FORESIGHT 03 - selected teaser

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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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Less risk in tenders cuts cost of offshore wind

RENEWABLES A GREAT CASE

If you can keep it

FORESIGHT 03 SPRING / SUMMER 2017

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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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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.

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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.

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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.

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ELECTRIFICATION OF HEAT AND TRANSPORT

The bigger the pool of energy demand, the less the ripples from renewables are felt.

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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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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.

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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.

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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

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TEXT Heather OʼBrian & Lyn Harrison / PHOTO Palle Peter Skov for Energinet.dk & Joe Dunckley, Shutterstock

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ELECTRICITY MARKET DESIGN

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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

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

TEXT Peter Bjerregaard / PHOTO Lars Just

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ELECTRICITY MARKET DESIGN

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

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

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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.

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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.

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