Enrico Furnari

Case study: Renewable energy will lose dispatch priority.

Discussion created by Enrico Furnari Partner on 04-Jan-2017
Latest reply on 30-Aug-2017 by Lukas Keller

Energy Policies play an important role in the definition of the energy framework in a country, through legislations, incentives and guidelines that attract or stave off investments in a particular field. One could argue that energy policies are, together with resources availability, the main reason why each country as his own energy mix (see nuclear power in France or photovoltaics in Germany), yet us, as the CommUnity by InnoEnergy, we know very little about it.

 

This is the first of a series of articles that aims to cover some of the most important topics in the EU framework, in order to bring information, awareness, and involvement on the issues.

In addition to these articles, a series of conferences with industry’s will be organised, to have professional opinions on the topics.

 

The core team is made by davidegarufi, fcapizzi, giorgiobalestrieri and me, Enrico Furnari. If you have any question on the project, feel free to contact any of us.

 

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On 30th November 2016, the European Commission has presented a package of measures to keep the European Union competitive in the energy markets, named Clean Energy for All Europeans (CEfAE), also referred as EU Winter Package [1].

 

One of the most important implications of it is the change on what types of energy should be given priority in the grid.

Since 2009, thanks to the Renewable Energy Directive, all renewables had been dispatched before any other source in the day-ahead market, leaving fossil fuels to compete for the remaining demand left.

 

This will no longer be the case for renewables plant larger than 500 kW completed after 2018/2019 (a threshold that will shrink to 250kW from 2026). Existing plants will keep the priority, which is very positive, as a retroactive change would have required operators to calculate again the Return On Investment. The priority will remain also for smaller installations (as could be residential storage) and innovative concepts [2].

 

There are currently two opinions on the topic: those who affirm that there will no effects for renewables, especially solar and wind, as their marginal cost close to zero will ensure their dispatch and those who heavily criticise the legislation, claiming that will jeopardise the EU efforts of moving towards a cleaner energy system.

 

Let’s analyse both perspectives.

 

Considering a dispatch curve in a typical day, one can argue that that renewable energy generation will not be affected at all by this change. Solar and wind have no fuel cost, which means that their operating cost is way lower than fossil fuel plants, and will, therefore, be dispatched first even in a cost-based scenario.

Moreover, one can also say that priority dispatch does not exist in the US, without major issues, as renewables curtailment is at the same level of Germany (even if it must be said that there are many other reasons for curtailment)

 

 

Figure 1 - Typical dispatch curve [3]

 

 

However, in the case above renewables have a very low share in the generation mix, which does not pose any challenge to the transmission grid. In the US, renewables contribute only for 15% of the electricity generation, which is much lower than in many European countries [4].

 

The second perspective argues, indeed, that in times of over-generation, renewables might be curtailed before fossil fuel as they would not produce any operational loss. It is much easier to switch off a wind turbine in comparison to a coal power plant, and in a cost-based environment, a coal power plant would be therefore kept online by inertia. Hence, the dispatch curve might be used conversely, favouring options with higher costs.

 

There is a second scenario in which renewables might not enter the grid. Recently, we have seen negative power prices in some countries (especially Germany), even at a time where coal and/or gas plants were in the power mix. This happened because some fossil fuel plants offered to generate electricity for free to pass selection, in the hope that others  will offer priced bids to form a marginal price (indeed, the final price is set by the most expensive bid, and every source get paid that price, regardless of their bid/marginal cost). Not passing selection means not getting any revenues at all, while an underpriced bid might result in some revenues - so it is worth the risk most of the time. The systems encourage everyone to bid, resulting in an overcapacity. The “trick” is used mainly by coal power plants, as their fuel is considerably cheap, while gas plants have to simulate more accurately the expected bid price before taking the risk [5].

 

In countries where renewables account for more than 30% of the total generation (such as Denmark, Portugal or Italy [6]), this might leave some renewables out of the power mix if they bid for their real marginal price, resulting in the loss of many MWh of green electricity.

 

Overall, some estimations showed that the EU emission could increase by 10% due to this policy: even only a fraction of that would be a huge step back from all the positive actions taken during these years  [7].

 

In addition to the obvious harm to the environment, this scenario would dump the costs of grid overload to the consumers rather than to the conventional plants. Many of these plants are losing money with the current situation, while they might earn more under the new legislation.

 

There are many opponents to this directive: most of the environmental groups and NGOs, but also Germany has not been favourable to the initiative [8]. Considering that under the supposedly mandatory previous legislation the UK, Sweden and the Netherlands were not giving renewables priority dispatch, it will be interesting to see if some countries will keep the existing format.

Indeed, investors rarely see changes positively, even if their expected impact is low. Governments might want to retain private investors by not changing the landscapes - especially considering that as of today is much more secure and profitable to invest outside the EU.

 

Personally, I am not in favour of the legislation, as I believe that anything that does not boost the expansion of renewables brings us a step further from our goal of mitigating climate change.

 

What is your opinion of the topic? Would you rather prefer this cost-based scenario?

Are you aware of any consideration that I left out of the discussion?

 

 

References

[1] EU Winter Package

[2] European Commission's vision for a clean energy transition 

[3] Electric generator dispatch depends on system demand and the relative cost of operation - Today in Energy - U.S. Energy … 

[4]https://pv-magazine-usa.com/2016/12/01/renewables-rise-to-15-of-u-s-electricity-generation-in-q1-q3-2106/  

[5] Arup | Thoughts | Game theory balances power markets 

[6] https://www.cleanenergywire.org/sites/default/files/styles/large/public/images/factsheet/figure-1-share-renewable-energy… 

[7] Renewables could lose European power grid priority, documents reveal | Environment | The Guardian 

[8] Germany defends priority dispatch - Politics | reNEWS - Renewable Energy News 

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