Tuesday, May 24, 2016
Europe is in an intellectual mess over several features of its energy and climate policies. This extends to a serious lack of comprehension of some of the most fundamental aspects of electricity economics. Enthusiasts for competition and free market approaches to the power sector have a preference for what are called “energy only markets”. Unfortunately, and increasingly, these do not work. They do not act as a signal for sufficient investment, or, with non-fossil technologies, even as a useful signal to promote efficient operations. So nation states are increasingly turning to measures such as capacity markets to ensure secure supplies for their citizens. But the realities of national decision making on what is acceptable security further undermine the basis for an overly restrictive competition theorists’ concept of a single European market in electricity.
The European Commission on 13 April 2016 adopted an interim report of a sector inquiry into capacity mechanisms. Commissioner Margrethe Vestager, in charge of competition policy, said that: "European consumers and companies should not have to face black-outs, and capacity mechanisms can help to reduce this risk. At the same time, consumers should not overpay for electricity and competition should not be undermined. The report published today shows that there is a lot of room for Member States to improve how they assess whether capacity mechanisms are needed, and how they design them. Mechanisms that are open to electricity providers across EU borders are key to building a true Energy Union in Europe."
In other words, energy-only markets are not working. If they were, why would the market not ensure, as it does in most sectors of the economy, adequate supplies of what people need, when they need it?
Why energy only markets do not work.
A peculiarity of conventional wholesale electricity markets is that they are driven by the short run marginal (fuel and operating) costs of the marginal plant needed at any point in time, normally referred to as SRMC. But if prices are based on SRMC they cannot in normal circumstances provide an adequate reward that covers the full costs, including capital costs, of the capacity required for a secure system. This phenomenon has long been recognised as a fundamental feature of electricity economics.
This anomalous feature of the market can sometimes be masked during periods of technical change and strong fuel price differentials, of which one example was the period of very cheap gas combined with the growth of new combined cycle gas plant (CCGT). In these periods prices continue to be set by increasingly marginal high fuel cost generators, and new low fuel cost plant can earn large profits. But such periods are exceptional.
What we are now seeing with the growth of renewables is an accentuation of this fundamental weakness in energy-only wholesale market mechanisms. With renewables, fuel costs are zero and as the share of renewables increases, joining other low carbon plant such as nuclear that also has a very low SRMC, the power system as a whole becomes increasingly subject to a zero wholesale price. Unsurprisingly this has led to fears of a capacity shortage and real threats to supply security.
Energy-only markets of this kind do of course have some advantages. They are easy to grasp intellectually and they lend themselves naturally to a comparatively easy translation across borders. It is therefore not surprising that they should have been grasped with such enthusiasm by proponents of competition and the internal market, an enthusiasm captured tellingly in the above quote from the Commissioner. The increasingly evident distance from economic and financial realities is unfortunate.
Capacity markets are yet another remedy that constitutes a central intervention.
One market solution is to allow higher prices that reflect scarcity, and to choke off consumer demand rather than just depending on a SRMC mechanism. This reliance on price spikes immediately hits political and regulatory problems, those implicit in the Commissioner’s statement that consumers “should not overpay”. An alternative was the UK approach adopted in 1990. The UK electricity market reforms, the model on which much of subsequent EU endeavour has been based, recognised the problem in the design of the new market structure. The new market rules set a penalty charge for failure to supply, constructed around a notional value of lost load (VOLL).
This was intended as a minimal intervention, and to mimic how a market might operate under conditions of capacity shortage, with the level of VOLL as the critical parameter in setting the security standard expected by consumers. It was a clever administrative device but suffered some of the same drawbacks as reliance on scarcity pricing. It was not well understood and provoked regulatory and political concerns, as well as accusations of market manipulation. At its best it remained an administrative intervention, supplementing a “pure” energy only market. However it demonstrated another important point very clearly, the fact that the issue of determining how much capacity the system should have is inextricably linked with the standard of generation security that is required. In other words it is a regulatory or political decision.
The market issue for capacity mechanisms is that they require some central authority, regulator or government, to conduct the auction, to decide how much capacity is needed, when and where it should be, how bids are to be compared and evaluated, how delivery is to be monitored, and also of course how the new capacity is going to be remunerated. In other words it draws the government into the role of a central purchaser and coordinator, acting over and above whatever else may be going on in the energy-only market.
Now is not the point to comment on the pros and cons of such a development. Clearly such interventions can be done competently or incompetently. The point at issue for the competition authority is that it is national governments that set the national standards of security with which they are comfortable. But, in the context of an EU internal energy market based on energy-only principles, any decision on security and capacity by any one member state necessarily impacts on every other national market in the EU. Some of these impacts may be trivial, but if a country like Germany (say), close to the centre of gravity of Europe, opts to increase its security standard, it induces additional capacity. This will automatically tend to undermine the energy-only prices on which generators in other countries across the EU are relying.
To take this point to its logical conclusion, the competition and state intervention issues with which the Commission is wrestling cannot be resolved without a single central EU authority determining a common security standard across the EU. This is not going to happen any time soon. Moreover the capacity issue is far from being the only aspect of low carbon imperatives that will challenge the competition authorities.
Monday, May 23, 2016
A lecture last week at the Oxford Martin School, by Dan Kammen, climate adviser to President Obama, touched on the issue of negative carbon technologies, and emphasised its importance, a point made strongly in my blog a week earlier. And a reader commented that I had previously understated the task of introducing new technologies. Their observations have emphasised, for me at least, the research priority attaching to negative carbon options, and also the dangers of excessive reliance on a “silver bullet” to resolve the problems of climate policy.
The need for negative carbon
Professor Dan Kannen pointed to a particular category of research. Particle physics was fundamental in its character but not always obviously useful in an immediate way. Developing Edison’s light bulb had been usefulness driven but not fundamental. But sometimes we need use-inspired basic research. (The lecture at the Oxford Martin School can be viewed on Youtube.)
The very challenging objectives set in Paris, even if aspirational rather than obviously attainable, set a clear premium on negative carbon technologies. Although there are known processes that extract carbon dioxide, the most promising to date are those that form part of the natural carbon cycle, or derive from finding means to enhance it. The task is to replicate or improve on a process with which nature and evolution have experimenting for hundreds of millions of years, to speed it up, and then to convert to an industrial scale of operation. All this suggests that some research into basics, and some fundamental breakthroughs, are indeed going to be needed.
The value of finding a means of sequestrating carbon directly from the atmosphere is immense. It is a backstop technology, as Myles Allen has also argued, that provides at least a partial insurance against the worst consequences of excess GHG and climate change. But in the absence of carbon pricing regimes that come remotely close to matching the value we should be attaching to carbon concentration reduction, it also hard to see how it translates into a product of immediate commercial value. It shares the characteristics of other forms of basic research but is essentially use inspired.
Moving from innovation to realisation
A visit to the Ecological Laboratory at Wytham Woods, and discussions with biologists there, reminded me of the complexity of biological processes and hence of “bio-solutions”. Bill Gates’ optimism over the breakthrough that will “save the planet” is a natural extrapolation from the world of information technology, where a new algorithm can sometimes translate almost instantly into a new solution for an old problem. The biological world is both more complex and much less completely understood, by an order of magnitude. This reinforces concern for reliance on a single “silver bullet” drawn from development of processes in the natural carbon cycle. A biological approach to carbon capture may be a major contribution but it may well turn out to carry its own baggage in terms of unforeseen side effects, unanticipated costs, competition for land use, and public acceptability.
The second comment simply drew attention to the relatively slow pace of change that typically accompanies major technical changes in energy technologies. Developments in solar energy and battery technology have been remarkable, but progress to effective deployment will still be a lengthy process. The world of energy, unfortunately, is more physical and less virtual. Its stranded assets have longer lives, central solutions with quantities of energy in concentrated form are almost by definition intrinsically dangerous, and the solutions need to penetrate every aspect of energy use. For these reasons we cannot depend on a single simple solution.
Wednesday, May 11, 2016
Bill Gates has predicted researchers will “discover a clean energy breakthrough that will save our planet and power our world” within the next 15 years. The Gates’ open letter is a thoughtful and accurate diagnosis of where we are, but we should ask whether innovation on its own is enough. We already have, or are close to, many of the scientific breakthroughs we need, but the challenges lie in the hard grind of making them viable in terms of cost. In some cases this involves major expenditure in developing new infrastructures and new production facilities, and also stranding existing assets. And time is not on our side. We need other policy instruments, including markets and regulation, both to limit emissions while we get to low and zero carbon, and to force the pace with key technologies whose application is already within our grasp. Reliance on belief in a single and as yet unknown “silver bullet” risks a dangerous complacency and is surely not what is intended.
So what might a “clean energy breakthrough” might look like. After all we already have quite a number of low carbon contenders: nuclear, carbon capture, wind, solar etc.
A single breakthrough or multiple developments in known technologies?
The answer is surely and emphatically the second. The energy sector is extremely diverse both in relation to production and consumption. Geography has a profound influence on the potential for low or zero carbon renewable energies, most obviously so for solar, wind and hydro-electric power, but also for biofuels. In terms of distribution and consumption, the very different needs between and within the transport, heat and industrial sectors also tend to require a multiplicity of solutions. And in reality we already have a very wide range of options in terms of many forms of renewable energy, nuclear and carbon capture, as well as in the technologies for using energy. This diversity is also reflected in growing decentralisation of many aspects of energy production and consumption, which further argues for a wide variety of solutions.
But there are perhaps two high priority areas where further breakthroughs are potentially the most profound in their impact. Most policy scenarios emphasise early decarbonising of electricity generation, by whatever means, and then using the low or zero carbon power to penetrate and substitute fossil fuels in other applications like heat and transport. The still largely unresolved problem is not production of “primary electricity” per se, but balancing supply and demand in real time, and with intermittent or inflexible resources (eg wind/solar).  So the first area is energy storage; advances that can either store surplus output or provide a low cost energy reserve are a potential game changer. The second area is carbon sequestration - actual removal of CO2 from the atmosphere. The Paris ambition for zero carbon puts a big premium on any breakthroughs that are carbon negative in operation, offsetting the effects of residual emissions elsewhere.
Energy storage. A critical challenge.
This was the subject of a recent April 2016 seminar, described in my comment of 3 May. The crucial requirement is for storage of energy generated in the first instance as electricity. Presentations and discussion suggested that battery technologies are moving very rapidly, and will be extremely important in creating flexible and reliable power networks based on zero carbon generation. In this context, the relevant scales range from the smallest local networks or off-grid operations up to large national systems.
But an even bigger prize, across countries with strongly seasonal heating or cooling needs, would be seasonal storage at reasonable cost and on a large scale. The economics of storage indicates this is unlikely to be batteries (high capital cost for a relatively small number of charging cycles). That leaves heat, which is a potentially useful but essentially localised form of storage, or conversion of electricity into a chemical energy store, eg hydrogen or ammonia. The ideal would be a route that led to chemical storage as a gas or liquid fuel, natural gas or diesel. This resolves the problems of spilling surplus power, and overcomes the seasonal storage problem. It could have the added cost and other advantages of compatibility with existing infrastructure, notably in the gas network.
A realistic carbon sequestration technology with a known cost (at least as an order of magnitude) is a real game changer for the economics of a low carbon economy and our approach to policy. The necessity for this technology is a corollary of the “net zero” approach on which a UK energy minister has said that the government intends to legislate. It was also emphasised in a recent article by Myles Allen.
Bio-energy with carbon capture and storage (BECCS) is a known technology, of which Drax might have been an early demonstration. One problem is scale and the potential competition bio-crops may face for land in a world also facing possible food security problems. But new GM crops, suitable for arid or marginal lands, might provide one route to an answer. These of course simply constitute an enhancement of the natural carbon cycle, and other artificial methods based on chemical processes may be possible. This looks like one of the biggest outstanding challenges, but if there were a breakthrough it would be game changing. Knowledge that we have a viable backstop technology "if all else" fails, reduces the risk and uncertainty in decision taking and, arguably, provides a simpler approach to pricing carbon emissions.
Reliance on innovation alone may be a dangerous mistake.
The Stern Review described the main instruments of energy and climate policy in the mutually interdependent and complementary categories of markets and pricing, regulation, and innovation. There is a danger of putting too much faith in technology and innovation on their own to solve our problems. And the clean energy breakthroughs, when they come, may bring their own unanticipated political and practical issues. If we are to avoid the worst outcomes we also need to be making better use of the technologies we already have at our disposal, and other policy options that are already open to us.
Attaching more urgency to what we can do now has a huge potential benefit. This includes pressing ahead faster with known technologies like conventional carbon capture (CCS), but it also includes using the tools of markets and of regulation. We know that better pricing of carbon, and regulation, can discourage unnecessary and wasteful use, and reduced emissions now help us buy time. Not only does this give us more time to find solutions. It also improves our global future independently of what eventually emerges as the best solution and mix of technologies . This is because we will reach any given climate milestones (such as 2oC) later or, if we are lucky, avoid some of the more dangerous outcomes altogether.
 See for example the UK Committee on Climate Change
 This is one of the important questions being addressed by the Oxford Martin School Programme on Integrating Renewable Energy.
Saturday, May 7, 2016
WHY ELECTRIC VEHICLES WILL POSE SOME NEW PROBLEMS AS WELL AS SOLUTIONS.
This comment is the third of three short pieces highlighting particular questions for the road transport sector. The first dealt with the role of regulation in shaping energy efficiency, using US experience as an example. The second dealt with lessons to be learned from the London congestion charge in the context of the environmental benefit of lower congestion.
Electric vehicles provide what is prima facie the perfect solution both to removing fossil fuel use from the transport sector and providing a convenient outlet for low or zero carbon electricity generation which is intermittent or inflexible. The reason is they use batteries and this potentially allows the timing of recharging to be fitted to the needs of the power system. But they also pose some potential problems and new challenges for power distribution networks, an example being the Norwegian “Friday night” problem, the subject of an interesting anecdote.
Electric vehicles (EVs) are widely seen as the innovation that allows decarbonisation of road transport. A prior condition is that the electricity itself is produced from sources other than conventional fossil fuel generation, ie from nuclear, renewables or thermal plant with carbon capture and storage (CCS). This is already broadly true for countries like France and Norway, but is also the clear ambition for the UK, anticipating a more front-end loaded reduction in carbon intensity for power generation than heat and transport, both of which will also depend on low carbon electricity. We can expect this pattern to be repeated in many countries approaching the commitment to the recent Paris (COP21) agreement.
But the big problem for power systems based on renewables and other intermittent sources is the non-storability of electricity and the need to balance supply and demand in real time. This poses problems both because of the intermittency of supply and the seasonal nature of some new loads such as electricity provided for the heat sector. The answers are likely to include storage as well as more active maangment of consumer loads. However electricity for transport has been widely seen as part of the solution rather than as part of the problem, simply because vehicle batteries have the potential to operate as a major source of storage.
Norway is a world leader in EV take-up. Its conditions are particularly favourable because it has what is essentially an all hydro-generation power system. This implies that the electricity generation is non-fossil fuel and essentially carbon free; and it also makes for great flexibility in the way the power system can be operated.
A useful case study is Norway, which is the world leader in per capita take-up of electric vehicles (EVs). A third of new car registrations are EVs, which now exceed 3% of the total fleet. The great majority of these are all-electric, of which there are now some 75,000. EVs have been strongly promoted by the Norwegian government, offering tax incentives and also allowing local authorities to prioritise EV owners for both road use and parking. As with the London congestion charge, over enthusiastic promotion of EVs in this way may have had some unforeseen consequences that defeated some of the original objectives (by increasing local congestion), but these have not detracted from what overall is a success story.
The Friday night problem
Many Norwegians drive quite long distances to their country retreats at weekends and on arrival seek to re-charge their vehicles. Since a Tesla can require a charge of around 75 kWh, or about a full week of typical household consumption, this creates some big loads on the power network. Over six hours it would create a load of about 12 kW, when the average household loading is usually less than 1 kW. Delivery of recharging over a few hours, when many people may choose the same time slot, has the potential to constitute a major and problematic peak load even for national systems. This would certainly be the case if EV penetration continued at its current rate. As there are also high geographic concentrations, typically in popular weekend destinations, this also has major implications for thermal and voltage constraints necessary to maintain stability in local distribution systems, and hence for investment in and management of those networks. These are unanticipated demands for large amounts of energy and power, often concentrated at particular parts of the distribution network. In a UK context we can imagine the effect of Bank Holiday “get away” traffic to Devon and Cornwall for example, Cornwall already being a county with potential connection problems in relation to the National Grid.
Norwegians are clearly aware of the general issue and an article by Karolin Spindler describes attempts to analyse it in particular contexts and to anticipate possible load shapes posed in particular conditions. But the more general question is one for future operational management of battery or other storage options in the context of low carbon power systems, and for the investment in local systems. Although it may be possible to adopt a “predict and provide” approach, this may imply a high level of potentially wasteful investment in banks of local batteries. This may be part of the answer but a complete answer almost certainly requires that the conventional utility business model for the supply of power has to change. Offering consumers a choice between:
· having the right to instant recharging but only at a premium price,
· rationing demand by local peak charges,
· organised pre-booking of charging slots
· or some combination of the above
The Norwegian example will set some interesting challenges. None of these should be insurmountable, but the transport sector, and other factors, will require a radical re-think of the ways we buy electricity. And these rather technical considerations will also be relevant to the ultimate balance between EVs and the other low carbon option - hydrogen powered vehicles.
 I have not been able to verify this anecdote, but in this case I am inclined, in mitigation, to plead what I shall call the Boris Johnson defence. It may not be true, but something like it is very likely to have happened or to happen in the future. In this context, and unlike the case of the recycled teabags or the Euro-coffin discussed by Mr Johnson with the Treasury Select Committee , it is a useful illustration of the kind of unexpected consequence that needs to be covered in thinking through the technicalities of a system with major electric vehicle penetration.
Wednesday, May 4, 2016
One question that may arise in the UK’s referendum debate is the effect of EU membership on the continuing force of the Paris COP 21 agreement, if the UK votes to leave the EU. Will the UK still be bound by the agreement if it leaves? The answer, unsurprisingly perhaps, is relatively simple to state but perhaps more complex in practice.
First, both the EU and the UK separately became signatories (link provides a full list) on 22 April 2016, among 175 parties signing on that day. This in itself is a surprising story, with a previously recalcitrant Russia as one of the signatories, but not Saudi Arabia. The EU’s internal decision making processes are complex and the official Council decision authorising the EU signature to the Paris agreement was only published on 19 April.
It is likely that there will be significant further internal negotiation before the EU is able to ratify the agreement. Definition of competence is relevant here. In "economic" areas such as trade in goods and the internal market the EU has exclusive competence, but in areas such as environment and climate, competence is shared with member states. In these areas they conclude "mixed agreements" – where both EU and individual member states sign. But in any case significant negotiations are likely to be involved. It is unlikely that the EU would be able to sign up to a commitment without a clear understanding of how it would impact on the individual member states.
Prima facie the position is very simple. If the EU signed an agreement and the UK or any member state subsequently left, then that state would not be bound by the agreement unless it had also signed the agreement itself. If it had not signed it would not be so bound. If it had signed and the EU had not, it would also be bound.
At present it may seem unlikely that either the EU or the UK will ultimately fail to ratify the agreement before the date set for UK exit from the EU after triggering Article 50 of the Treaty on European Union. However given the political correlation between scepticism over Europe and over climate policies, it is possible that the EU could ratify and the UK could leave before ratification, and that the UK could refuse to ratify. The converse, the UK ratifying while the EU did not, currently seems much less likely, but cannot be ruled out if other tensions within the EU continue to multiply.
If, as seems most likely, the momentum from Paris continues to grow, a failure to ratify could make life very difficult for the UK in future post Brexit trade negotiations both with the EU and with other countries. If this is appreciated by ministers, the possibility of non-ratification may seem a little academic.
Tuesday, May 3, 2016
Energy storage is a critical technology for a low carbon economy, reflecting the need to substitute use of electricity in transport and heat, and the less flexible nature of low carbon power generation. A recent Oxford Energy seminar brought this together in a way that emphasised the profound importance of all three main pillars of energy and climate policy – innovation, markets and regulation. The discussions also brought out the fundamental importance of context in determining the choice and application of storage technologies. Key issues will be managing the future of the heat sector, resolving the problems of longer term or inter- seasonal storage, and using regulation and markets to incentivise the solutions we need.
Energy storage is a critical technology for a low carbon economy largely because most of the alternative options we have for low carbon energy rely on electricity as the main vector to carry the energy output from its source (primary energy) to the point of use. It is also widely assumed that fossil fuels can be displaced from the very large heat and transport sectors by low carbon electricity. Electricity itself is an instantaneous non storable commodity, so without some form of storage we cannot easily match production with the times we actually want to use our energy for heat, light or power. This is especially so for less flexible low carbon resources such as wind and nuclear, and a zero carbon commitment will further limit the use of what is traditionally the easiest source of flexibility, fossil fuel generation.
Innovation and context.
The pace of recent advances in battery technology has been staggering, and this advance currently looks set to continue with research and development continuing to drive big improvements both in technical performance and in production costs that parallel the advances made in photovoltaics over recent decades. But the complexities of power systems and the energy sector make it very clear that different solutions are required for different problems.
There is no “one size fits all” for battery technology. The key parameters for performance may include capital and energy costs, mobility, speed of response and battery life (in years or cycles). The importance of each depends on the application – weight and volume for transport applications, scale and capital cost for large scale systems, and so on. Li-ion battery costs are falling at a rate that could very soon have a transformative effect of electricity markets, according to one of Europe’s leading battery experts, but they function best when delivering all of their stored energy over a few hours. Redox flow batteries have cycle lives and storage capacities that could be much greater than Li-ion cells, and are one of the few battery candidates for longer-term storage at a utility scale.
For power systems, storage options are increasingly useful both at grid and system levels, but also in relieving thermal and voltage constraints in much more local distribution networks. They will become increasingly important in the context of future electrical loads. For transport this includes coping with unforeseen peaks that reflect personal transport habits (a later comment on Norwegian experience will expand on this). For heat the scale and seasonal character of heat loads (in temperate climates) poses particular problems and choices.
But this choice extends beyond simply making choices between different types of electric battery. Batteries are in competition with other forms of storage, including heat storage, “gravitational storage” in large hydropower dams, compressed air (for some purposes) and so on. In the key area of seasonal storage, batteries seem unlikely to provide useful solutions, with conversion to storeable energy vectors such as hydrogen a more practical answer.
Nor can storage questions be separated from their geographical context, with very different answers for hot or tropical climates with high solar potential and cooling load. And they cannot be separated from technology choices in energy use. One speaker emphasised the potential use of “cold” as opposed to “heat” storage, an exciting but neglected possibility, given the increasing proportion of energy use devoted to air conditioning and food storage. Similar options can be discussed in relation to storage of heat, and the provision of cheap battery back-up within individual consumer premises.
Behind this discussion lies the growing realisation that the four options to balance supply and demand in an electricity system can be considered at all levels of scale, from an individual household with solar and batteries, and its own load, up to national or larger systems. The options are more flexible generation or management of consumption, storage, and reliance on external interconnection with an outside source. Flexible generation is becoming much more problematic in a low carbon context, but the future choices that need to be made will involve competing claims from means to store and balance energy at highly decentralised or much more aggregated levels; at its extreme this choice is between smaller scale household heat or battery stores and large scale hydro or other methods.
Markets and Regulation
It is sometimes assumed that markets can or should be the sole determinant of what technologies succeed or fail. But reliance solely on markets is a questionable strategy in determining approaches to storage, for three main reasons:
· first there is currently no adequate approach to putting a price on the key element of cost, that of the environmental and climate damage imposed by CO2 emissions. Unless these costs are internalised, markets are unlikely to find optimal or even acceptable solutions
· second, many storage and energy system solutions have the character of infrastructure investment – investment that is long life, has no alternative uses, and is not mobile. Infrastructure investors will not put up the very large sums required for these without secure long term contracts or other guarantees
· third, conventional electricity markets were designed to suit the technical and economic characteristics of fossil fuel based power generation. It was observed that any value that storage options can earn by arbitraging electricity markets is likely to be a fraction of their real economic value to the energy system.
Markets do not develop in a vacuum. They are established within an institutional and regulatory framework. One lesson from the discussion was that this framework now needs to address some fundamental questions around energy storage and other features of a low carbon economy. Storage, the associated choices, and the implications for regulation and markets, sit at the centre of the low carbon energy revolution.