In October, Reuters published an article highlighting the difficulties faced by German policymakers and regulators caused by the country’s rapid shift to renewables over the past five years. Thanks to a combination of weak sunlight and unpredictable wind cycles during the cold winter months, there had been several days where a shortfall in wind and solar generation had left a significant gap in the energy mix that needed to be plugged by back-up gas generation. On one day in February, for example, peak production of natural gas reached 22.4GW, which was close to Germany’s total gas-fired capacity of 24GW.
Uncharitably referred to in the article as the “Achilles’ heel of renewables”, this episode illustrates what has now become a widely recognised fact within the energy industry: that renewable power is inherently intermittent, and therefore requires complementary flexible generation to ensure the energy system remains balanced and the lights stay on.
While the German experience is pronounced, it is not unique. Against the background of binding European Union targets and an emerging global consensus about the need to decarbonise economies, many European countries are in the process of integrating significant amounts of renewables into their existing energy mix.
Given the UK’s ambition with respect to decarbonisation and renewables, the need for flexibility is beginning to rise up the policy agenda. This flexibility could be delivered through modern back-up gas plant designed to rapidly ramp up and down from standstill for short periods.
It is clear that UK policymakers recognise the value of flexibility, and that it can play an important role in balancing the energy system. The analysis from the Department of Energy and Climate Change (Decc) published in August 2012 estimates that flexibility from a range of sources – including from flexible generation, demand-side response, interconnection and electricity storage – can result in significant savings for UK consumers, particularly in a scenario with a high wind penetration.
Furthermore, a recent study commissioned by Wärtsilä through Redpoint Energy and Imperial College London has demonstrated that, depending on the wind scenario, gas generation (as a reliable source of flexibility) could save the UK consumer between £380 million and £550 million a year by 2020 through reduced balancing costs incurred by National Grid. Modelled savings are estimated to be significantly higher in 2030 as the volume of wind on the system is anticipated to increase further.
So what’s the problem? Wärtsilä is genuinely concerned that despite Decc and Ofgem acknowledging the issue, as things currently stand neither are sufficiently focused on putting the appropriate provisions in place to deliver flexible generation. This could ultimately leave the UK reliant on less flexible technology to meet the intermittency challenge, resulting in higher costs to the consumer.
For example, let’s consider the Energy Bill. One of the core proposals in the Bill is the capacity market: an auction through which back-up capacity can be procured to reduce risks to security of supply. The looming risks to security of supply were highlighted in Ofgem’s recent Electricity Capacity Assessment, a new annual report commissioned by Decc, which forecast that the UK’s reserve capacity could fall from the current 14 per cent to 4 per cent by 2015/16.
While there is merit to the concept of a capacity mechanism, the design envisaged does not differentiate between different types of generation technology. Instead, it focuses on procuring a fixed amount of megawatts, with no explicit consideration given to what the system will actually require in future. This is despite the widely acknowledged need for flexibility in balancing intermittent renewables.
Serious concerns over this shortcoming in the capacity mechanism design are shared by the respected Energy and Climate Change Select Committee. In its pre-legislative scrutiny of the Energy Bill, published over the summer, the committee clearly stated that in the future “the flexibility of the remaining capacity on the system will thus become at least as important as its total volume”; that the capacity market proposals are “based upon outdated assumptions”; and that the government should undertake “much clearer analysis of the problem that the capacity market is trying to solve, particularly the integration of the large volume of intermittent generation that is likely to be required to decarbonise our electricity supplies”.
Decc’s position on flexibility remains that market signals will bring forward an efficient mix of flexible capacity, combined with reserve procurement undertaken by National Grid as system operator. This puts the ball in Ofgem’s court, which oversees electricity balancing arrangements. Recognising that the current short-term prices (cash-out prices) are not providing sharp enough signals to the market, Ofgem has already begun a two-year review of these arrangements. While we welcome this development, it remains to be seen whether Ofgem shares the same objectives as Decc regarding the efficient integration of renewable generation – or whether its decision will come as quickly as it needs to.
So where does that leave companies like Wärtsilä, looking to enter the UK market? Like many within the sector, we are looking to policymakers and regulators to take the opportunity, as part of the current round of reforms, to put a robust and coherent set of market arrangements in place that are durable in the long term. It appears that, while Decc has taken on board the feedback it has received from industry and parliamentarians, it has not yet re-evaluated its approach to flexible generation through the Energy Bill.
However, irrespective of Decc’s response, it remains critical that Ofgem also shows leadership on this issue through its continuing review of the current electricity balancing arrangements. Now more than ever, it should be considering new approaches to system balancing – for example, a competitive day-ahead reserve market, which can reveal the true value of flexibility and help ensure the required investment is forthcoming.
In any event, the need for flexibility is not going to go away, in the same way that the sun will not always be shining or the wind blowing. It is essential the necessary framework is put in place now to ensure the UK does not become overly reliant on inflexible forms of reserve capacity to balance the energy grid as more renewables come online in the years ahead.
Melle Kruisdijk is director, market development for Wärtsilä Power Plants
This article first appeared in Utility Week’s print edition of 7th December 2012.
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