Outdated grid regulation slowing Europe’s energy transition

Date: June 21, 2019

OSLO, NORWAY …  Governmental policies that provide regulatory certainty are needed to spur private investment in the flexibility technologies required to ease the transition to a high-renewable energy future.

This is the core finding of a new industry white paper “Developing flexibility: the new cornerstone of the grid” commissioned by power management company Eaton and the Renewable Energy Association. The paper includes market data, expert insights and case studies from analysts and industry players including: Bloomberg New Energy Finance (BNEF), Britain’s Renewable Energy Association (REA), Eaton, Drax, Nord Pool, Good Energy and Upside Energy.

In Europe, wind and solar power will dominate electricity generation from the early 2020s, due to powerful drivers including statutory requirements to meet the global Paris climate agreement, the falling cost of solar panels and wind turbines, rising carbon prices and the electrification of transport and heating.

Electricity demand has always varied with the seasons, weather and time of day. As a result of growth in wind and solar power, electricity supply will also be increasingly variable. To avoid resulting, higher system costs, flexibility must become the new cornerstone of the grid. Technologies and business models that promote flexibility can help smooth out this variability, for example by aligning peaks in demand with peaks in supply of wind and solar power.

Today’s electricity market and network regulations are failing to keep up. Market access requirements favour large, centralised fossil fuel and nuclear power plants. Governments and their energy regulators are thereby holding back a low-carbon energy transition, by increasing the cost and complexity of increasing the market share of variable renewables.

The following are the most important deficiencies highlighted in the paper where regulatory action could make the biggest immediate positive impact. Many of the related recommendations are based on the experience of the Nordic markets, which are the most advanced in Europe in terms of regulation and government policy that encourages private investment in smart, flexible energy systems.

• Weak or non-existent flexibility markets: Deep and liquid flexibility markets are an essential prerequisite to provide investors certainty on long-term cash flows. Where they exist today in Europe, they often provide only short-term visibility on possible cash-flows for flexibility assets. Reform is needed to provide predictable, long-term cash flows, for example via a combination of multi-annual contracts and annual auctions guaranteed to run for several years.
• Unequal access to ancillary services and capacity markets: Increasingly, electricity will be provided and managed by a range of technologies, including decentralised wind and solar power, batteries and smart EV chargers, working alongside centralised power plants. All these resources should compete on a level playing field, including in balancing markets. Current grid regulation in most European countries favours centralised generation assets, through connection, testing and metering provisions, availability requirements, capacity payment haircuts for storage assets and other administrative costs and minimum size thresholds. These hurdles penalise aggregators of small, distributed assets and make it difficult for all flexibility technologies to compete evenly.
• Need for smart and bi-directional EV chargers: Smart EV chargers will be essential to integrate variable renewables by shifting peak demand to times of peak supply. Smart charging would also lower the system cost of adding EVs, for example by avoiding the need for local grid upgrades, and new-build generation capacity to meet higher EV-related electricity demand. The latest EU charging rules focus on the numbers of chargers, rather than their flexibility - there is no requirement to make EV charging “smart”, or to install V2G. As a result, in both Britain and Germany, only a handful of either smart or V2G chargers exists. In the case of V2G chargers, there is also limited EV compatibility today.
• Need for smart meters and dynamic consumer pricing: Dynamic tariffs offer financial incentives for consumers to change behaviour, for example to shift to off-peak demand periods in response to market price signals. In Nordic countries, there is already near-universal, national rollout of digital meters. In Britain, dynamic pricing is now becoming available due to the target for universal roll-out by 2020. For example, the UK’s Octopus Energy has introduced an “agile tariff” which tracks wholesale power prices and advises customers 24 hours in advance of low-cost periods. In Germany, however, dynamic tariffs are unavailable, due to the absence of digital meters. In France, the introduction of dynamic tariffs is expected shortly to follow its smart meter programme.

The white paper “Developing flexibility: the new cornerstone of the grid” is available for download here.

Eaton

Eaton is a power management company with 2018 sales of $21.6 billion. We provide energy-efficient solutions that help our customers effectively manage electrical, hydraulic and mechanical power more efficiently, safely and sustainably. Eaton is dedicated to improving the quality of life and the environment through the use of power management technologies and services. Eaton has approximately 100,000 employees and sells products to customers in more than 175 countries. For more information, visit Eaton.com.

The Renewable Energy Association (REA)

The REA is the UK’s largest trade association for renewable energy and clean technologies with around 550 members operating across heat, transport, power and recycling. The REA is a not-for-profit organisation that represents renewable energy and clean technology companies operating in over fourteen sectors, ranging from biogas and renewable fuels to solar and electric vehicles. Membership ranges from major multinationals to sole traders.

The REA’s EV sector group is comprised of around 70 members delivering the critical infrastructure needed to deliver the transition to a zero emission car and van future. The REA additionally serves as secretariat to the All-Party Parliamentary Group on Electric and Automated Vehicles. For more information, visit: www.r-e-a.net.

Contact

Vera Grishchenko, VeraGrishchenko@eaton.com