03
CLIMATE & ENERGY BUSINESS DENMARK
Electricity markets need fixing CITIES
POLICY
BUSINESS
ENERGY MARKET DESIGN
In search of a cure for cannibalisation
Learning how by sharing solutions
The added cost of protectionism
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SPECIAL REPORT: PAGES 14-33
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PAGE 65
Less risk in tenders cuts cost of offshore wind
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As the proceedings on the American constitution ended in 1787, anxious citizens gathered outside Independence Hall in Philadelphia to get the latest news. When Benjamin Franklin emerged, a woman asked: “Well, Doctor what have we got, a republic or a monarchy?” Franklin promptly responded: “A republic, if you can keep it.” Franklin was alluding to the citizen as the most important institution in a liberal democracy and the citizen’s ability to make informed decisions. People look to the media to separate fact from fiction, help identify good ideas from bad, and flag up matters in need of attention. The importance of sober journalism has rarely been more clearly recognised than in these times of rule by tweet. In this issue of FORESIGHT, we shed light on the next major challenge of the energy transition: how to design well functioning electricity markets for a future in which renewable energy provides baseload power and other technologies flexibly respond to the variations in renewable supply. Today’s electricity markets, designed for a different purpose and different technologies, do not serve renewable energy well. In many places, the more renewables built, the more their production risks going to waste. The market failing is twofold. First, cheap green energy gets curtailed when there are bottlenecks in the grid and contracted conventional power is prioritised for dispatch. China, a particularly bad case of throwing cheap and green energy away, curtailed around 50 TWh of wind last year, enough to supply around 13 million citizens. Second, even in countries where wind successfully displaces fossil fuels, the current design of wholesale spot-price markets results in a rough deal for renewables. The more wind and solar on the system, the lower they drive market prices. Fossil fuel can temporarily exit a low-price market, re-entering when renewables falter and prices rise again. Renewables have no such option. The market design gives them no choice but to cannibalise their own revenues. The days of baseload power from costly fossil and nuclear are numbered, as are the days of assuming renewables can build their business case through technology advances alone. Keeping hold of the case for renewables requires urgent attention to market design. The transition to a decarbonised energy economy demands a major shift of perception. No longer can electricity supply be seen as an isolated utility service that when based on renewables needs vast amounts of expensive “back-up”. There are better options. An affordable path to decarbonisation opens up as soon as electricity, heat and transport are perceived as a single, integrated energy system. It is the next big step for market design.
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NORDIC
LABEL AL
IRONMEN T NV
Peter Bjerregaard
541-004 PRINTED MATTER
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EDITOR-IN-CHIEF
FORESIGHT
Content
KNOWLEDGE
SPECIAL REPORT
BUSINESS
CITIES
POLICY
IN BRIEF
IN SEARCH OF A CURE FOR CANNIBALISATION
RISK REDUCTION IN OFFSHORE TENDERS PROMISES COST CUTS
LEARNING HOW BY SHARING IDEAS
ENTRY OF CHINA HERALDS EMISSIONS TRADING SHAKE UP
Chinese CO2 emissions under control; EU fossil fuel dependency rises; conventional power bleeds billions of value; German Energiewende not a blueprint for the world; bank washes off dirty coal; offshore wind lull before the next storm. Page 6
WAVE TRIES TO HITCH A LIFT WITH WIND
Combining untried wave power with well proved wind on a floating platform may forge a path to commercialisation of a hybrid solution to harnessing the energy of the seas. Page 8
As the wind blows, the sun shines, and green generation rises, demand is saturated. Market prices fall, but renewables are caught cannibilasing their own investment case. Page 14
ELECTRIFICATION OF HEAT AND TRANSPORT
The bigger the pool of energy demand, the less the ripples from renewables are felt. Page 26
THE RULES OF THE GAME NEED UPDATING
IEA boss Fatih Birol discusses the need and the tools for bettering the business case for renewable energy.
Denmark’s offshore wind tender model is being looked to as a shining example of how to drive down cost through proactive government action. Others may adopt the market model, too.
Instead of reinventing the wheel, just learn from those who have already done it. Cities are busy doing just that as they look for ways to adapt to climate change and build more liveable urban spaces.
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Page 42
DESERT FARMING WITH NEXT ERA SOLAR
CLOUDBURST MANAGEMENT THE COPENHAGEN WAY
Farming in the desert might seem a bit optimistic. An Australian greenhouse uses concentrated solar power to produce energy and become independent of fresh water supplies. The result is 17,000 tons of tomatoes a year.
Splitting the bill between water utilities and the city budget made financing Copenhagen’s cloudburst plan possible.
When China later this year introduces its emissions trading system, it will double the combined size of all existing carbon markets. Page 62
THE ADDED COST OF PROTECTIONIST POLICY
Offshore wind in the US is in its early infancy. A century old law is making life unnecessarily difficult and is hindering market growth. Page 65
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FORESIGHT
5
Knowledge
In Brief
Utilities lose more value Lower electricity prices on wholesale markets have hit European utilities hard. According to EY, a consultancy, asset impairments of €120 billion were booked by utilities between 2010 and 2015. Impairments hit a peak of €34.7 billion in 2015. The sheer scale of the losses has brought home just how much the traditional utility asset base is challenged. Germany’s two electricity giants, RWE and E.ON, have both taken the radical step of splitting into two companies, one focused on renewables, networks and customers, and the other focused on power generation (primarily thermal power based on fossil fuels).
Germany not a blueprint
6
Chinese CO2 emissions China is forecasting a significant drop in CO2 emissions of approximately 1%, according to a Greenpeace analysis of China’s National Energy Administration forecasts for 2017. If true, this would be the fourth year running of either zero growth or a decline in Chinese CO2 emissions. A mixture of declining coal consumption and increasing wind and solar power capacity lie behind the decrease. China is currently installing solar PV panels at the rate of three football pitches of surface area every single hour of the year, according to Greenpeace. The campaign group says China is virtually certain to overachieve its 2020 climate targets and its CO2 pollution may already have peaked.
FORESIGHT
ILLUSTRATION Anders Morgenthaler
Germany’s transition towards a low-carbon economy, known as the Energiewende, should not serve as a global policy blueprint, according to the World Energy Council (WEC). In a WEC survey of energy experts from 42 countries, 79% say aspects of German energy policy could serve as inspiration and be adopted in their respective countries, but 60% do not believe the Energiewende should be implemented in its entirety. The survey also shows that in non-EU countries, economic growth and increasing the availability of energy are the primary drivers of the energy transition. In EU countries, climate protection and energy security are seen as the main drivers of the transition. In most countries, energy efficiency measures and a carbon tax are perceived as the chief strategies for tackling the causes of climate change.
73%
EU IMPORTS OF FOSSIL FUELS INCREASE TO 73%
Fossil fuel dependency rises
A hard day’s work
Less energy is consumed in the EU than in 1990, but dependency on fossil fuel imports has risen. New Eurostat data reveals that while gross consumption of fossil fuel has dropped from 83% in 1990 to 73% in 2015, it continues to be the main source of energy. EU dependency on imports of fossil fuels has increased, with 73% imported in 2015, compared with 53% in 1990. Put another way, in 1990 one tonne of fossil fuel was imported for each tonne produced in the EU; by 2015 three tonnes were imported for each tonne produced.
MHI Vestas Offshore Wind has introduced a 9 MW upgrade of its V164-8.0 MW turbine. The prototype was installed in Denmark at the Østerild test site in late 2016 and stands 220 metres tall from tower base to blade tip. In December the machine set a new world production record for a single wind turbine, generating 215,999 kWh over 24 hours, enough to cover the electricity demand of an average US household for 20 years.
$361 BILLION
$361 BILLION SPENDING ON RENEWABLES IN CHINA
Lull before the storm A total of 367 new offshore wind turbines were installed in Europe in 2016, reports industry association WindEurope. Of these, 338 were connected to the grid, adding 1558 MW of generating capacity. Compared to 2015, a record breaking year, connection of new capacity fell by 48% in 2016. On the bright side, 11 coming projects attracted €18.2 billion in investment, a 39% increase over 2015.
Bank washes off the dirt Deutsche Bank has revised its approach to coal financing. Together with its subsidiaries it has decided to no longer grant new financing for greenfield thermal coal mining and new coal fired power plant construction. Moreover, the bank will gradually reduce its existing exposure to the coal sector.
Follow the money China continues to move big and bold away from coal power generation and towards more renewable energy. Under the country’s latest five year economic plan for energy development, the government intends to plough $361 billion into renewable energy generation by 2020, creating 13 million jobs in the process. Almost half the sum will be allocated to solar power.
Electric avenue Norway achieved record sales of plug-in electric vehicles (EVs) in January 2017, with EVs taking a 37% share of the market for car sales. More than 100,000 zero-emission EVs now drive on Norwegian roads and their number is expected to quadruple to 400,000 by 2020. It is not unrealistic to suppose that sales of new cars running on fossil fuel could come to an end in Norway by 2025, says the government.
FORESIGHT
7
OCEAN ENERGY
Combining wind and wave energy production in a single floating power plant holds potential for capturing the benefits of both, or so believes a company staking its future on the concept Wave power has a long history of failure and unfulfilled potential. Despite its considerable promise—in theory it could meet the world’s electricity demand at least twice over—the efforts of researchers and entrepreneurs over six decades have failed to produce a commercial result. A small Danish company, however, believes it has found a way, by marrying wave and wind power. After more than a decade of development and testing, Floating Power Plant says its technology is now 8
ready for full scale commercialisation in two wavewind power stations, one off the coast of Wales and the other in Scottish waters. The combined power rating of each floating device, dubbed the P80, will range from 7 MW to 10.3 MW, using large commercially available wind turbines with rated capacities of 5 MW to 7 MW and wave power devices with capacities between 2 MW and 3.6 MW. The wind turbines will account for 70% of total production and wave power the remainder. “The two sources of energy complement each other and share the costs. After a storm, the waves will continue and wash into the device for some time and produce energy when there is no wind. At the same time, it is easier to forecast how much energy you can FORESIGHT
TEXT Eskil Meinhardt Hansen
Wave tries to hitch a lift with wind
Knowledge
to wind turbines in shallower water mounted on foundations that are piled into the seabed or held in place by gravity and suction forces. Installing wave power technology on the underside of floating platforms will absorb the energy from the waves and in the process, stabilise the platform, reducing its required weight and thus the cost of construction, explains Esben.
Bigger projects further from shore European offshore wind heads for 25 GW by 2020
Water depth (m)
INTO THE MARKET
SOURCE WindEurope
0
50
100
150
200
Distance to shore (km)
12.6 GW
4.8 GW
According to the International Renewable Energy Agency, the levelised cost of electricity from a 10 MW demonstration wave power device would lie between €330/MWh and €630/MWh, falling to an average of around €150-180/ MWh in 2030. The agency’s projection for offshore wind in 2030 is €70/MWh, higher than bids accepted last year for projects now nearing construction
24.2 GW
7.0 GW
harvest from the waves at a certain time. These two conditions increase the value of the wave power,” says Floating Power Plant engineer Nils Ebsen. Jens Peter Kofoed, head of wave energy research at Denmark’s Aalborg University, says wave power development has suffered from lack of investment. “In developing new technologies, tests at sea are necessary but also expensive. It is not like wind power, which is possible to test at minor scale on land and in which the room for failure is bigger,” he says. “There are many different concepts for harvesting wave power and for investors it is difficult to decide which kind of technology to invest in,” adds Kofoed.
RADICALLY DIFFERENT Marrying well established offshore wind power with unproved wave power may attract the venture capital needed, according to Ebsen. “What we have done that is radically different from others is that we are building hybrid devices. As wind is a more developed technology it is a safer business case to set up at sea,” he says. In water depths of 45 metres and more, wind turbines mounted on floating platforms anchored to the seabed are expected to be a commercial competitor FORESIGHT
In November 2016, Floating Power Plant announced a partnership with DP Energy, an Irish firm, to proceed with development of two full scale projects with planned rated capacities of 200 MW each. Anders Køhler, CEO of the Danish company, describes the deal as a breakthrough for his business. “We are on the doorstep of commercialisation. We have spent more than ten years turning the idea into reality. It’s all about these two projects now. We have to show that the technology is functional and the prices are able to compete,” he says. Whether the first project will be off Wales or Scotland has yet to decided, but construction will begin in 2018 and the first device is to be up and running in 2019. “We must be able to compete with the prices of offshore wind. That is our goal and we know our technology is up to it,” says Køhler. The levelised cost of energy (LCOE) from commercial offshore wind in Europe today lies between €90/MWh and €140 €/MWh. The lowest bid accepted for the next round of offshore wind construction is €49.9/MWh for a project in the Baltic Sea, excluding the cost of the transmission infrastructure for sending the power to shore. For projects further out to sea, an LCOE of €71/MWh by 2022 is predicted in a recent report on offshore wind financing by FTI Consulting, a global business advisory firm. Køhler is certain that Floating Power Plant will be able to deliver at competitive prices in the long run. Initially, however, LCOE will be around €200/MWh for the first units built. “That is the deal when you set up prototypes. But the price is still significantly lower than it was for the pioneering solar and wind power projects,” Køhler claims. He expects the next generation of offshore wind will see turbines on floating platforms, citing the deep waters off the UK, France, Japan and Portugal as the most likely venues. Kofoed at Aalborg University believes that wave power is part of the energy future. “The consumption of energy varies a lot. At a coal fired power plant you can increase or decrease the amount of energy produced depending on demand,” he says. “As long as it is not possible to store the power produced from renewable energy, you need to have complementary sources. A combination of sun, wind and wave power is all in all better for the system.” • 9
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Annonce Foresight 2017_1.indd 1
03-03-2017 11:28:49
The Big Picture A green roof movement has slowly been gaining momentum in recent years and some cities have even made them part of their sustainability plans. Chicago boasts that 509 city roofs are now planted with greenery, a statistic that includes the City Hall roof garden. In this third issue of FORESIGHT, our big picture is of the 600 square metre urban and organic market garden, Ă˜sterGro Rooftop Farm in Copenhagen. Since 2014, the Ă˜sterGro market garden has produced organic vegetables, eggs and honey. A recent US study indicates that CO2 emissions per kilo of produce grown on urban roofs are 2kg lower than for the same produce bought from a store. PHOTO Lars Just
In search of a cure for cannibalisation A seemingly unsolvable challenge of opening up wholesale electricity markets to renewable energy is spot prices driven so low that investment signals get stuck on permanent red. Renewables are harder hit financially than fossil fuel. Finding a fix for the market design failure is exercising the wits of many in industry and government. Their efforts may be converging on a solution THIS SPECIAL REPORT ON ELECTRIFICATION AND MARKET DESIGN WAS RESEARCHED WITH THE SUPPORT OF THE DANISH WIND INDUSTRY ASSOCIATION 14
FORESIGHT
TEXT Heather OʼBrian & Lyn Harrison / PHOTO Palle Peter Skov for Energinet.dk & Joe Dunckley, Shutterstock
SPECIAL REPORT
ELECTRICITY MARKET DESIGN
T
Data communication To create a more transparent electricity market, the Danish operator of the power system, Energinet.dk, introduced a data hub in 2016 that handles more than 500 million meter readings a year. By 2020, meter readings in Denmark will have reached 42 billion
he irony is inescapable. Renewable energy, labelled for years as too expensive, is in danger of becoming a victim of its own success. In reducing electricity prices for everybody it is busy cannibalising its own market revenues. The more the wind blows, the sun shines and demand is saturated, the greater the decline in prices on wholesale markets. Cheap electricity benefits consumers, but it becomes a problem when producers fail to make enough money to cover their costs, let alone enough profit to invest in the next power plant required. The particular problem for renewable energy is that while other generators can sell their output when prices are high, it cannot. More expensive generation moves in to the market and pushes up prices during wind lulls and sunless hours when renewable energy producers are unable to respond to rising demand. During these high price periods, the more competitive bidders among non-renewable generators can make up for losses endured when prices are low. For renewables that is not an option. In Denmark, where wind energy supplies around 40% of electricity, wind turbine owners are feeling the pinch. Over the course of 2016, the average price paid for wind energy was 10% below the general market price, which was already pushed low by the high volume of wind on the market, says Christian Kjaer, CEO of the Danish Wind Turbine Owners association. Kjaer’s observation of what happens in practice is borne out in theory. In a recent report on energy pricing, the European Commission acknowledges that wind power decreases wholesale prices. “Econometric analysis suggests that every percentage point increase in renewable share reduces the wholesale electricity price by €0.4/MWh in the EU on average; the actual reduction depends on the regional market and the fuel source being replaced by renewables. The impact of renewables is greater (€0.6 - 0.8/MWh) in north-western Europe, the Baltics and central and eastern Europe.”
ZERO MARGINAL COST The problem lies in the market design. Across Europe, North America, Australia and elsewhere electricity prices are decided in short-term “energy-only” wholesale markets. Bi-lateral trades are also a part of the global electricity business as are long term power purchase contracts between seller and buyer, but wholesale markets tend to set the reference price outside of auctions for new capacity. An energy-only market operates on the basis of what it would cost to produce the next unit of electricity generated here and now, referred to as the marginal cost, which igFORESIGHT
nores the lifetime capital and running costs of the plant, which a power purchase contract includes. In a world of fluctuating fuel prices, using marginal cost as the price setter to balance supply and demand serves consumers well. As demand fluctuates during the day, so does the marginal price. It rises when demand outstrips supply to pull in more generation and drops when demand is met, pushing unneeded generation offline. Renewable energy producers have lower running costs than nuclear, gas and coal. They can consistently undercut their competitors on marginal cost. With no fuel bills to pay, their marginal costs lie around zero and in times of low demand and high production, the market clearing price can be zero or even turn negative, meaning that electricity retailers are paid to take electricity out of the system before it destabilises. For conventional generators, operating through a short period of negative prices can often be cheaper than stopping and restarting equipment, which is why they pile on the price pressure. Renewable energy producers respond with ever lower bids.
A FUNDAMENTAL FLAW As the German EEX electricity exchange points out, negative prices and the principle of “scarcity pricing” are not generally bad. They work to provide customers with the cheapest power possible at all times. But as the proportion of renewables on wholesale markets rises, a fundamental flaw in the marginal cost model is becoming increasingly apparent. A market of renewable energy suppliers all presenting bids at zero does not provide a price. Without a well functioning price signal the market mechanism that dispatches generation to exactly match supply and demand, crucial for a stable flow of electricity, breaks down. “The price levels today are set by the conventional generator but if you assume renewables will replace conventional generators there will be a problem with that traditional model,” says Jochen Kreusel, market innovation manager in the power grids division at ABB Power. “We see competition between renewables and no longer between renewable and conventional generation,” he adds. Analysts at Citigroup, a bank, believe the time has come to say goodbye to power prices fully driven by fuel prices. Renewables will squeeze the market share of conventional power, they say, “Making thermal power, which is a price setter, a marginal contributor to power price formation.” Where things get difficult for wind and solar is when they are feeding large volumes into a market 15
Send more money
Power sector investments by type, OECD Europe, 450 scenario 2015-2040*
$ (BILLION) 1600 1400 1200
*The International Energy Agency 450 scenario is consistent with the aim of restricting the increase in global temperature to 2°C by limiting the concentration of greenhouse gases in the atmosphere to around 450 parts per million of CO2
Other 98 Bioenergy 126 Hydro 143
1000 Solar 357 800 600
200 0
Distribution 674
Oil 2
Gas 116 Coal 85
348 FOSSIL FUELS
EXPLAINER
MARGINAL COST AND SCARCITY PRICING
Spot-price trading of electricity at marginal cost has yet to prove itself as a wholesale market design fit for a renewables future In the wholesale electricity markets of today, which largely emerged with their liberalisation across the United States and Europe in the 1990s, revenue received by generators is solely for units of energy produced. Generators bid energy into the short term market at the marginal cost of its production, which for fossil fuel sources includes the cost of buying fuel. The bids are ranked in ascending order of marginal cost, or the cost of generating power here and now, resulting in what is commonly known as the merit order. Fixed costs, like the capital spent on building a facility, are not specifically taken into account in the bid prices. The purchase price all generators subsequently receive is determined by the marginal cost of production of the last generator satisfying power demand for any specific bid period. The demand is established according to bids placed by electricity purchasers, which are also ranked in merit order based on price (see graph page 21). 16
SOURCE WEO
400
Wind 852 NUCLEAR
Transmission 184 RENEWABLES
The marginal price of energy moves up and down during the day. When supply is scarce, prices rise and when it is plentiful they fall. In a market mix dominated by thermal power stations, which trace the majority of their costs to fuel purchases, the wholesale market price of electricity follows underlying fuel prices. By dispatching power on the basis of marginal cost, the aim is to minimise the overall cost of electricity production. Before the advent of renewable energy in the market, prices neatly reflected the generation characteristics of the various conventional power sources. At the low marginal cost end of the scale, nuclear capacity is relatively inflexible, meaning it is unable to adapt to rapid changes in demand by quickly ramping up or down but is valuable as a baseload supplier. At the other end of the scale, so-called peaking plant, such as gas turbines, produce at a higher marginal cost, but can quickly react in response to calls for more or less energy. In between the baseload and peaker extremes are mid-merit generators like coal plants. As renewable energy penetrates these “energy only” markets, its low marginal cost (it has no fuel bills to pay) enables it to consistently underbid fossil fuel energy technologies and nuclear power. That helps push the most expensive generators at any one time out of the production mix, bringing down FORESIGHT
T&D
the average marginal cost of production and average electricity prices. The market model relies on scarcity pricing. When demand surges or supply collapses, occasional price peaks ensure the generator, in the market providing power with the highest marginal cost, is able to recover its fixed cost. Alternatively, a utility with a diversified generation portfolio can potentially make up for losses on generating sources with high marginal costs on its cheaper marginal cost units. For owners with portfolios consisting of wind and solar capacity alone, however, the effect of scarcity pricing is to reduce their revenue. The more the wind drops and the sun sets, the scarcer that electricity becomes, driving up prices to encourage more expensive generation to come online. The wind and solar plant are almost never able to benefit from these higher prices. The effect is seen on both sides of the Atlantic Ocean in very different wholesale market structures. American markets are fragmented and highly dynamic, with thousands of bid prices reflective of the actual cost at any given moment. In contrast, Europe has focused its efforts on “market coupling” to increase the overall flexibility of the market. The more a market is interconnected, the better the ups and downs of demand and supply can balance one another.
ELECTRICITY MARKET DESIGN
that has no flexibility to channel excess supply elsewhere, such as into the heating system, or to an industrial customer offered a good deal to shift its high use period to a different time. In outbidding one another to offload their generation, renewables drive prices down to untenable levels for longer periods. Modelling by the International Energy Agency (IEA) of a largely decarbonised European electricity market by 2050 indicates that very low prices could occur for a third of the time with 43% solar PV and wind. “Beyond this point, the number of hours with zero prices increases further,” it states. •
MARGINAL COST FAILURE
NOT AN ATTENTION GETTER
The threat of marginal cost pricing to investment in renewables is well recognised, but alleviating it is not given the priority that might be expected
The problem of renewable energy cannibalising its own market revenues is being left to fester at the bottom of the cauldron of challenges
While much attention has been paid to the issue of conventional power companies squeezed out of the market by a cheaper competitor, the problem of renewable energy cannibalising its own market revenues is being left to fester at the bottom of the cauldron of challenges. The risk is that as the proportion of renewable energy grows, the business case for investment in more solar and wind gets rapidly weaker. In a slew of recent and major reports on reworking market design, including from the International Energy Agency (IEA) and European Commission, the cannibalisation issue receives scant attention beyond being acknowledged. Jochen Kreusel, market innovation manager at ABB Power, offers one explanation for the lack of concern about the financial punishment meted out to renewables in some wholesale markets. “I think they are more or less protected since they are still in the subsidised, protected segment of the market. But it will increasingly be a problem for them, too,” he says, comparing the situation of renewables to conventional generators. The IEA, in modelling its envisaged European market in 2050, reveals that when wholesale prices are zero or lower, market revenues for variable renewables decline rapidly below the average market price, which it says will remain relatively high at $78/MWh. But with wind generating 31% of electricity by 2050, the model’s calculated market revenue at $40/ MWh, 50% below average market price, “still represents two-thirds of the levelised cost of electricity of onshore wind,” argues the IEA. The cost of wind, with capital cost and operating cost levelised over the entire life of the plant, is assumed at $69/MWh in 2050. Solar, generating 11% by 2050, does not sufFORESIGHT
fer as much. Its revenues are modelled at $70/MWh, or 90% of average market price, “close to the level of utility scale solar PV by 2050.” Although the model “is almost certainly wrong” in its details, admits the IEA, the indications of trouble ahead are clear. “Taking a scenario with very high shares of wind and solar power could lead to lower average electricity prices and even lower market revenues for wind and solar power generators,” it cautions. But the modelling is the closest the agency comes to detailed examination of the zero marginal cost issue as it affects renewables in the entire 246 pages of its Repowering Markets report on market design. In Denmark, the owners of over half the nearly 4 GW of onshore wind no longer receiving subsidies sell their output through the wholesale market at below average prices. Christian Kjaer, CEO of Denmark’s Wind Turbine Owners Association is nonetheless unconcerned that neither the IEA nor the European Commission treat the growing case of cannibalisation with any sense of urgency in their recent policy papers. Right now, he says, there are more pressing concerns to deal with at European level if renewables are to grow at the rate needed to fulfil the IEA’s 2050 prognosis. Catherine Mitchell, who heads the Energy Policy Group at Exeter University in the UK, agrees. “It hasn’t really become an existential issue yet,” she says. Kjaer believes that long before renewables have chewed out the bottom of their market, the pressure for lowball bids will be relieved by new price signals.
WAKE UP CALL Others are not so sure. Energy-only markets and marginal cost pricing have limitations as a market design and do not encourage up-front investment in technologies like renewables with high capital cost, but low running cost, says Graham Weale, professor of energy economics and politics at Ruhr University Bochum in Germany. He says that as a basic concept spot market prices based on marginal cost are not an investment driver. “The wholesale market is basically a short-term optimising market so it was always a mistake to think it could ever give long term price signals. Only in a very few cases have power plants built in liberalised markets in the past 20 years been able to recover their full costs in the wholesale market,” he says. This was true even before the financial crisis in 2008 and the market entry of renewables, both of which added further challenges. “And now with more solar and wind the situation is worse because the wholesale price is moving steadily downhill.” That the entire European power industry is facing a deteriorating investment climate is a view supported by wind industry trade body WindEurope. “The 17
INTERVIEW
LET MARKET FORCES RULE
Peder Østermark Andreasen, in his role as president of the European Network of Transmission System Operators for Electricity and CEO of Danish transmission system operator (TSO) Energinet.dk, has been deeply involved in integrating renewable energy into the power systems of Europe. What are his views on perhaps an even tougher challenge, integrating variable renewables without fuel costs into electricity markets that were never designed for that purpose? Andreasen talks about the ability of markets to efficiently provide the right solution and draws parallels with how the telecoms industry transformed itself. Q: How much of a challenge is represented by the growing deployment of renewable energy with low marginal cost but a high capital cost? A: The current market model we have is certainly an important tool for integrating renewables. Without the proper price signals, we can’t integrate renewables. There is a challenge from the zero marginal cost phenomenon we see in wind and solar, and to a certain extent hydro. The amount of renewables we see entering in our region is bringing down prices. This is a challenge but also an opportunity. We see volatility and price spikes but also the opportunity to offer flexibility to stay in the market, to hedge the market. It is true that some of the conventional power plants have suffered but we see an opportunity to bring prices up. Q: How do you see prices coming up? A: In the next decade or two it is expected that a major part of the existing generation capacity will be decommissioned. In market situations with no supply from PV or wind, prices are expected to peak, especially until demand side response in the market becomes more developed. Few hours with high prices will thus probably be a major part of the business case for conventional power plants in the future. Q: Would volatility and price spikes also be part of the business case for renewable generators? A: This is more difficult. I think what TSOs should do is to offer access to bigger markets, allowing export to areas where the willingness to pay is higher, so linking low cost areas like the Nordics to high price areas. Q: My understanding, however, is that weather patterns are similar across northern Europe. How could this work in practice? A: From a traditional regional point of view it’s true that the correlation of renewable energy production is pretty strong across markets. But taking the development of the Viking Link between Denmark and England as an example it is possible to extend market integration to areas where renewable energy produces in different patterns. There are potential gains by integrating markets in a true regional way and not only between neighbouring countries. Q: Some people call for ways to stabilise the revenue of renewable generators. What do you think about that? A: We believe markets need to take care of it. We have seen other low marginal cost businesses adapt their business model. I think it will happen in this industry as well. For example, digitalisation in the telecoms industry has meant that the industry in fact faced zero marginal costs. In this industry we have seen a shift in business models from minutes and bytes to more content based packages with integration of, for example, news services and streaming. Likewise it can be that the traditional kilowatt hour product in the electricity end user market will face competition from new offerings including energy services, mobility and potentially home automation. It’s important to say that these products don’t substitute the need for energy production and infrastructure, but business models and market places will develop to cater for a less commodity and more service oriented product definition. The new business models will probably aim at creating new value for consumers instead of “just” providing cheap electricity to appliances. 18
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risks faced by investments in capital-intensive assets are too high,” it states in a January 2017 policy paper. “Short-term wholesale electricity prices are too low and volatile to provide and predict adequate returns from the spot market revenues only.” Mitchell says that while other issues are more immediate, zero marginal cost trouble is brewing on the horizon: “The market model is absolutely a problem for renewable generators without subsidies. The wholesale energy market set-up is to pay back conventional generators, so when you move to technologies with completely different characteristics you will need a new market design.” ABB's Kreusel agrees. “We face a fundamental change of the cost structure on the supply side and a need for a fundamental change,” he says. Another expert putting the stress on “fundamental change” is Malcolm Keay at the UK’s Oxford Institute for Energy Studies. Continuing to set prices through marginal cost bids on a wholesale market is a road to nowhere, he believes. “What you are building is a permanent distortion. You would have to continue subsidising,” he warns. •
INSTEAD OF MARGINAL COST
THE RESET BUTTON OPTION To reduce investment risk, alternatives to the marginal cost approach are available that retain the use of price signals for generation dispatch A number of specialists in electricity market design advocate scrapping the existing wholesale model based on marginal cost prices and replacing it with one that penalises neither renewable energy nor conventional generation. Among them is Malcolm Keay at the Oxford Institute for Energy Studies. He proposes two markets for generators: an “as available” market for the variable supply from renewables; and an “on demand” market for flexible generation that can be dispatched as required. Consumers would benefit from significantly lower prices in the “as available” market, but its generators would receive support, at least initially. The price differential between the two markets would be sufficient to provide an incentive for consumers to invest in technology such as storage or microchips in appliances that react to the presence of “as available” supply and are designed to make best use of it. Consumers would only pay the higher price for “on demand” supply if “as available” power had run short, with the option to turn off certain equipment if prices went over an agreed threshold. Much can be done through price signals to shave
ELECTRICITY MARKET DESIGN
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towards a version of this model and the auction of concessions is also used to shape the Dutch and Danish offshore wind markets. From the perspective of a renewable energy producer, auctions and PPAs have many advantages, says Francesco Venturini, global head of renewables for Italian utility Enel, a major owner of renewable energy capacity on both sides of the Atlantic Ocean. In markets like those of Europe, with prices held down by an excess of generating capacity and barriers to market exit for fossil fuel and nuclear, PPAs provide revenue certainty for investments in new renewables, says Venturini. They have worked for offshore wind, stimulating development, providing security for investors and driving down cost. Enel is building around 1 GW of solar capacity in Mexico, costing about $1 billion and with the output contracted under PPAs. “Can you imagine us investing all that money and not having any idea of how the market will be structured, being completely exposed to market risk and not knowing if anyone will buy the power?” Venturini asks.
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peaks in demand that are expensive to cover, or encourage users to shift their demand to periods of excess generation, says Keay. Previous blunter applications of time-of-use pricing, such as reflecting over-supply through low consumer prices in the UK to encourage charging of night-storage radiators in the 1970s, led to a major shift in demand patterns, he points out.
AUCTIONS AND PPAs Another approach as an alternative to wholesale markets, or a complementary mechanism, is providing revenues to producers through long term Power Purchase Agreements (PPAs) between buyers and sellers, a well tried and much used bi-lateral contract approach. These can be initiated by a request for generators to offer competing bids for the cost of energy from a specific volume of capacity, or awarded after an auction process. Auctions can also be for government price support that makes up the difference between the price set by bidding and the market price paid to generators, known as Contracts for Difference in the UK. It is a model which uses price signals to dispatch the cheapest generation first, but places a safety net under renewable energy finances. Germany has moved FORESIGHT
COPY CHILE He points to Chile as a market that works for renewables, keeping prices low for consumers while providing investment certainty for generators like Enel. The country’s National Energy Commission oversees auctions for 20 year PPAs that are open to any technology. The contracts go to the lowest bidders who sell their generation to electricity distributors for resale to regulated customers. Wind and solar bid so low they won about 50% of the capacity on offer in an August 2016 tender. In principle, the buyer behind the PPA can be a large pool of electricity retailers or a single large company, says Venturini. It is a market model operating in parts of Latin America, where Enel has a strong presence in renewables and also sells directly to big corporations. “In Mexico and Chile we have industrial customers while in several other countries we are also in contact with mining companies,” he says. WindEurope sees such corporate PPAs, popular also in the US, as an emerging and “extremely relevant” trend in Europe, says chief policy officer Pierre Tardieu. But they are insufficient on their own to deliver the investment volumes needed for the EU to meet its 2030 target to trace 27% of gross energy consumption to renewable energy. About 2 GW of such deals, roughly the size of two large coal or nuclear stations, have been signed for renewables power in Europe, the majority wind. Venturini is somewhat frustrated by the European Commission’s policy proposals for improving the design of electricity markets in its Clean Energy for All Europeans report released in November 2016, more 19
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commonly known as the Winter Package. It has some good ideas, he acknowledges, but clings firmly to the wholesale market model. “They are looking at this stuff backwards. I still think they are convinced the short-term market model could work even though they are also starting to realise that you need something parallel, with long term price signals that give investors confidence to invest in infrastructure and allow them to see a decent market return,” he says. •
make up the global energy trilemma, the wholesale market responds to two of them. Missing from the clean, reliable and affordable trio are investment signals to secure a reliable supply long term. To the large but cautious investor, essential for power capacity development, the prospect of ever longer periods of ever lower prices, interspersed with volatile price spikes that energy regulators may decide to cap, is not an attractive proposition.
FLEXIBILITY IS THE CURE BEST PRACTICE
THE MARKET AS SERVANT
A reformed, flexible but still marginal-cost-based market can be designed to avoid price extremes. Flexibility is the key to curing cannibalisation
Creation of price signals that change patterns of customer consumption is a key task for wholesale markets
Both the International Energy Agency (IEA) and the European Commission remain convinced that wholesale markets in which electricity is traded at marginal cost are the best design for solving the energy trilemma—the supply of clean, secure and affordable energy to all. That conviction in the value of market forces is shared by industry lobby groups on either side of the conventional and renewable power divide. On this issue, electric industry association Eurelectric and green energy organisation WindEurope are in agreement. Each has provisos contentious to the other, but they do not dispute the wholesale market approach. In its Winter Package the Commission refers to an enhanced electricity market design where “short term markets are fully developed” and “renewable generators can earn a higher fraction of their revenues from the energy markets.” The IEA speaks in similar tones. “The transition to low-carbon power can be carried out through upgrades to existing market arrangements and regulatory instruments. The necessary upgrades can be identified in the best practices of existing electricity markets in Europe, in the Australian National Electricity Market, and in North America,” states the IEA in Repowering Markets. The extremely dynamic electricity markets of the US, those that adopted the “standard market design” approach proposed by the Federal Energy Regulatory Commission, are arguably the best demonstrations yet that marginal cost wholesale markets can make good servants when prevented from becoming bad masters. The undisputed advantage of a wholesale market based on marginal cost is that when it functions as intended the cheapest product is prioritised at all times. In the current electricity market, that product is renewable energy. Of the three challenges that FORESIGHT
The solution emerging is to stop occurrences of long periods of low or negative prices caused by false scarcity signals. With tweaks to the design of wholesale markets, energy products that increase the flexibility of the power system can be attracted into them. The effect would be to stop the extreme scarcity signals that send prices through the floor and to provide new revenue streams for renewable energy producers. Flexibility products include: voluntary reductions in demand on request, known as demand side management; adapting consumption to be more energy efficient; energy storage options like power to heat; and more cross border grid connections. The more flexible the system, the flatter the demand curve and the less likelihood of extreme surges in prices. Putting a price on the benefits of shaving off peaks in demand that cause high prices or limiting the frequency and depth of low prices, could provide the investment signals needed. “If an actor was paid for not producing or not consuming it would be of economic value and there would be more economic income in this flexibility. And there would be new business models of how to exploit these low cost price situations,” says Peter Karnøe, professor at Denmark’s Aalborg University. “We certainly need a way to bring in more flexibility on the demand side and that has got to be valued in some way. And quite how that happens or the dimensions of how that happens is unclear,” says Exeter University’s Mitchell.
ACTIVE CONSUMERS For Michael Hogan of the non-profit Regulatory Assistance Project, a global organisation with American roots, the way forward is clear: creation of price signals that change patterns of customer consumption is a key task for wholesale markets. Without demand response, he sees price volatility in current markets increasing as the share of renewables grows. The extreme scenarios of prices at zero or below for significant periods of time when these generation sources are price setters, or at sky-high levels when they are not, comes about because the market, “totally ignores demand response,” he says. “The historical assumption of inelasticity of demand 21
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is increasingly not true,” he adds. “The practical ability of consumers to act is increasingly available at increasingly affordable prices. What is missing is the rate structures and the regulatory system.” Entering contentious waters, Graham Weale, a professor at Rhur University Bochum in Germany, believes customers can be activated by price signals. “There is a major disconnect between the prices most consumers pay and the wholesale market,” he says. If electricity bills were more closely aligned with wholesale market prices customers would be more inclined to take advantage of technology like smart meters to respond in real time to changes in prices. To reduce their exposure to peak demand prices, they could buy more efficient appliances, or agree to have non-critical devices temporarily switched off. Some power system operators in the US already make extensive and large scale use of demand response. The Energy Reliability Council of Texas (ERCOT) has for a number of years got 50% of its supplemental reserves from demand response while a third of the new market for provision of electricity capacity in the Pennsylvania-New Jersey-Maryland system is demand response, says Hogan.
EXTRA REVENUES Adding flexibility provides renewable energy generators with more options for revenue through sales of grid support services. Traditionally, such services were exclusively offered by generators able to readily dispatch bursts of power on request by burning more fuel. Paying for such services outside the market and deliberately excluding renewables from participating, has to change, says Hogan. If the cost of procuring reserves is also accounted for by system operators, prices should not go to zero for any significant amount of time, he says. “The demand curve that is usually drawn completely ignores the demand for reserves,” he adds. Since demand for operating reserves tends to increase when renewable generation is high, Hogan says accounting for them in the demand curve should support prices. When renewables are providing 100% of energy, he notes that the system operator is sure to be running more expensive generation in the background to provide reserves, but this has often not been conveyed in wholesale prices. ERCOT is among the system operators that have implemented what are known as operating reserve demand curves, administrative mechanisms that set the value of an incremental unit of reserves that rises gradually to the full value of lost load or to a very high price cap as the supply of reserves falls below requirements. This co-optimisation mechanism is subsequently used to create a price adder that is included in the clearing price for energy, closing the 22
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gap between the energy market price set through trading and a fuller price that includes the value of security of supply. Hogan sees the energy-only market as working well but notes that renewable energy support will still be needed wherever there is overcapacity, as on the European continent. “In many cases, renewable energy continues to need support because the market doesn’t need incremental investments. So you need to push them in, and you also need to push out excess capacity,” he says. •
MARKET MASTERY
RENEWABLES LEARN THE TRADE
Given a fit-for-purpose market design, renewables are proving they can meet power system reliability standards and keep energy affordable. The risk of a destabilising market revolution is receding as steady evolution points the way forward In a power system built around renewables, it is renewable energy generators that must provide the services needed to run the grid. If not, consumers will be landed with the considerable extra cost of a dedicated alternative source of generation, says Jochen Kreusel, market innovation manager in the power grids division at ABB Power in Germany. Ireland is among the front runners in demonstrating that a high penetration of renewable energy in a modern power system is feasible, affordable and meets reliability standards, even in a country with restricted interconnection capacity. Much effort has been put into designing the Irish market to be fit for purpose. Renewables not only provide grid and balancing services, they get paid for doing so, too. “We see a lot of renewables owners and operators becoming more savvy and they are now competing in the balancing or services markets,” says Alexander Kulesh, energy analyst with Irish power trader and services provider Electroroute. “I see this as the way forward.” Through its DS3 System Services programme, Irish system operator EirGrid is doubling the number of services it will buy to keep the system stable to 14 and quadrupling the budget for services to be procured to €235 million from an annual spend of €60 million. “Previously fixed service system tariffs were paid mainly to large generators to provide reserve systems,” says Kulesh. “Now EirGrid has added services ranging from super fast-acting reserves to long term ramping when the wind isn’t blowing and also opened up the programme to a lot of new providers.” DS3 was developed following a study published in FORESIGHT
In Germany, 55% of all electricity bill recipients have never switched to a new supplier despite the opportunity to make considerable savings. Source: Bitkom poll
Energy Conference 2017
The Energy of the Future Date:
Monday April 24th 9.30am - 3pm.
Location: Esbjerg Conference Hotel, Stormgade 200, 6700 Esbjerg. What does the energy supply of the future look like? Which opportunities and challenges will we encounter? It will require technology, development and well-educated specialists. The upcoming energy policy, supply strategy and the circular economy are among the topics of discussion at the energy conference organised by Dansk Fjernvarme and Maskinmestrenes Forening. The Energy Commission will present its recommendations regarding the Danish 2020-2030 energy policy at the end of the first quarter. Denmark is a world leader when it comes to combining an ambitious transition to renewable energy with low costs and security of supply. The industry has been extremely successful in the past decade and accounts for a large proportion of Danish exports. But it will require a special effort to achieve DI Energy’s goal of reaching 100 billion Kroner in exports by 2020. We need an export strategy to ensure that we take full advantage of this potential
Troels Ranis, Director, Danish Energy Industries Federation (DI Energy).
Thomas Danielsen (V), Chairman of the Danish Climate, Energy and Building Committee.
Troels Ranis, Director, Danish Energy Industries Federation (DI Energy).
Peter Birch Sørensen, Chairman of the Danish Climate Council.
Martin Næsbye, Managing Director, OilGas Denmark.
Tom Nielsen, Director, Business Region Esbjerg.
Price: 299,00 Kroner ex VAT. Registration: Please register by e-mail at kld@danskfjernvarme.dk or mf@mmf.dk or by phone at +45 3336 4920.
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PAY AS BID Peter Karnøe, professor at Aalborg University, points to a wholesale market refinement being considered. Instead of bids based on marginal cost, in some situations a better result may be achieved by pay-as-bid, in which successful bidders are paid the price offered, as used in intraday trading on Nord Pool, the Nordic power market. In theory pay-as-bid would allow for more strategic bids that also cover part of the capital cost expenditure. But for market players it is also riskier. Generators that bid too high would not sell any power while others risk getting less than they would receive under the marginal cost model, where the highest accepted bid sets the price for all. WindEurope believes the risks are too great and marginal prices are the better market instrument. “Pay-as-bid pricing can lead to inefficiencies, among other things because small players do not have the capability to forecast prices,” it states in its Market4RES report. But it concedes the potential for a hybrid solution within an energy only market, with a marginal cost clearing price set in the day-ahead market deciding the power mix, followed by fine tuning of supply and demand in an intraday market with payas-bid pricing, referred to as the continuous market. “The hybrid approach can be expected to be the best design variant,” states the report.
EVOLUTION NOT REVOLUTION Reaching agreement on what incremental changes to introduce to the design of wholesale markets and how best to implement them will not be achieved overnight. Continued support for renewables until markets are fit for purpose is advocated by WindEurope, the International Energy Agency (IEA), and other government advisory bodies. 24
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“Reaching decarbonisation objectives by 2030 implies deploying low carbon technologies faster than existing generation is expected to retire and this situation will continue to depress prices during the energy transition,” says the IEA. The agency cautions against rapid change and expects the energy transition to be a gradual process as the interaction between technologies and market rules is steadily refined. Evolution may indeed win the day. Windy weather in Denmark over the 2016 Christmas period, when industrial demand for electricity is low, had wind turbine owners fearing days of negative prices, heralding a financially disastrous end to the year, similar to that experienced in a previous winter holiday season. But market signals successfully triggered planned flexibility measures, underpinning prices over 29 critical hours. Instead of the acute financial pain of a deep plunge into negative territory over days, wind turbine owners suffered no more than a relatively short and shallow dip into the icy waters of prices below zero. A feared Christmas nightmare of big losses in windy weather became a success story for market flexibility, flexible generation and savvy power system operation. • FORESIGHT
SOURCE Lion Hirth, What Caused the Drop in European Electricity Prices?
2010 indicating what policies and services could be adopted to allow the Irish power system to handle about 75% of renewable energy penetration at one time. “As a small island nation with little interconnection capability, Ireland is seeing the challenges in operating a system with a large amount of renewables years before others,” notes Kulesh. In most cases, predicting the likely revenues renewables could earn is difficult, says Kreusel. “If you had asked people a decade ago about the implications of reaching 2020 targets for renewables, you would have heard that balancing costs would be really high,” says Kreusel. “But balancing costs are at an all time low in Germany and this is not because there is no volatility. There is a lot of volatility but balancing markets have been streamlined, control areas and system operators are coordinating better and market closure times have been shortened. So the market looks a lot different than it did a decade ago.”
ELECTRICITY MARKET DESIGN
Photo: Timm Becker, DTU
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TEXT Heather OʼBrian / PHOTO Tine Sletting
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Electrification of heat and transport The bigger the pool of energy demand, the less the ripples in supply from renewable energy are felt. The electrification of transportation and heating is not only the next big step in decarbonisation, it will also ease the way, both physically and commercially, for much greater uptake of renewables in electricity systems
Electric trains The Netherlands has electrified its entire rail network. Interestingly, electric trains can release small amounts of electricity back into the grid during braking and can reduce demand by coasting into stations
When Danish wind turbines are turning at full force at three in the morning, electricity surplus to immediate need heats water stored in district heating networks, reducing demand on the grid for warming up buildings at another time. Heat is easier and cheaper to store than power. Forging a close-knit relationship between the two comes with further added value. First, the scope for balancing demand and supply is greatly increased as the market for renewable energy grows. Second, the risk of green power going to waste is reduced on windy or sunny days. Going forward, the electrification of heating, along with that of cooling and transport, is an essential element for creating the demand and supply flexibility needed to run entire power systems on renewable energy. Electrification has the added advantage of helping other industrial sectors reach their emission reduction targets by greening their energy use. “Electrification is the lifeblood of the energy transition,” says Kristian Ruby, head of industry association Eurelectric. “The electricity sector has been decarbonising faster than others and will continue to drive the energy transition. It has the potential to deliver clean energy to transport and heating and cooling as well.”
LOAD WITH A DIFFERENCE Power demand will increase with electrification, but what is more interesting is that the type of load asFORESIGHT
ELECTRICITY MARKET DESIGN
sociated with heating and transport is different, says Jochen Kreusel of ABB Power’s power grids division. “To a certain extent, both heating and charging an electrical vehicle are dispatchable loads. You can preheat or pre-cool buildings because all buildings are storage,” he says. Kreusel also sees demand management, the shifting of demand for electricity to another time, being integrated into infrastructure from the beginning of electric mobility due to grid constraints. “Electric mobility without the opportunity to influence the time of charging won’t work or will result in expensive grids,” he says. The shift to a greater share of electricity in meeting energy demand will also bring efficiency gains. Exchanging an oil burner with a heat pump can save, on average, almost 50% of annual primary energy consumption, Eurelectric notes in a 2015 report. In road and rail transport the numbers can be equally impressive.
HEATING USES HALF OF ALL ENERGY The delivery of clean energy to heating and cooling is further advanced than for transport, although much remains to be done. District heating networks receive energy from a variety of sources, including combined heat and power (CHP). Electricity from renewable sources, typically wind energy surpluses, can be used to power a large heat pump or an electric boiler which heats up water that is then stored for use in the network. The lower the temperature in the network, helped by better insulated pipes and buildings, the greater energy efficiency achieved. Heating and cooling accounts for roughly half of Europe’s energy consumption, with about 75% of this still satisfied by fossil fuels. Paul Voss of industry association Euroheat & Power says European cities are looking towards the district heating networks common to Denmark and other Scandinavian countries as a model. These networks, in which heated water is transported via underground pipes from a central source to suburbs, city centres and even remoter groups of buildings, take advantage of aggregate demand and are seen as an important tool for introducing greater shares of renewable energy in urban settings. “They are a bridge between the heating and power systems and provide the best way to decarbonise the heating sector,” says Voss.
CITIES LEAD ON DISTRICT HEATING Only about 10% of heating in Europe is provided by district heating networks with the remainder coming from individual oil or gas boilers. That proportion looks set to rise rapidly in coming years. Among cities moving are Amsterdam, which is rolling out district 27
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heating as it seeks to completely decarbonise its heating network, now reliant on natural gas, by 2050. For its part, the UK is to invest £320 million over the next five years in district heating. In Copenhagen’s Carlsberg City a district cooling system cools some 300,000 square meters of office space. A chiller, a type of heat pump, uses outside air to help cool four million litres of water contained in underground storage tanks. “We generate cooling when [electricity] prices are low, thereby also helping to integrate renewable energy,” says Anders Dyrelund at consultant engineering company Ramboll Energy, which helped implement the project. In a second stage, a heat pump will allow the cooling system to push surplus heat into Copenhagen’s district heating system. “Almost everyone immediately grabs for batteries when you talk about storage,” notes Dyrelund, “But it can be more effective when you set up new buildings to adjust your consumption.” A recent study by German energy consultancy Tilia looked into the potential for district heating and cooling (DHC). “DHC grids can be supplied by a very broad range of renewable and recycled energies, providing an off-take base for those local energies and stimulating their development,” it says. “Coupling the electricity and heating systems through DHC can help to efficiently manage intermittency from wind and solar PV at an affordable cost. This can be done through the optimised use of thermoelectric equipment like heat pumps, electric boilers and CHP, together with thermal storage, which is already contributing to a higher integration of intermittent generation in some countries like Denmark.”
ELECTRIC TRANSPORT OUR BEST CHANCE While progress has been made on lowering overall levels of greenhouse gas emissions in Europe, emissions from transport continue to rise. “The bottom line is that we need to decarbonise transport and about 75% of transport emissions come from vehicles,” says Jelena Simjanovic at Transport & Environment, an NGO based in Brussels promoting sustainable transport. “There aren’t that many options. We use fossil fuels, we thought biofuels were okay but they’re not because they emit the same or even more. Electricity is our best chance because the power sector will continue to get cleaner over time.” Uptake of battery electrical vehicles (BEVs) has been slower than many expected and in 2015 the global stock had reached no more than 1.3 million. Even though growth has been faster recently, low oil prices, concerns about the limited driving range offered by current batteries and the general lack of a fast-charging infrastructure have impeded a faster rollout. That could change in the medium term, for both private cars and light duty vehicles (LDVs). “Around 28
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2025, fundamental technology and industry trends are expected to enable BEVs to be cost competitive against conventional vehicles without subsides, underlining the likelihood that LDVs will eventually be electric rather than any other alternative,” American consultancy Navigant Research said in a recent report. The International Energy Agency (IEA) expects 35-40% of all new cars on the road worldwide to be electric by 2040. Inroads have been made in places with supportive policies. A clear example is Norway, which now
“There aren’t that many options. We use fossil fuels, we thought biofuels were okay but they’re not because they emit the same or even more. Electricity is our best chance because the power sector will continue to get cleaner over time.”
has some 136,000 EVs ( just over 100,000 BEVs) and has provided tax breaks and other bonuses such as access to bus lanes alongside an extensive charging network.
MAYBE SOME GRID STORAGE Looking further ahead, some see electric vehicles as a possible source of stored electricity, which can be fed back into the grid from full batteries connected to charging stations. Specialised batteries would need to be developed along with essential hardware and software to facilitate extraction of electricity on demand. For the process to be affordable, it is reliant on economies of scale. “A single car is too small to do this,” notes Simjanovic, “But if I’m an aggregator and have contracts with 10,000 cars, for example, I could pull this power together and have electricity to sell.” Meanwhile, electrification of rail transport is more advanced, paving the way for further advances in system flexibility. Trains are routinely instructed to coast into stations to save energy and during braking can even feed power into the grid. The Dutch rail system has been electrifying its trains since the 1950s and as of January they are now 100% powered by wind. Dutch energy supplier Eneco has contracted to cover the 1.4 TWh needed each year by the entire rail system using renewable energy generated from extensions to wind farms in the Netherlands, Sweden, Belgium and Finland. “Fossil fuels are not the way to go forward. That’s over and done,” says Eneco’s Michel Kerhof. • FORESIGHT
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TEXT Peter Bjerregaard / PHOTO Lars Just
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INTERVIEW
The rules of the game need updating The International Energy Agency (IEA) recently published its first report on electricity market design, Repowering Markets. “There is no field where clean energy and energy security interact more powerfully than electricity regulation and market design,” states IEA boss Fatih Birol in the report’s foreword. In conversation with FORESIGHT, Birol elaborates on the report’s key findings
Influential Fatih Birol has been Executive Director of the IEA since 2015. He has been named among the most influential people on the world’s energy scene by Forbes magazine
INVESTMENT SIGNALS
Q: You say that energy market revenues are not attracting the required low carbon investments in a timely manner. Purchase prices set in wholesale markets are lower for electricity from low carbon technologies, which makes it harder for these to recoup their investment costs. How do you suggest we solve this problem? A: Merchant renewable investments exist and we will see more of them, even if at this stage they remain the exception. Despite tremendous cost decline of wind and solar technologies, electricity prices will probably remain too low to attract the level of investment needed. Maybe it’s possible to quietly reach a few per cent of wind and solar in the mix over the next decades. But this is neither compatible with a two degree scenario nor with less ambitious targets. If you want to FORESIGHT
reach 30-40 per cent of wind and solar power in the mix in a given market (not only in a very well interconnected small country), you have to invest faster than the natural replacement rate of existing capital stock. This creates excess capacity, displaces power plants and depresses prices. Even if we manage to put a proper price on CO2, the renewable targets are so high that it is unlikely that we will be able to reach them without additional policy support. We suggest continuing to support low carbon investment with long term arrangements, whether this is FIT [Feed in Tariff ] PPA [Power Purchase Agreement], a slightly more sophisticated certificates system, or obligations that push electricity retailers to enter into long term PPAs with project developers, such as in the US. This is not new. This is precisely what governments are already doing and we expect this will continue. In the coming years, such support 31
SPECIAL REPORT
schemes can be reduced as we fix and increase carbon pricing. It will become more and more important to integrate renewables into electricity markets that are well designed and send efficient investment signals. Q: You stress that solar and wind are qualitatively different from conventional fossil energy production from a regulatory point of view. How should this be reflected in future regulation? A: What matters from a regulatory perspective is the capital intensity of wind and solar and the fact that they can be deployed rapidly, in fact faster than the rest of the system can adapt. Their cost structure is mainly fixed while their revenues come from volatile and uncertain electricity market prices. This does not fit very well together and can increase the cost of decarbonisation because investors will ask a high risk premium to invest, or will not invest at all. Solar PV can also be small scale and modular and can be installed on roofs, close to consumption centres in a more distributed fashion. Such distributed resources can radically change the way the electricity sector functions and will need to be regulated. Consumers are becoming “prosumers” who both take electricity from the grid and sometimes send electricity back to the grid. This has major implications for the business model of network and generation companies and the overall market design and regulatory framework. Q: You have called stop-and-go policies the biggest killer in relation to the energy transition and advocate a steady “walking pace” rather than an inefficient “crawl then sprint” model. With governments having all sorts of policy objectives (health care, education, and so on), what do you think is required before more governments opt for more ambitious “walking pace” policies? A: Decarbonisation is a very ambitious policy that will require a complete transformation of the energy system. Therefore it will need to attract investors. We also know that the opportunity window to reach a two degree scenario is rapidly closing. In a report on climate change published in 2015, we indicated that the opportunity would close in 2017. Even if energy demand growth is lower than we projected, in particular in China, the need to reduce CO2 emissions is very urgent. Of course, policies tend to change with governments and so it will be important to find ways in practice to commit to long run policy directions that can give a framework of stability for investors. One of the issues for carbon pricing has been that the track record of stop-and-go policy commitments has damaged the credibility of carbon pricing. 32
CARBON PRICING
Q: The IEA continuously stresses the importance of a high carbon price, but most countries are hesitant about introducing a levy that might hinder economic growth. What is the most realistic solution to solving this global game of “after you, sir” where countries are reluctant to introduce effective carbon pricing? A: Carbon pricing is progressing and has been introduced in many countries, not least this year in China. This is very encouraging. By 2015, emissions trading schemes covering 4600 mega tonnes of CO2 equivalent were operating in 45 jurisdictions, which together accounted for 40 per cent of global GDP. Meanwhile, even a moderate carbon price still can play an important role, not only to signal the commitment to decarbonisation but also to help support switching from coal to gas, to accelerate the retirement of existing polluting plants, and to bring mature renewables into the energy market. Q: You have said that intense lobbying activity related to carbon pricing has repeatedly derailed informed policy making. Can you elaborate on this and perhaps support the statement with examples? A: Carbon pricing suffers from the fact that it is a political construct intended to correct an externality. This creates extremely important distributive effects: in other words, winners and losers. Policy makers are careful about these effects. Even where a carbon price exists, very few countries—like Sweden—are likely to introduce a carbon price that would be consistent with decarbonisation pathways, such as $100 for a tonne of C02, or more. Reasons for low carbon prices differ from region to region, but there are broadly three factors. First, the economic downturn has led to lower than anticipated emissions, resulting in a surplus of emissions allowances. Second, concerns about industrial competitiveness and rising consumer electricity prices have made it difficult to negotiate political decisions (and maintain political will) to set tight emissions caps or high carbon prices. Third, the positive effect of energy efficiency policies has begun to be felt in flattening or falling electricity demand in many jurisdictions and has resulted in reduced demand for emissions trading scheme allowances, such as in the European Union.
FLEXIBILITY AND INTEGRATION
Q: The IEA has stressed that even if we greatly improve demand response and storage technologies and build a more efficient energy system, we still need new approaches to policy and regulation. Why do we need new regulation if better technology usage could stabilise the fluctuations in supply and demand? FORESIGHT
ELECTRICITY MARKET DESIGN
Walk and talk FORESIGHT spoke to Fatih Birol after he presented World Energy Outlook 2016 at the Royal Library in Copenhagen. During his talk, he identified stopand-go government energy policies as the biggest killer of further renewable energy deployment
A: This is a very good question. Storage and demand response are extremely promising. They have been around for a while, but it is increasingly clear that new digital technologies are unlocking much more potential for flexibility: you can store electricity or shift load on the system to when electricity is abundant at low cost. There is less need to worry about peak demand anymore. But we are not yet there and there are still uncertainties associated with deployment. Today demand response and storage represent only a small fraction of installed capacity, between zero and a maximum ten per cent of peak demand in some markets. Meanwhile, it remains important to keep the lights on. We have concluded that governments still have an important role to play to regulate security of supply in the coming years. Q: You say that the low carbon transition requires strengthening the integration of energy markets over large regional areas. The European Commission has just presented its Winter Package, which partly reflects this concern. Apart from in the EU, however, do you think market coupling is high enough on the global agenda? A: Regional integration of electricity markets is a worldwide trend. On this point, Europe is far ahead of other regions of the world. The internal energy FORESIGHT
market represents a market of more than 3200 TWh in the EU alone. Electricity prices are coupled from Helsinki in Finland to Lisbon in Portugal. This is a major and unequalled achievement. In North America, power systems and power markets remain much more fragmented and the electricity sector is still not liberalised in many US states. Regional integration presents clear benefits in terms of security of supply, increased fuel diversity and smoothing out the variability of wind and solar power over large geographic areas with different weather conditions. But regional integration of electricity markets across borders raises significant issues in terms of electricity security that also have to be addressed. Q: What do you see as the greatest barrier yet to be overcome for the rapid replacement of fossil fuels by renewable energy? A: The greatest barrier to overcome is the integration of variable renewables into electricity systems. This will require developing power system flexibility and also a friendly deployment of variable renewables. At high market shares, wind and solar power can create situations of over generation that have to be managed. We have created a dedicated unit in the IEA to analyse this issue and will be looking at this very closely over the coming months and years. • 33
What does the Danish Prime Minister dream about? What ambitions should we set out to achieve? How do we generate energy that helps improve Denmark? Those are some of the questions asked at the Energy Summit 2017. You can meet your colleagues and receive answers from Prime Minister Lars Løkke Rasmussen, Anders Runevad, CEO at Vestas and Samuel Leupold, Executive Vice President for Wind Power at DONG Energy. Lokomotivværkstedet Otto Busses Vej 5A, DK-2450 Copenhagen SV
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OFFSHORE WIND TENDERS
Less risky tender model promises more cost cuts Denmark’s tender model for development of offshore wind is being looked to as a shining example of how to drive down cost by removing risk. Sharp price competition is delivering record low bids. A common tender approach across Europe would further lower costs
pointment of receiving just one bid in 2015 for a concession contract. The new approach aims to create an attractive tender model that contains a strong competitive element. “We wanted to set conditions that would attract more bidders and introduce sharp price competition,” says Lisbeth Nielsen of the Danish Energy Agency (DEA). The result is a model in which the Danish state identifies zones for offshore wind concessions, undertakes site studies and shares data on seabed conditions, tidal currents, the wind resource and deals with environmental concerns. The DEA further functions as a single source for the permits developers require from various authorities and takes care of the transmission infrastructure that links the wind plant into the onshore grid network. A close “market dialogue” is maintained with all potential bidders. As part of the prequalification process, developers submit non-binding bids, after which they negotiate with the DEA to further minimise economic risks associated with the project. In this way the bidders contribute to the terms and conditions drawn up by the DEA for the final tender documents.
MARKET FORCES BETTER
OPEN TO ALL COMERS Denmark’s risk reduction approach to offshore wind development was embarked upon after the disap36
FORESIGHT
DENMARK INSPIRES THE NETHERLANDS The Danish model has attracted the interest of other countries, says the DEA’s Nielsen. Particularly the Netherlands, but also Germany and France are watching closely after news spread about the record low Kriegers Flak bid. “Dutch politicians were inspired by Denmark and
TEXT Regner Hansen
Of the 24 GW of consented offshore wind capacity in Europe not yet in construction, 78.1% is destined for the North Sea, 14.1% for the Baltic Sea, and 4.1% for the Atlantic Ocean, reports industry group WindEurope, with the Irish Sea and Mediterranean Sea accounting for the remainder
With an accepted bid price of just €49.9/MWh, the Kriegers Flak project in the Danish Baltic Sea will deliver power to the grid at the lowest price yet for offshore wind electricity. The winning bid for the Danish government project, from Swedish utility Vattenfall, was accepted in November 2016. It was 20% lower than Vattenfall’s bid for Denmark’s near-shore projects just two months earlier (although unlike Kriegers Flak that bid included the cost of transmitting the power to shore) and 50% less than Vattenfall’s winning bid in 2015 for another Danish offshore wind farm, the 406 MW Horns Rev 3 project. Vattenfall and other players in the offshore wind market stress that the low prices are at least partially driven by Denmark’s tender model, in which the state is involved as a proactive participant. “The Danish model has shown its value in lowering the overall costs of offshore wind development by reducing the risk factor,” says Vattenfall’s Ole Bigum Nielsen. He praises the model’s transparency, as does competitor utility E.ON and offshore wind turbine supplier Siemens.
While the Danish model is delivering low offshore wind prices, market players still see room for improvement. “The argument for the model is that if the state takes care of the basics, we avoid a situation where all developers undertake the same site identification and preparatory work. But if the authorities alone select the concession zones, the risk is that good sites may never be developed. With regard to pre-construction work, many of the players have tried it before and don’t necessarily have to start from square one every time,” says Ulrik Stridbæk from DONG Energy, a Danish utility. Stridbæk also questions the wisdom of letting the state undertake the transmission connection, the cost of which represents a large share of the whole. If three to five large companies were to bid for the transmission rights, the resulting competition between them would deliver a cost benefit, Stridbæk believes.
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The rewards of proactive government
Countries that work hand-in-hand with industry to reduce risk reap the rewards of lower prices
BRITAIN HVDC station
GERMANY
DENMARK
have developed their offshore wind market along similar lines. There are many similarities between the two models,” states the Dutch environment ministry. The only main difference is that the Netherlands does not pre-qualify bidders. Britain pioneered the one-stop-shop permitting process for offshore wind, but otherwise its tender model has more competitive elements than the Danish and Dutch approaches. Developers of projects in British waters select their own sites, although within zones defined by seabed owner, the Crown Estate. They are also responsible for grid connection of projects, although subsequent delivery of offshore wind energy is undertaken by commercially run and privately owned offshore transmission operators. In recent advice to the British government, the country’s Energy Technology Institute (ETI) says the cost of offshore wind can be further reduced if the state were to assume responsibility for some of the infrastructure development and construction. It is a concern, says the ETI’s Stuart Bradley, that offshore 38
wind prices in Britain are half as high again as in Denmark. “What is impressive about the Danish model is that it creates strong competition among bidders and a much lower electricity price,” he says.
COMMON TENDER MODEL In June 2016, countries bordering the North Sea signed a common declaration on offshore wind development, including tender models. The cooperation will likely lead to timely coordination of offshore wind projects in the North Sea region, with potential for a concerted approach to project development. Whether the deal can go one step further and result in a single tender model for Europe only time will tell. “We’d rather see a market convergence based on best practice and harmonising tender models,” says Stridbæk. Both E.ON and Vattenfall are hoping for a European model with the same terms and conditions. It will promote transparency and further price reductions, says Bigum Nielsen. • FORESIGHT
As with most major infrastructure development across Europe, offshore wind projects are state sponsored endeavours with different levels of government involvement. At one extreme, the British approach is to leave development entirely in the hands of the private sector, contrasting with Denmark's hands-on involvement in resource assessment, seabed surveys and provision of all the transmission infrastructure. Germany lies between the two, partially paying for transmission. The more proactive the government, the more the costs are covered by the taxpayer rather than the electricity consumer and the lower the overall cost has become.
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ENERGY-WATER-FOOD NEXUS
Relying on nature’s abundance of sunlight and desalinated seawater to produce high value crops in arid areas, Australia’s Sundrop Farms operates the first greenhouse of its kind. The project takes concentrated solar power to the next level Growing fresh fruit and vegetables in the desert may seem like a Sisyphean project. Yet that is exactly what Sundrop Farms does in South Australia, using primarily sunshine and seawater to fill eight trucks with tomatoes every day, or about 17,000 tons a year for consumers across the country. Approaching Sundrop’s farm outside Port Augusta, a three hour drive south of Adelaide, the arid outback is dominated by the facility’s 127 metre tall, sky-piercing solar tower. Get closer and the 23,000 mirrors placed at its base come into view, each of 40
them collecting the sun’s rays and reflecting them to the tip of the tower. The heat warms up a pipe that contains a sealed-in supply of oil, which in turn brings the water pumped up from the nearby Spencer Gulf to 160°C and desalinates it. The water is then used to irrigate tomato plants growing on the 20 hectare greenhouse area during the seasons. Periodically, it is also used to run a steam turbine for electricity generation. The integrated energy system, designed and delivered by Denmark’s Aalborg CSP, a concentrated solar power specialist, is the first agricultural set-up of its kind. Contrary to conventional greenhouses, it uses no pesticides, fossil fuels, groundwater or soil, while avoiding the emissions of up to 16,000 tons of CO2 annually. “If you can farm successfully here, you can farm FORESIGHT
According to Denmark’s technical university, large scale production of food, such as lamb and fruit in New Zealand, often appears to be less energy intensive than smaller scale production of the same products by countries already importing them
TEXT Sofie Buch Hoyer / PHOTO Sundrop Farms
Desert farming with next era solar
Business
er Group, an energy consultancy. He adds that the business of integrated energy systems is gaining a foothold as an industry in its own right. A recent report from the Technical University of Denmark (DTU), the International Energy Report, supports his view. It concludes that energy, water, and food need to be considered together in the socalled energy-water-food nexus if the world is to respond successfully to the resource challenges posed by climate change and population growth. The Sundrop Farms initiative and projects like it depend on a high degree of predictability of production output and a stable resource-efficient water and energy supply. They have promising prospects to make a huge difference in drought stricken agricultural areas around the world, says DTU’s Martin Drews, one of the report authors.
COST LIMITATIONS
Somewhere in the region of 30-50% of all food produced is wasted, along with the energy used to produce, supply and dispose of the discarded feedstuff
almost anywhere in the world,” Sundrop Farm boss Philipp Saumweber recently stated as the company seeks to launch similar projects in Portugal and the US. Other companies thinking along the same lines as Sundrop are testing pilot seawater greenhouses in desert areas in the Middle East.
WATER GUZZLER Agriculture today consumes 70% of the earth’s available fresh water. With the world’s water demand for all uses projected to increase by more than 50% globally between 2000 and 2050, projects like Sundrop Farms may well be the face of the farming future, experts predict. “It’s a very interesting configuration because it’s an extremely high-tech and potentially cost-effective way of making food,” says Keith Lovegrove of IT PowFORESIGHT
Sundrop Farms, however, clearly has its limitations in terms of what can be grown, says professor Robert Park of Sydney University. “Many staple foods that are crucial to food security are grown over very large areas that could not be achieved in a greenhouse system, for example wheat, rice, maize and so on,” he says. Other critics argue that desalination really only make sense in places that are water-stressed. While Sundrop Farms does not use any fresh water, the solar driven project still relies on main grid power for 10-15% of its power needs, especially during winter. On site, there is storage for about ten days for water, heating, cooling and electricity. According to Drews, it is no surprise that Sundrop Farms, with a total project cost of around $200 million, was established in Australia, which also has a strong infrastructure and a financially sound customer base. “If a project is to be economically viable, there has to be a strong market as well as an adequate distribution chain in place, which would currently disqualify many of the obvious production places in the developing countries,” he says. The economics of Sundrop Farms are hard to ascertain, with the company declining to provide information on its cost of energy. Lovegrove, however, insists that integrated energy systems can be made to have a good return on investment once the full costs of energy provision are taken into consideration. “Every sustainable approach is linked to the world’s approach to greenhouse gas emissions and how much we value its cost versus the price on oil and other fossil fuels,” he says. • 41
Cities
Learning by sharing While it was global leaders who signed the UN’s Paris Agreement on climate change at the end of 2015, it is often city authorities in the frontline of implementation. By learning from one another around the world they save time and money
form followers about what works and what does not. In practice, this means implementation happens almost twice as fast than it would have done. Simon Hansen and Maryke van Staden, who lead ICLEI’s Low Carbon City Agenda, have a long list of lessons learned by cities from one another. Through C40, European cities learned about electric buses in Chinese cities. Large South American cities have quickly implemented bus rapid transit, and in Oregon, Portland learned about green bonds as a financing option from Johannesburg. Through ICLEI, its members, such as the South African city of KwaDukuza, learned about sustainable urban planning and green public transportation from Helsinki. Recife in Brazil learned about green buildings from Copenhagen. “Learning from Copenhagen’s green-roof approach, the Recife mayor immediately implemented a policy for green roofs in his city. That was a direct result: seeing a great idea, taking political leadership, and implementing it,” says van Staden.
Bicycle freeway The regeneration of Copenhagenʼs docklands includes an elevated cycle route that crisscrosses the basins of the inner harbour, now largely used for recreational purposes
A year after the founding of the C40 international climate network for cities, six of its members rolled out bicycle programmes in their respective metropolises. Ten years later, the number had risen to 43. That did not happen by coincidence. The bicycle initiative is just one example of how C40’s 90 member cities, with a total population of 650 million, inspire one another. They share specific ideas, best practices and pitfalls, as do other city networks that also focus on climate and sustainability. Such networks have gained momentum over the past two decades and include the International Council for Local Environmental Initiatives (ICLEI), United Cities, and the brand new Global Covenant of Mayors for Climate and Energy. With 7100 members from 119 countries, the covenant of mayors is now the largest. Simon Hansen, C40’s director of regions, lets the numbers speak for themselves. Between 2009 and 2015, C40 member cities delivered more than 11,000 concrete initiatives, a third of which were directly inspired by other cities. “It’s not necessary to reinvent the wheel every time,” says Hansen. “This is an enormously effective way to accelerate the change.”
FOLLOW AND LEARN Learning to avoid the pitfalls others have fallen into is nearly the most important lesson. Leaders can in42
FORESIGHT
IN THE DRIVER’S SEAT New York has repeated the message several times since then, notes Klaus Lehn Christensen, project director of the Danish Cleantech Hub in New York City. “New York likes to be in the driver’s seat,” says Lehn
TEXT Rasmus Thirup Beck / PHOTO Rasmus Hjortshøj, Coast Studio
CITIES MORE AMBITIOUS THAN STATES Increasingly, cities appear to be the greatest hope for action on climate change. Many are committing to substantial CO2 reductions. Stockholm, Copenhagen, San Francisco, New York, Sydney and others have all committed to a minimum CO2 reduction of 80% no later than 2050. Copenhagen aims to be the first 100% CO2-free city by 2025. In countries where national governments show little ambition in tackling climate change, it is cities that often show the way. In Jordan, the mayor of capital city Amman, Aqel Biltaji, says that despite the huge pressures of the refugee crisis, combating climate change cannot be ignored. Nothing else will matter in the long run if that problem is not solved, he says. Sydney in Australia is another example of a city taking a lead while the federal government is broadly criticised for its laissez faire approach to climate change. In the US, the climate change policies of president Donald Trump are largely unknown; cities and states may find themselves going it alone. During the C40 Mayors’ Summit in Mexico City in December 2016, the US mayors present pledged to continue their ambitious climate policies, regardless of the actions of the president.
FORESIGHT
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Cities
Christensen. “That’s in keeping with a traditional C40 belief that the solution must be found in the cities. We believe the way to do that is through public–private partnerships. Cities can’t do it alone. We have refined the approach in Denmark over several decades. In New York, it’s a relatively new idea.” New York has given climate change adaptation high priority after the severe flooding it experienced from Hurricane Sandy in 2012. The city is improving its flood defences and rainwater collection after heavy downpours, with an eye to both Copenhagen’s climate change adaptation plan, mooted in 2008, and its cloudburst management plan from 2011. A three year feasibility study in New York suburb Queens is being carried out by Danish engineering consultancy Ramboll. It should lead to development of a dedicated climate neighbourhood using Copenhagen as a model. Any city looking to Copenhagen for inspiration can seek free advice through Copenhagen Solutions To Go, a public-private initiative. The agency can also provide opportunities for interaction with private sector companies that have implemented solutions and technology in the Danish capital.
THE CITY IMPERATIVE More people live in cities than in the countryside. Since that tipping point in 2008, the proportion of 44
“Cities are already responsible for between 60% and 80% of global energy emissions and by 2050 demographers expect the urban population worldwide will rise from 50% to 70%”
city dwellers continues to rise. Demographers expect that nearly 70% of people will live in cities by 2050, steadily pushing up urban emissions of greenhouse gases. Cities are already responsible for between 60% and 80% of global energy related emissions, dependent on the measurement method adopted, and they devour 75% of the world’s resources. Often located on coasts or rivers, cities are particularly vulnerable to stronger, more frequent hurricanes and rising sea levels. Ninety-eight per cent of C40 cities see themselves as vulnerable to climate change and 70% of their residents are already dealing with the consequences. It is in this context that city mayors around the world are acting. “Instead of big ideological battles, mayors are working on practical solutions,” says Hansen. • FORESIGHT
Copenhagen copycat The city government of Xiamen in China recently inaugurated a 7.6 kilometre elevated bicycle path similar to that built in the Danish capital. Both paths are designed by Copenhagen architeture company Dissing+Weitling
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FORESIGHT
Cities
Cloudburst management the Copenhagen way Adapting to climate change does not come cheap. Copenhagen has found a way to co-finance its flood protection plan, provide for new civic amenities, dig up fewer streets and save money, all thanks to one tweak of the law
Severe cloudbursts have become a regular happening in Copenhagen over recent years. The worst drenching was in July 2011 when more than 135 millimetres of rain fell on the city in one day. The cost of making amends exceeded €1 billion, making it the single most expensive case of weather related damage in Europe that year. “Copenhagen is very exposed to future cloudbursts. We realised that in 2011,” says Morten Kabell, the city politician responsible for technical and environmental affairs in Copenhagen. A cloudburst management plan was drawn up, but with a price tag of €1.5 billion stood no chance of being carried to completion by the city. What saved the day was a legislative amendment that allowed the city authority to split the bill for the plan with the local water utility. Before 2013, only underground drainage could be financed by water utilities in Denmark. Any work above ground had to be paid for by the municipal authority. A change to the relevant law, however, means water utilities can now help finance cloudburst management. The newly opened door proved to be a game changer for Copenhagen’s cloudburst plan, which had struggled to compete for a slice of the city budget against schools, retirement centres and other worthy causes. “The water utility, Hofor, will get a loan to pay for the civil engineering work and pay it off through additional water charges. Households will pay but this is the least expensive model,” Kabell says. The bill is essentially split in two, one part concerned with management of water, which is financed through water charges, and the other part for urban space improvements, the cost of which comes out of the municipal budget. FORESIGHT
AN EXAMPLE TO WATCH James Alexander, city finance director at C40, a network of the world’s largest cities committed to tackling climate change, sees the finance model behind the cloudburst plan as an example to follow. “Like so many cities globally, the key question is how to finance such investments. Cities often struggle to get access to capital and are therefore increasingly looking towards innovative financing mechanisms to deliver the infrastructure needed to address the 21st century’s climate challenges,” says Alexander. He adds that what is particularly innovative in the Danish financing model is that it enables the water utility to finance investments that create new green spaces that are owned and maintained by the city. “This type of strategic thinking is why the project was a winner in the 2016 C40 Awards, which celebrate the most innovative climate change projects in cities around the world,” says Alexander.
EXPECT RAINY DAYS Copenhagen’s cloudburst management plan consists of around 300 projects spread across the city to relieve pressure on the drainage network and in this way protect assets from flooding. The plan is based on a few basic principles, the main one being to keep rainwater on the surface rather than collecting it in drains underground. A completely new infrastructure will be established for flooding management, with public parks and parking areas used as water retention zones. In areas where the water cannot be managed above ground, four extra-large cloudburst pipes are being built to take the water from torrential downpours to the harbour and city lakes. The solution is cheaper than conventional drainage. “If every street in Copenhagen had to be dug up, it would be extremely expensive,” Kabell points out. •
TO ADAPT OR NOT TO ADAPT Were Copenhagen to shun new approaches
to cloudburst management and continue as before it would cost the city around €2.2 billion over the next century, estimates the municipal government. In a business as usual scenario, the cost alone of increasing the capacity of the city drainage system would amount to an estimated €2.7 billion, or more. On the other hand, if storm induced flooding and rain run-off are instead safely channelled at surface level away from where they cause damage, cloudburst management will cost €1.5 billion, much less than not changing old ways. 47
PHOTO: STEVEN ACHIAM
Rainwater management in Taasinge Square Taasinge Square is situated at the heart of Denmark´s first climate resilient neighbourhood. The handling of rainwater is exposed with high learning and demonstration value. As a green oasis in a densely populated city district, the square will be able to handle heavy cloud bursts in the future. Also, it gives the St. Kjelds´ Quarter in Copenhagen a distinctive green and sustainable landmark. On Taasinge Square we tell the story about an urban habitat in which the city’s rhythm meets nature’s cycles and the logic of rainwater forms the urban environment. The activity of citizens, water flows, the precise geometry in the district and the Copenhagen dialect are all combined with the natural and self-grown approach to vegetation and water. The topography creates an urban space where edges, transitions, and the relationship between inside and outside are essential. The topographical concept allows various types of space that in interaction with solar orientation and the surroundings offers a diverse use of Taasinge Square. The square is equipped with luminous sculptures: drops and parasols. Rainwater from the roof surfaces lead to three large storage containers. These tanks, shaped as giant drops, reflect the sky and invites to be climbed on. With hand pumps, one is made to release its content, so water is led to the vegetation. The parasols lead the rainwater to infiltration and provide shelter. The presence of water is given a playful form which functionally fits this particular place in the city.
GHB-LANDSKAB.DK
TEXT AND PHOTOS Lars Just / CALCULATIONS Torben Krogh Mikkelsen
When the sun set on Friday, January 20, the world had changed. Its most powerful person was now a man who does not believe that climate change is caused by human activity and has publicly stated that global warming is a hoax. Climate researchers and campaigners ended the day in shock and as darkness fell, further development of renewable energy, wind power included, felt nowhere near as secure as it had been. The photo essay on the following pages turns its focus on wind energy and reflects on its enormous power for helping us keep the planet fit and healthy for coming generations.
PLASTIC BAG Lifted effortlessly into the air, a plastic bag swirls above a basketball court in central Copenhagen. The wind energy keeping it aloft is roughly half to that used by an iPhone on standby. Our plastic bag has a mass m 0.01kg and has a vertically projected area of 25cm25cm = 1/16m2 The gravitational force the wind must overcome to keep the bag in the air is F = g*m = 9.82* 0.01
≈0.1 [N]
We assume the bag is round and its drag coefficient Cd is about 0.5. Apply the calculation for drag to find the wind speed (in metres per second) in a vertical direction needed to keep the plastic bag in the air 0.1 = ½*1*u^2*0.5*1/16 u = 2.5 m/s The required updraft in the wind to keep the bag in the air is about 2.5 m/s. In terms of energy that is equivalent to a power of F*u = 0.1[N] * 2.5 [m/s] = 0.25 Watt. An iPhone 6 on stand-by uses about 0.6 Watt
TREE In the lull after Storm Urd, which raged over Denmark on December 26, 2016, twilight descends over a tree blown over by the high winds. Already its branches are becoming partially trapped in the stiff frozen waters of Utterslev Marsh. The energy in the wind which felled the tree could keep a Tesla S running for 42 hours at 100 kph. Presuming that the surface area of the tree is similar to that of the rotor swept area A [m2] of a medium scale wind turbine, the tree would absorb energy [Watt] at a rate equal to: P = Cp* ½ rho*U^3*A 0.5*0.5*1*20^3*20*20 = 1/4*20^5 800 kW During the storm, the strongest gust was measured at 37.8 m/s (84.5 mph). Had the tree fallen in winds of 21 m/s while standing for one hour, the average energy absorbed would have equalled 1 MWh. A Tesla S at one tenth of its maximum capacity of 236 kW (1000kW/23.6kW) would keep moving for 42 hours.
FLOODING The sun rises over a changed landscape. A tidal surge caused by the previous night’s storm leaves rows of small boats tied to invisible underwater jetties in Ise Fjord. Together with neighbouring Roskilde Fjord it makes up the largest fjord system on Denmark’s main island of Zealand. The force of the storm, equivalent to about eight hours energy consumption in the city of Aarhus, raised the fjord's water level to 1.59 metres above normal. Ise Fjord is nearly 50 kilometres long and has a total area of about 450 square kilometres. E= m g H [Joule] Pr m2: 100 dm * 15.9 dm *1*9.82 m/s^2*1.59 m = 24,826 Joule/m2 450 km2 = 450 e6 m2 E pot =11.2 TJ = 11.2 e3 G Joule A Dane uses just 6,122 kWh a year. With a year made up of 8760 hours, that is just under 1 kW of power per citizen 6122 kWh/8760 hours = 700 Watt Denmark’s second largest city, Aarhus, with a population of nearly 320,000 therefore uses on average 700 W *319 680 people = 223 MW. One hour’s consumption of electricity in Aarhus corresponds to 223 MW * 3600 [s] = 0.806 TJ The energy behind the rise of the water level in Ise Fjord could keep Aarhus supplied with energy for 11.2 TJ/0.806 TJ = 14 hours
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Policy
ENTRY OF CHINA HERALDS EMISSIONS TRADING SHAKE UP China’s roll-out of its emission trading system this year doubles the combined size of all existing markets for carbon credit trade. Helped along by a market-coupling mechanism introduced under the UN’s Paris Agreement, a global carbon price with bite may yet transpire Policy initiatives that put a price on the environmental cost of carbon emissions have doubled in number since 2010. The World Bank now estimates that 40 national and over 20 sub-national jurisdictions, responsible for almost one-fourth of global greenhouse gas emissions, currently place a price on carbon or will do so in 2017. China’s decision to roll out its national Emissions Trading System (ETS) this year has much to do with the leap in volume. The Chinese carbon market, with emission allowances backdated to January 1 for those taking part, is expected to be twice the size of the EU-ETS and greater than all existing carbon markets combined. As such it will likely set the de facto global floor price for carbon and could change the entire political landscape for putting a price on CO2 pollution. Carbon is priced under a range of policy measures. As well as the creation of ETS markets for the trade of carbon credits, these include carbon taxation and indirect levies on polluting behaviour, such as destroying forests that would otherwise absorb CO2 (see box on next page). The aim is to monetise the damage caused by greenhouse gases, making it financially attractive to reduce them. During the 1990s carbon taxes were placed on fuel prices in countries such as Finland (1990), Sweden (1991), and Denmark (1992). A second wave of initiatives after 2005 saw the creation of markets for carbon trade that put a price on carbon emission allowances, or credits, the biggest being Europe’s ETS. The era when carbon pricing was limited to rich north European countries with progressive environmental governance is long gone. The concept has spread to a wide variety of countries (see graph page 64). In addition, nearly 500 companies have adopted some form of internal carbon pricing. Jeff Swatz, president of the International Emissions trading 62
Association argues that carbon pricing is no longer just an OECD-led policy construct, but one in which emerging economies are actively taking part.
GET THE PRICE RIGHT China and other countries can learn important lessons from the EU-ETS experience, where the issue of a surplus of emissions allowances, caused by overestimating demand, has consistently prevented the market from setting robust carbon prices. Much of the blame for disablement of the price signal is placed on the global slow down in industrial activity after the 2008 global crisis. The over-supply of emission allowances equalled the total EU emissions released over a year. The EU-ETS price has mainly fluctuated around €5 a tonne of CO2, considerably lower than the expected €30. Difficulties in predicting the long term price in an ETS market is problematic for business. Many argue that insertion of a price floor could offer some comfort to investors.
CONNECTING THE DOTS Fragmentation of the global market for carbon into a plethora of different regional market designs and sizes is a key challenge for the development of a global price. Responding to the challenge, the United Nations Paris Agreement on climate change, which came into force in November 2016, provides a basis for connecting the subnational, national, regional
“ As such it will likely set the de facto global floor price for carbon and could change the entire political landscape for putting a price on CO2 pollution”
and international carbon pricing initiatives through Internationally Transferred Mitigation Outcomes (ITMOs). Under the ITMO process, countries can trade carbon certificates internationally to help them meet their nationally determined contributions to global emission reductions, while avoiding double counting. Another idea promoted by the World Bank is carbon clubs (or border carbon adjustments). Members of such clubs agree on a specific carbon pricing system. FORESIGHT
TEXT Tobias Nielsen & Jakob Skovgaard
CARBON PRICE CORRECTION
Policy
WANT LESS CARBON?
SOURCE World Bank, Ecofys and Vivid Economics
Put a price on it
ETS implemented or scheduled for implementation Carbon tax implemented or scheduled for implementation ETS or carbon tax under consideration ETS and carbon tax implemented or scheduled Carbon tax implemented or scheduled, ETS under consideration ETS implemented or scheduled, carbon tax under consideration
CARBON PRICE MECHANISMS
Cap and trade, stick and carrot
EMISSIONS TRADING SYSTEM (ETS)
Caps the total volume of greenhouse gas emissions and enables low emission industry and practitioners of energy efficiency to sell excess allowances to high emission industry. By creating supply and demand for emissions allowances, an ETS establishes a market price for greenhouse gas emissions.
CARBON TAX
Directly puts a price on carbon pollution by taxing greenhouse gas emissions or, more commonly, the carbon content of fossil fuels. It is different from an ETS in that the emission reduction outcome of a carbon tax is not predefined, but the carbon price is.
INDIRECT FISCAL INSTRUMENTS
These include taxes and levies on electricity or fuels such as petroleum; payments for emission reductions (off-setting or results-based finance), such as rewards for not cutting down forests as in the UN’s Reducing Emissions from Deforestation and forest Degradation (REDD+) mechanism; and, arguably, the removal of fossil fuel subsidies, such as state subsidies of fuel.
FORESIGHT
63
Policy
Despite the current momentum in carbon pricing there is a long way to go. On the global fiscal scales, subsidies flowing out to support fossil fuel energy greatly outweigh revenues coming in from carbon taxes and emissions trading systems. Carbon pricing also has its share of critics. A common complaint is that while carbon pricing can work to reduce energy consumption and waste, it cannot replace more direct support of particular technol-
ogies, such as renewable energy, if these are to expand at the rate required. Another criticism is that the carbon tax rate or emissions cap are too low to provide adequate compensation for the economic consequences of climate change. A recent report on the cost to society of carbon pollution, from the US National Academy of Sciences, indicates that the prices on carbon set by markets is far too low. The price of a ton of CO2 should be around $62, it suggests. •
GLOBAL CARBON PRICING INITIATIVES
An irreversible momentum
Share of global GHG emissions (cumulative)
As carbon pricing regulations are increasingly adopted around the world, more and more companies strive to integrate the topic into everyday business and make sure it is present in boardroom discussions. HSBC, a bank, has introduced climate metrics into the scorecards of its senior management.
20%
15% 40 38 35
36
31
10%
5% 9
Number of implemented initiatives
2
4
5
6
7
10
14
8
0%
64
FORESIGHT
15
18
20
SOURCE World Bank, Ecofys and Vivid Economics
23
Policy
OFFSHORE WIND IN AMERICA
A CLEAR CASE OF PROTECTIONIST POLICY ADDING TO THE COST A classic example of how protectionist legislation can impede progress and add unnecessary cost is seen in the offshore wind industry in the United States. Circumventing the law makes money for lawyers and others, but it is those on the job who suffer, and the electricity consumer who pays The specialist vessels developed in Europe for transporting and installing wind turbines at sea are legally banned from operating out of American harbours. For the country’s first offshore wind project, an inventive workaround was devised to enable installation without contravening the law, but the wind farm consists of just five wind turbines. The much bigger offshore projects coming up next represent a logistical challenge of far greater dimensions.
TEXT Regner Hansen
“By not making landfall between two points on American soil the ship did not contravene the letter of the law”
The Merchant Marine Act of 1920, commonly known as the Jones Act, is a century-old federal law designed to protect American maritime trade. It requires that vessels carrying cargo and equipment between two points in the US must be American built and sail under the American flag. Installation of the 30 MW Block Island Wind Farm off the coast of Rhode Island was completed in December 2016. The first of its kind facility is likely to be dwarfed by what comes next. The US Bureau of Ocean Energy Management has issued 11 licenses for wind farms off the Atlantic coast, several of which have a projected capacity of 1000 MW. Projects in the Great Lakes are moving ahead and proposals are FORESIGHT
being considered based on floating foundations off California.
EXPERTISE ON TAP America benefits from the experience that Europe’s 25 year lead in offshore wind provides. Block Island has strong European ties. The design of its GE Energy wind turbines, made in France, was obtained through the American company’s acquisition of French industrial giant Alstom, which in turn had bought a privately held Spanish wind turbine maker. Installation of the five turbines was carried out with European technology and expertise. Around the North Sea, strong government support has helped the wind industry develop a sophisticated system of offshore wind logistics, including custom built vessels with special holders for the huge components, particularly rotor blades and cylindrical tower sections. The vessels are able to maintain stability and position during the installation of the heavy parts using 100-metre tall cranes mounted within the hulls. “It will be difficult and expensive if you have to repeat the Block Island model for large offshore wind farms,” says Andrew Ho, senior analyst at industry association WindEurope. Towing turbines and blades to the project area from American ports by American ships and loading them onto European installation vessels at sea is not an ideal arrangement. Adaption of an installation vessel currently used by the US oil and gas extraction industry is possible, but European experience suggests it can be problematic. “If a US installation vessel must first be built, that becomes very expensive and it may take four to five years,” Ho explains. Some Americans predict that American-built installation ships will cost two to three times as much as European vessels, because the process must start almost from scratch in the US.
STRANGE LEGAL ANOMALY Charlie Papavizas, an American lawyer specialising in maritime law, calls the Jones Act’s lack of compatibility with the needs of its offshore wind industry “a strange thing.” The act’s reference to “coastwise points” at sea means that it clearly applies to offshore wind, he says. While the law covers the US territorial sea, which extends 200 nautical miles, it specifically includes permanent or temporary devices attached to the seabed. Conversely, Papavizas is doubtful that the term “natural resources” in the law’s 1953 revision includes wind energy. The revision increased the law’s reach from three to 200 nautical miles to encourage 65
Policy
development of oil and gas at sea. “But everyone is acting as if the law applies to offshore wind,” he says.
WORK AROUND THE LAW Most project developers in the new offshore areas off the US Atlantic Coast are European. Denmark’s DONG Energy, a leading offshore developer, has secured access to two large sea areas: south of the island of Martha’s Vineyard in Massachusetts and off the coast of Atlantic City in New Jersey. The company’s Thomas Brostrøm confirms it is aware of the issues related to the Jones Act. “There are ways to work around the law,” he says, though declines to give further detail. Vattenfall, a Swedish utility and close competitor of DONG’s in the water, see the US as the most prosperous market for offshore wind outside Europe. “The Jones Act is an important question in search of an answer,” says wind boss Gunnar Groebler. In the case of the Block Island wind turbines, a Norwegian vessel carried them from France, crossing the Atlantic Ocean, but staying at sea when it reached the site rather than docking safely in harbour between work shifts. By not making landfall between two points on American soil the ship did not contravene the letter of the law, but it was a stopgap solution impelled by the Jones Act.
TRUMPED TALKS The European Commission is seeking to obtain US concessions on the Jones Act through the Trans-Atlantic Treaty and Investment Partnership (TTIP) talks between the US and the EU. During the 15th round of talks in October 2016, the Commission presented proposals concerning cooperation on renewable energy. Since then there has been no sign of movement in the discussions. After Donald Trump was elected, EU Trade Commissioner Cecilia Malmström announced in November, “There is a natural pause and we have to wait for the new US administration to see what happens.” Malmström’s decision was likely prompted by Trump’s highly critical position on free trade agreements, including the TTIP. The modification of the Jones Act urged by the European Community Shipowners Association (ECSA) does not seem likely any time soon. “We have designated offshore services as suitable for waivers from the Jones Act when no suitable American vessel is available,” says ECSA’s Lieselot Marinus. The organisation’s efforts may be in vain. Paul Ryan, Speaker of the House of Representatives, says the Tump administration intends to negotiate trade deals that benefit the American economy. “That means we level the playing field and get other countries to play 66
by our rules. This is a shared priority for the Republican Congress and the Trump administration,” he says. If anything, enforcement of the Jones Act had intensified before the election, rather than weakened. In July 2016, US Customs and Border Protection established a special body, the Jones Act Division of Enforcement, to support compliance with the law.
AMERICAN SHIPS Jones Act or not, American installation vessels will eventually be necessary for the US to achieve its offshore wind aspirations, say both DONG’s Brostrøm and Michael Hannibal, offshore wind CEO at Siemens, a major wind turbine supplier. “It’s sort of a chicken-or-the-egg problem,” says Hannibal. “What should come first? A large market that makes it profitable to build US installation vessels or the building of such vessels, which kick starts offshore wind energy in the US?” Although vast regions of the US are blessed with strong winds on land, the biggest centres of population tend to be clustered in overbuilt coastal areas. Offshore wind can be a more attractive proposition than importing wind from other states, necessitating the construction of hundreds of miles of transmission lines, often aesthetically unpopular with the public. Wind power is rapidly gaining ground in America for its clean energy attributes and low cost. Most
According to British sources familiar with the UK-US trade negotiations post Brexit, the UK government will make a strong case for an exemption to the Jones Act to allow its offshore wind farm construction vessels to operate from American ports
The US Department of Energy envisions wind power providing 10% of America’s electricity by 2020 and 20% by 2030
“There is a natural pause after the election of Donald Trump and we have to wait for the new US administration to see what happens”
states have set targets for the volume of electricity that has to come from renewable energy. The rapid decline in the cost of offshore wind in Europe, which has more than halved in the past five or six years, has been noted across the ocean. In August 2016, Massachusetts gave offshore wind energy a specific boost with a ground breaking law that may inspire other states. It requires power companies in the state to buy energy from 1600 MW of offshore wind as part of long term contracts by June 2027. “The Jones Act is a barrier in the US, but it is possible to overcome it,” says Hannibal. • FORESIGHT
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