Internal Electricity Market in the public debate on Germany’s “Energiewende” (energy transition) is surprising, given itsrole as the main transit country for electricity in Europe. The transformation of the country’s energy sector will further exacerbate network fluctuations and intensify the need for modifications in Europe’s power system. Cross-border power transfers will have to increase in order to overcome national limitations on absorbing large volumes of intermittent renewables like wind and solar power. As the Nordic power market demonstrates, only a truly integrated, supranational electricity market can provide the capacity needed for synergetic interaction of diverse national power systems. In order to establish such an infrastructure on a European scale, the energy transition needs to be guided by an economic approach designed to prevent further fractures in the Internal Electricity Market. Moreover, constructive negotiations with neighbouring countries on market designs and price signals will be important preconditions for a successful “Energiewende” in Europe.

Introduction

The German government proclaimed its “revolution of Germany’s energy sector” (Angela Merkel) without consulting its neighbours. Eighteen months later the country is still searching for an operational approach for transforming its energy system for a sustainable future. The neglect of Europe’s Internal Electricity Market is one of the most surprising aspects of these public debates, since increasing use of decentralized generation units such as wind turbines not only subverts the hierarchical top-down logic of electricity distribution on the national level, but has implications for the supranational dimension as well: National power systems do not function in isolation from one other and cross-border power flows are daily routine. Taking a European perspective on the consequences of Germany’s energy transition may therefore produce new insights (see SWP Comment 33/2011 and SWP-Aktuell 37/2012).

A major blackout in November 2006 illustrated the transnational nature of Europe’s power sector. Beginning in north-western Germany, the outage cascaded through Austria, Belgium, France, Italy, and Spain before finally crossing the Strait of Gibraltar to affect the Moroccan power system. Analogously, the repercussions of the Energiewende do not stop at Germany’s borders and may end up being more far-reaching than originally intended. While the transition could stimulate the trend to a more deeply integrated Internal Electricity Market and a more sustainable European power sector, the risk of disintegration of the European market and recourse to fossil fuels is equally present.

The backdrop to this dichotomy is the growing share of intermittent renewable energy sources such as wind and solar power. Depending on natural forces which are difficult to forecast and impossible to control, these forms of electricity generation cause growing fluctuations in the system and make it difficult to match output and consumption. Compared to past decades where baseload power generation defined the system, with power plants adapting their output to (predictable) shifts in demand, renewables turn the logic of power generation and distribution upside down. Nowadays grid management must match fluctuating generation to power consumption. Such a system is never far from blackout (overcharge) and brownout (voltage drop), making network management a Sisyphean task. Irrespective of whether it is indeed a revolution or rather an evolutionary process, Germany’s energy transition amplifies the “ups” and “downs” in the network as intermittent renewables largely replace the phased-out nuclear power stations. Hence the Energiewende creates the need to adapt the power system.

In this context uncontrolled power flows of surplus German wind energy to neighboring countries indicate the limitations of national systems in meeting the challenge (see SWP Comments 5/2012). One of the main tasks of energy policy therefore is to advocate a power system which is flexible enough to fulfill several tasks at once at different levels – local, national, and supranational. The difficulties involved in bringing enough units from Germany’s “cold reserve” into operation to counterbalance the “downs” point in a similar direction.

Cross-border electricity swaps will have to increase to keep the networks stable. Germany’s role as main transit country for electricity in the centre of Europe makes the the country’s energy transition implausible without taking interactions with neighboring systems into account: A truly integrated Internal Electricity Market could provide the capacity needed for synergetic interaction of diverse national power systems. Moreover, the ongoing discussions about which energy sources could provide a climate-neutral and economic operating load to counterbalance intermittent renewables show that the Energiewende could become a factor on international energy markets.

Best practice in the North: Denmark’s “grønne omstilling”

The Nordic electricity market is a “best practice” case of integrated electricity markets with high shares of renewables: A state-of-the-art transmission infrastructure densely interconnects the national systems, making electricity a commodity which is traded across borders. Moreover, with 64.9 per cent in Norway, 47.3 per cent in Sweden, and 30.3 in Finland the share of renewables in gross electrical consumption is well above the EU average. Yet with the exception of Denmark these high numbers for renewables cannot be compared to other EU member states due to the widespread availability of hydroelectric power in the Nordic countries. The Danish energy sector has otherwise been described as a microcosm of current major energy issues.

With 19.9 per cent, renewables in Denmark’s energy system already exceed the German 18 per cent target set by European Directive 2009/28/EC for the year 2020 (and set to rise to 100 per cent according to the Danish government). These high numbers are primarily based on electricity generation (see below) and have to be seen against the backdrop of external shocks and a successful energy saving programme. In contrast to other European countries, Denmark never put its plans for a large nuclear sector into operation and phased out its world-leading nuclear research programme in the aftermath of the 1970s oil crisis. In the long run the Danes gave energy efficiency and renewable energy high priority.

Starting from a very low level of 1.8 per cent in 1973, renewables grew steadily to today’s 29.1 per cent of Denmark’s gross electricity consumption despite GNP growth of about 50 per cent since 1980. Since Denmark became the EU member state with the lowest energy intensity and world leader in energy efficiency the country’s energy consumption remained stable over this period. Hence the transformation of Denmark’s energy system did not have to keep pace with economic growth. Wind power plays a role similar to the Energiewende concept, with wind turbines generating about 20 per cent of the country’s electricity demand (Germany: 6 per cent in 2010). Given the absence of major storage capabilities due to geological conditions in Denmark, this success of Danish energy policy is striking.

Best practice 1: Storage and interconnection

Denmark’s energy system has undergone radical change since the 1970s and is today one of the world’s most decentralized. This structure imposes particularly high requirements on the national power grid. With regard to intermittency, interconnections with neighbouring countries play a major role. Whenever there is too much electricity from Danish wind farms, the energy can be discharged to pumped-storage stations to the north (Norway, Sweden), or to consumption centres to the south (Germany, Netherlands). Since the surrounding power systems are much larger, electricity from Denmark is insignificant and can easily be absorbed. Conversely Denmark can rely on electricity (re-)imports. Denmark’s superb interconnections with neighbouring countries can therefore be considered the backbone of the country’s energy system. Without that infrastructure the integration of wind power would hardly be possible.

Hourly alternation from energy import to export thus keeps the Danish energy system stable despite the country’s large and growing proportion of intermittent renewables. The energy from wind power actually consumed in Denmark thus ultimately accounts for only the less striking average of 12 per cent of total electricity generated. Connecting electricity generation to local heating systems is another way to discharge parts the wind power surplus. During peak hours electric heaters replace fossil fuel combustion for the production of hot water, which is storable for many hours in pipes and tanks. With 62 per cent of Danish households connected to district heating the system has huge thermal storage capabilities for energy from Danish wind farms.

Best practice 2: Operating load and biomass

High shares of intermittent renewables in the energy system require power stations to provide the network’s base load, yet flexible enough to counterbalance the fluctuations in the system. After phasing out its nuclear programme Denmark switched to coal as the prime conventional energy source for network stabilization. But in recent years gas and biomass have become more important, whereas coal combustion is to be phased out by 2030 according to the Danish government’s latest plans. Biomass is slated to become the most significant climate-neutral energy source to reduce coal consumption.

Accordingly, biomass already accounts for approximately 14 per cent of Denmark’s energy consumption. In the electricity sector the growing use of biomass dates back to the biomass agreement of 1993, which forces power stations to include biomass in their fuel mix. Biomass already exceeds 10 per cent of electricity generation. Since this energy source can be used in the “co-firing” process, modern Danish power stations like Avdedøre near Copenhagen burn coal together with a mix of gas, wood and straw. Hence, no new power stations had to be constructed, as existing ones needed only marginal modifications. But Denmark’s biomass resources are limited, and large amounts of the fuel therefore have to be imported.

Germany’s Energiewende: Avant-garde of European energy transition?

For 2020 the government in Copenhagen is seeking to cover 50 per cent of electricity consumption using wind power, and this share is set to increase further by 2035 supposed. However, the example of Denmark’s “grønne omstilling” shows that such developments do not take place in a vacuum, but encounter and interact with a European context. Integrating large volumes of intermittent renewables into the Danish energy system would not work without interdependent electricity markets. Accordingly, Denmark’s “grønne omstilling” and world leadership in the manufacturing of wind turbines led to greater rather than less interdependency with countries to the north over the years.

Two elements are decisive: the availability of suitable technical infrastructure and a legal framework that allows (short-term) trading in liberal transnational electricity markets. Being a member of the Nordic electricity market, which integrates Norway, Sweden, Finland and Denmark (with the Netherlands and Germany in its orbit), Denmark offered excellent energy policy conditions. The Energiewende likewise interacts with its environment, but compared to the Nordic market it encounters a less developed European frame: whereas the Nordic power market is fully integrated and based on appropriate infrastructure, power systems and energy markets in the rest of Europe remain largely nationally defined. The European Union’s limitations in energy-related topics are unfavorable in this respect, with member states only slowly adopting European legislation to deepen the integration of their electricity markets.

As in Denmark, German surplus wind energy flows to neighbouring countries. But in the German case these power flows are random and cause technical, economic and political difficulties, since they overload foreign networks and affect the market shares of local operators. In the coming years this option will no longer be given: Germany’s neighbours are discussing the installation of technical equipment to physically block electricity imports at peak times, while they will themselves also be producing power surpluses from renewables according to national action plans and projections. The resulting unforeseen power flows will further increase congestion of interconnectors.

Yet Germany’s “Energiewende” appears to be the avant-garde of a developing European energy policy: With an overall target of 34.5 per cent renewables in the EU’s gross final electricity consumption in 2020,EU policy corresponds almost exactly to German policy, which aims for 35 per cent. In the light of the Danish experience, the German targets could end up being exceeded, since the integration of large volumes of intermittent renewables

EU members exceeding 5 per cent intermittent renewables in the power system in 2005, 2006, and 2010

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requires large-scale electricity markets to absorb the “ups” and “downs” in the energy system. The “Energiewende” could therefore force Germany to support a policy of deeper integration of electricity markets in the EU and beyond. Moreover, the demand for a climate-neutral operating load could stimulate international energy markets.

Storage and Interconnection in a European perspective

According to the International Energy Agency (IEA) and the European Commission (see COM(2012) 271), network balance is considered to be in jeopardy if intermittent renewables exceed 5 per cent in the power system. Yet in 2010 they already amounted to 5.6 per cent of electricity consumed in the EU-27 (compared to 2.6 per cent in 2005) and will rise to 17.1 per cent by 2020 according to national renewable energy action plans (http://ec.europa.eu/energy/renewables/action_plan_en.htm). Europeans will therefore be compelled to distribute electricity more efficiently. European legislation acknowledges this necessity insofar as it aims for completion ofthe Internal Electricity Market by creating additional capacity for electricity exchange between national power transmission systems (see 1364/2006/EC).

In the logic of the internal market, this may be considered sufficient to reduce monopolisation. Moreover, this policy goes hand in hand with the need for a power grid which is able to absorb electricity from decentralised generation units via dense “smart” networks for flexible distribution to centres of consumption and storage facilities. But except for the rather vague proposal of different “priority corridors” (see Brussels European Council, 19/20 March 2009, Presidency Conclusions), existing European legislation offers no solution for the challenge of efficient long-distance transmission from regions of electricity production to points of consumption or storage in one or several member states (or third countries).

The latest initiative of the European Commission to overcome deficits in the European power grid therefore includes not only trans-border power transmission and distribution networks (cross-border transport of electricity to consumers on high-, medium- and low-voltage systems) but also high- and extra-high-voltage transmission (“electrical highways”; see regulation proposal COM (2011) 658 final). The North Sea Countries Offshore Grid Initiative, as well as single projects as the Kriegers Flak wind farm in the Baltic Sea which is designed for simultaneous use by Denmark and Germany, point in this direction and could form the nucleus of a European overlay network or supergrid. The inclusion of Norway suggests that such a network would be pan-European. In this respect it is noteworthy that the integration of the North African and European grids has already reached an advanced stage.

Operating load and biomass in a European perspective

The Internal Electricity Market helped to implement the first steps of Germany’s transition. Interconnections with neighbouring countries not only enabled wind energy surpluses to be discharged, but also permitted electricity imports to bridge the supply gap after the quick phase out of nuclear plants in the wake of the Fukushima disaster. But transmission capacities are scarce and already heavily congested.

Hence, the deployment of large volumes of intermittent renewables increases the urgency of creating new power transmission infrastructure in Europe. In a complete Internal Electricity Market, that is to say where capacity for transmission of generated current exists, it is irrelevant which side of the border these power plants are located and it can be expected that electricity will be generated in those plants that have the lowest marginal costs. In the course of its Energiewende Germany resorted to its “cold reserve” of fossil fuel plants to provide a stable electricity supply. Hence the Energiewende might lead not only to growth in renewables, but oddly enough might also underpin the current trend for cheap coal in Europe since 2009.

But not every technology based on renewable energy exhibits large fluctuations in output. On the contrary, biomass, hydro and geothermal are stable in their electricity output and capable of providing the necessary operating load to counterbalance wind and solar power. But since continental Europe lacks sufficient hydro potential, only the combustion of carbon can fulfill the task of counterbalancing the fluctuations caused by wind and solar power. If recourse to large-scale use of coal in the Internal Electricity Market is to be avoided, alternatives must be found that can compete with its price levels.

In this respect it is noteworthy that the first signs of an international biomass market are emerging. Based on new technologies such as pelletization, briquetting and torrefaction, wood biomass such as forest residues becomes a cost-effective alternative for co-firing in coal power plants. In the interests of sustainability and energy security the European Union aims to develop its own supply chains (see COM(2012) 60 final) to meet the growing demand. Although high labour costs limit the prospects for large-scale exports from the forest-rich Nordic countries, the lower wages and high levels of biomass per unit of land in the new EU member states, especially the Baltic countries, promise great potential. Russia’s vast forests could also be taken into account as a potential source of biomass.

Prospects

With growing feed-in from decentralized and intermittent sources like wind and photovoltaic, the risks of grid outage increase, therefore making the construction of new power lines imperative. A limit of approximately 5 per cent on intermittent renewables in the system is regarded as critical for network stability. Their share in the EU exceeded that margin in 2010, and according to the Energy Roadmap 2050 (see COM(2011) 885/2) will increase further. Depending on the underlying scenario, between 25 and 65 per cent of the EU’s electricity consumption will be supplied by this form of energy by 2050. The Energiewende will accelerate this process since the nuclear phase-out increases the need for new generation capacity. Renewables, especially wind power, will have to take the place of decommissioned plants. The Energiewende therefore increases the pressure on Europe’s electricity networks and makes the inclusion of neighbouring countries in planning an imperative. The European electricity market could be the missing cornerstone in the transition process, opening up scope for political steering and offering untapped potential for conversion of the energy system.

Denmark’s green energy transition, or “grønne omstilling”, began in the aftermath of the 1970s oil crisis and shows that “green transition” is a long-term project. But successful energy-saving policies to decouple economic growth and electricity consumption can help to speed up the process: With stable energy consumption the deployment of renewables does not have to keep pace with movements in the gross domesic product. But binding targets for energy saving could yet be decided on the European level. In growing economies this will certainly limit the proportion of renewables which can be achieved in the short term. In particular rapidly growing countries like Poland will face difficulties reaching their targets.

Denmark’s green transition also reveals the limitations of national systems for absorbing large volumes of intermittent renewables and the need for supranational infrastructure and markets to ease the pressure on the grid by cross-border power transfers. Yet transmission capacity is still scarce and heavily congested in Europe and different electricity tariffs and market models in different EU member states make market opening a delicate task. All the more in case of the Energiewende, since deeper integration could lead to increasing imports of fossil-based or even nuclear electricity.

In order to set up an infrastructure which allows smooth interaction of power production and consumption in Europe, the Energiewende should be guided politically by an economic approach designed to overcome the fractures in the Internal Electricity Market. A successful transformation of Germany’s energy sector therefore depends on competitiveness. Yet electricity tariffs in Germany are already way above the European average, both for private households and for industrial consumers (see Figs. 1 and 2). Limiting tariffs is therefore the crux of Germany’s energy transition. Backup power generation using coal and second-generation biomass to counterbalance wind and solar power could keep costs down and allow further market opening. Moreover, constructive negotiations with neighbouring countries to match market designs and price levels and develop common infrastructure projects are important elements for making Germany’s energy transition work.

Figure 1                                                                      Figure 2
Private households                                                 Industrial consumers

                                          EUR/kWh                                                                              EUR/kWh

Denmark

0.3078

Malta

0.1927

Germany

0.2781

Cyprus

0.1822

Belgium

0.2215

Italy

0.1565

Netherlands

0.2202

Germany

0.134

Italy

0.2164

Slovakia

0.1327

Ireland

0.2162

Ireland

0.1303

Spain

0.2154

Spain

0.1271

Cyprus

0.2131

Austria

0.1213

Austria

0.2128

Czech Republic

0.1195

Sweden

0.2066

Hungary

0.1194

Luxembourg

0.2013

Greece

0.1188

Portugal

0.1925

Belgium

0.1182

Malta

0.1822

Netherlands

0.1181

Slovakia

0.1815

Luxembourg

0.118

United Kingdom

0.1676

Slovenia

0.1162

Slovenia

0.1649

United Kingdom

0.1149

Poland

0.16

Poland

0.1142

Finland

0.1574

Denmark

0.1091

Czech Republic

0.1541

Portugal

0.1064

France

0.1478

Latvia

0.1015

Greece

0.1403

Romania

0.0925

Lithuania

0.1378

Sweden

0.0887

Romania

0.1207

Estonia

0.0817

Latvia

0.1174

Finland

0.0784

Estonia

0.113

France

0.0763

Bulgaria

0.0934

Bulgaria

0.0746

EU 27

0.182307692

 

EU 27

0.099328571