RenewableS 2013 GlObal STaTUS RePORT - REN21

■■The Economic Challenge
Conventional electricity markets are driven mainly by generation
costs per unit of energy. Levelised costs of energy and the
resulting merit order are the main elements of price building on
the different market levels (futures, day ahead, intra-day, etc.).
For thermal power plants, capital costs make up a relatively
small share of generation costs, whereas (and to a lesser extent
also for nuclear plants) fuel costs are a major portion of the
total. Therefore, volatile fuel prices have an important impact
on the economic viability of a power plant. In contrast, with the
exception of bio-power plants, renewable power has zero fuel
costs and the major share of the cost is capital invested up front
for the technology, project construction, and grid connection.
Consequently, a fundamental difference between most renewable
energy generation and fossil and nuclear power is the cost
ratio between capital and operating costs. The marginal costs
of most renewables (including hydro, geothermal, solar, and
wind power) are low and often prevail over conventional power
generation on spot markets, thereby reducing the economic
viability of marginal cost based generation.
The result is ambiguous. Where high capacities of wind and
solar are installed, they can significantly reduce electricity
prices, with resulting benefits for residential and industrial
consumers; on the other hand, this effect makes it increasingly
difficult to recover costs and thus achieve a reasonable (if any)
return on investment. 9 In combination with priority or guaranteed
grid access for renewable energy, existing conventional
power plants (in particular those providing peaking power) are
more often pushed out of the merit order and thus operated
with decreasing capacity factors and, therefore, reduced
profitability. 10
As with technology-related challenges, solutions are being
developed to create sufficient signals for investment in grids
and in strategic capacity reserves as well as in new and flexible
power plants. Capacity markets i , which offer remuneration
for available capacity instead of for the electricity generated,
as well as other flexibility mechanisms, are tools to secure
(new) capacity to meet demand at any time. However, such
payments risk locking-in conventional thermal capacity, which
may be needed for only a few years until the transition towards
renewables is further advanced. Mechanisms that are not well
designed could result in subsidising environmentally harmful
power plants that might otherwise be taken off line as stranded
assets.
Discussion is ongoing regarding how to best design flexibility-driven
capacity mechanisms—including, but not limited to,
capacity markets. Several other options to advance and enable
system transformation are evolving, however. These include the
following:
◾◾
All technical and economic aspects of the energy system
must be developed around the need to support variable
renewables; 11
◾◾
Incentives and regulations must support the development
and deployment of improved flexibility options (e.g., grid
infrastructure, storage capacity, DSM, and highly flexible
power plants), rather than supporting capacity alone; 12
◾◾
Regulatory frameworks need to enable the participation
of both dispatchable and variable renewables in balancing
markets in order to further reduce system costs;
◾◾
Reduction in gate closure times ii (including in intra-day
trading) can facilitate the inclusion of variable renewables
in balancing markets. Grid systems that are “smart” and
diverse, and that cover large balancing areas, can be used in
combination with properly functioning balancing markets.
■■System Transformation Has Begun
In developing economies, where power systems are growing
rapidly and still taking shape, systems can be designed to be
highly flexible in order to accommodate variable renewables.
In most OECD countries, however, the optimal way to achieve a
system based on a high penetration of variable renewables is to
transform the existing system towards one that is highly flexible.
Various elements of transformation are already in place in
existing supply systems and energy mixes. Some of these
elements are mature solutions that help with integration and, on
a larger scale, can be elements of transformation as well; others
are being introduced as new options. For example:
◾◾
Solar hot water systems with and without electricity back-up
are combined with conventional decentralised and district
heating systems;
◾◾
Bio-methane/biogas is injected into natural gas grids, where
it is used for electricity, heating and cooling, and for fuelling
vehicles;
◾◾
Abundant electricity from renewable sources is used for
heating and for producing hydrogen, or for other applications
that enable energy to be stored for later use;
◾◾
Natural gas and biogas and solid biomass are interacting in
combined heat and power (CHP) systems;
◾◾
Electricity used in public vehicle fleets and private cars
with the batteries serving as storage and balance for the
electricity system is another option that is being explored.
Denmark, which pioneered the use of wind power and CHP
biomass, achieved a renewable share that exceeded 24% of
total final energy use in 2012. 13 In 2011, more than 40% of
Denmark’s electricity came from renewables; by the end of
2012, wind alone contributed more than 30% of the country’s
electricity consumption. 14 Biomass-CHP is a key domestic element
of balancing power and system stability, while variability is
balanced further by interconnecting the Danish grid with grids
of other Scandinavian countries that source electricity either
mainly from hydropower (Norway) or from hydropower and
biomass CHP (Sweden).
Energienet.dk (ENDK), the state-owned grid operator for the
gas grid and the electricity system, is working towards targets of
50% wind power by 2020 and a fully renewables-based energy
system by 2050. 15 ENDK is developing and implementing new
06
i Capacity markets have been used without reference to renewables deployment for a long time in the United States and elsewhere around the world.
ii Gate closure time describes how long in advance of actual delivery of energy the bids have to be placed. The shorter these times and the closer to real
time, the easier it is for variable renewables—particularly in larger balancing areas—to participate in these markets, since weather forecasts are more
accurate.
Renewables 2013 Global Status Report 91