Regulating the Green Energy RevolutionUpcoming challenges and trends

Klaus Skytte Klsk@dtu.dkEnergy Economics and Regulation, DTU Management, Denmark

The Lost Decade? Planning the FutureAalborg University, 28 February 2019

2020

2030

-20% Greenhouse

Gas Emissions

20% Renewable

Energy

20% Energy Efficiency

≥ -40% Greenhouse Gas

Emissions

≥ 32% Renewable

Energy

≥ 32,5% Energy Efficiency

10% Interconnection

15% Interconnection

Climate & energy targets

≥ 14%Renewables in transport

Independent of fossil fuels2050

≥ 100% RES-Electricityand 55% RES in 2030

Carbon neutral2050

≥ - 80 % Greenhouse Gas

Emissions2050

≥ - 50-75% Greenhouse Gas

Emissions2050

No net greenhouse gas emissions

2045

Nordic long-term decarbonisation

targets

Wind share in DenmarkWind production share in DK-West

23 December 2017: 1 hour with 139%

25 December 2017: 1 day with average of 109%Political target 2050: The total energy supply based on renewable energyincl. heat, gas, transport, industry, etc.

Need for Flexibility

Current electricity system

The trichotomy of energy policy

Decarbonised energy systems

Market design

Flexibility

Coupling

Sustainability

Competition

Reliability

Centralised fossil-intensive supply

Electricity market only

Decentralised

+

Variable renewable energy

+

Phase-out of fossil peakers

System integration

The Clean Energy TransitionGoals and RE-thinking of the energy infrastructure

smart

Flexibility by couplingUpcoming challenges and trends

How to be smart?

• Expand existing electricity markets?

• Include new sectors? Decarbonisation/electrification of heat, gas and transport.

• Coordinated markets with different objectives?

Different focus areas and drivers

Electricity market flexibility

Supply flexibility

Demand responds

Flexibility enablers/drivers:

Different technology mix, InfrastructureMarket

Flexibility by sector coupling

Supply flexibility

Sector coupling/Electrification

Demand responds

Flexibility enablers:

Smart coupling

Business opportunities

Coordinating markets and contractsSplitting markets between investments (long-term contracts) and operation (short-run, spot market)

Solve a double challenge:1. Hedging price risk to ensure adequate investment/bankability;2. Unlocking flexibility to ensure the market can cope with volatile supply.

Example: Power Purchase Agreements (PPA) are used for all technologies -contracts coexisting with the energy-only markets.

PPAs for wind farms in Europe

With the current phase-out of support schemes for renewable energy, corporate renewable-based PPAs have become a cornerstone for the bankability of new renewable energy projects.

Flexibility by couplingUpcoming challenges and trends

ScenarioCoupling/ connectivity

Incentives for flexibility Price variations

Driver Impact

Interconnection

Geographical connections

Price differences between regions

Different technology mix

Increased imports and exports

System integration

Sector coupling

Price differences between energy sources and technologies

Increased business opportunities

Increased national demand

Coordinated markets

Market coupling

Price volatility in the electricity market More actors

Differentiated pricing

Transmission

Forward markets,Bilateral contracts; PPAPower Purchase Agreements

Electricity/gas/heatTransport/storage

Interconnection

Common frameworks developed over the last 3 decades

Sector coupling

Sector specific frameworks Flexibility/risk objectives

Coordination of markets

Regulation / soft infrastructure

Nordic commonalities with regional diversity

Nordic Interview survey• All foresee an increase in VRE

• Common barriers, but specific conditions need consideration

• All have information deficit on flexibility and lacking policy awareness

Market design

Flexibility

Sector coupling

Sustainability

Competition

Reliability

EU framework (Clean Energy for All Europeans)

Nordic region greener than EU

Traditional energy policy framework still dominate

Summary - Upcoming challenges and trendsTransition to a decarbonised Nordic energy system is possible •Wind is dominating new deployments•Trend to more market integration and need of more flexibility

•System instead of individual sector approaches–in order to identify and assess regulatory and technical pathways towards coherent energy systems

•No one-solution-fits-all. Coexistence of solutions•Soft infrastructure (Regulation/economics/institutions) as important as hard infrastructure

•Policy awareness on flexibility in addition to traditional environmental and cost related issues.

•Energy economic analyses allowing policy makers and businesses to make efficient decisions

Questions

Klaus SkytteHead of Energy Economics and RegulationDTU ManagementTechnical University of Denmark

klsk@dtu.dk,

Extra slides

13

Challenges in a larger perspective

Energy

EfficiencyCCS

Infrastructure Biomass

Supply

Energy system integration

Regulation &

market design

Wind share in Denmark

Wind production share in DK-West

23 December 2017: 1 hour with 139%

25 December 2017: 1 day with average of 109%

Political targets2030: at least 100% RES-electricity

2050: The total energy supply based on RESincl. heat, gas, transport, industry, etc.

Sector couplingElectrification as source of flexibility

Distribution of EU energy consumption(Source: EU Heating and Cooling strategy)

Large flexibility potentials in electrification of the energy sectors

Market design Direct regulation Fiscal policies Support schemes Grid regulation

Remove barriers

Framework conditions

Hindered by regulatory barriers

Nordic interview survey

Nordic Barriers• EU framework (Clean Energy for All Europeans)• Nordic region greener than EU• Traditional energy policy framework still dominate

Main barriersB1 Insufficient market signals for some stakeholders;B2 Uneven frameworks for different renewable energy resources.

Policy recommendations (Market-based policy framework):

R1 Create a level playing field for all RES technologies across sectors through consistent fiscal policies;

R2 Implement electricity grid tariffs which allow market signals for flexibility to reach the end-users;

R3 Dynamic taxation of electricity (e.g. restructuring levies and taxes);

R4 Encourage VRE operators to act flexibly using short-term market-based incentives;

R5 Abolish RES support during negative price periods;

R6 Enhance electrification by removing the limitations on using electricity for heating;

R7 Tackle investment risks in flexible individual heating through new financing and private ownership models.