5.2

Skip to 0 minutes and 13 secondsAt a small scale of KWh,

Skip to 0 minutes and 15 secondswe’ve seen the technical effect of near zero marginal running cost for prosumers: it is better to use the surplus of energy to heat (even at the expense of efficiency) than to fit it back in the grid when it is not paid, like in the case of Spain. At a big scale, something similar is also happening. The wholesale market was in negative values in Germany, which means that producers pay the customer for consuming energy. This phenomena has rarely occurred in Germany, but it is on the rise as a large number of renewables are feeding the grid. This is the technical reason that positions “flexibility” and “storage” as top solutions for future energy markets.

Skip to 0 minutes and 58 secondsBut it also makes clear that the electricity market and business models developed for the fossil-fuel era, no longer work for the new paradigm of high penetration of renewables.

Skip to 1 minute and 13 secondsIn liberalized power markets, prices are set by the marginal cost of generation, and the intersection of supply and demand. On the German day-ahead power exchange market, power producers bid certain amounts of power for a certain price, while buyers place their orders and signalize how much power they are willing to buy at a given price. This is done by 12 o’clock every day for all hours of the following day. When placing the bids for selling and buying orders, two curves can be drawn. The point where their trajectories meet marks the market clearing price. The price that is paid to all successful bids.

Skip to 1 minute and 55 secondsNegative power prices on the electricity exchange occur when a high and inflexible power generation appears simultaneously with low electricity demand. This is often the case on public holidays such as Christmas or Pentecost. Particularly in hours of predictable high renewable power supply, lots of wind and sun for instance, power producers offer their electricity for negative prices on the exchange. This is often done by marketers of renewable power, but also by conventional power stations like nuclear and lignite plants. In this event, the market clearing price can be set below zero. Based on this market fact, the return of the investment both in renewables and conventional resources is not clear enough.

Skip to 2 minutes and 45 secondsOn one side, the International Energy Agency (IEA) predicted that carbonizing the global electricity grid would require a near $20trn investment up until 2035; while on the other side, fossil and nuclear power plants are working few hours per year (below the viability threshold) and need to be paid using “capacity mechanisms” to deal with the intermittence of renewables and providing grid stability. The paradox is such that the more green energy is deployed, as it is needed due to climate change, the more the price of power from any source is lowered, especially in saturated markets. In Europe, where such effects were first felt, utilities have suffered years of falling returns, stranded assets and corporate disruption.

Skip to 3 minutes and 36 secondsFor instance, Germany’s two biggest electricity providers, E.ON and RWE, ended up splitting in two as result of this new landscape.

Skip to 3 minutes and 50 secondsThe toughest task is to redesign power markets to reflect the new need for flexible supply and demand. Otherwise, the change to decarbonized economies might not happen.

Skip to 4 minutes and 2 secondsThese are some actions that could be undertaken in future energy markets: Markets should adjust prices more frequently, to reflect the fluctuations of the weather. From extreme scarcity of clean energy to overproduction, a fair prices scheme to prevent blackouts is needed. For instance, price spikes. Markets should reward those willing to shape their energy consumption profile to balance the grid. Price mechanisms will change the energy bill to be higher or lower depending on how strongly a customer wants guaranteed power all the time, for instance. Stronger carbon-price signals to incentivize clean-energy investment and technology rather than subsidies for polluting fuels. Cross-border power markets.

Skip to 4 minutes and 47 secondsModernization of the regulatory regime in regulated activities, such as electric distribution, aiming to foster the digitization of electricity networks, rather than investing more capital in the expansion of the grid’s capacity.

Skip to 5 minutes and 1 secondEvolution of business models in the electricity market: from selling kWh to offering products and services to the consumers.

The financial framework for the energy transition

Flexibility and storage are the keywords for future energy markets. The electricity market and business models developed during the fossil-fuel era, no longer work for the new paradigm of high penetration of renewables.

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Smart Grids for Smart Cities: Towards Zero Emissions

EIT InnoEnergy