Post - Blog
Splitting the energy market is a necessity for a decarbonised future
- 1 year, 3 months ago (2023-01-04)
- Junior Isles
By Alan Greenshields , Director of Europe ESS Inc.
The Smarter E Europe 2024
Over the past year, the world has once again started to pay attention to energy markets as the global transition to clean energy continues and Russian actions in Ukraine inject considerable volatility into fossil fuel prices. Be they discussions over price, supply, or the type of energy, there is growing recognition of the need for significant reform to overcome the current cost challenges and ensure a clean, reliable and secure energy system.
The price of natural gas drives electricity prices, despite the fact that renewables meet 40 per cent of electricity demand in the UK . Current market structure, which is effectively tied to the cost of gas, is preventing society from realising the benefits of low-cost renewables.
Today, wholesale electricity is traded on open markets; buyers (typically utilities) bid for the power that suppliers (generators) put on to the market and then resell to consumers. The market price is set at the highest price necessary to meet demand, meaning that the most expensive power source (recently, gas generators) sets the price for the market, driving up prices for consumers regardless of the generation mix.
Under the current market structure, home electricity bills in the U.K. rose by 54 per cent in April 2022 and without the Energy Price Guarantee would have increased a further 80 per cent in October.
Splitting the energy market between renewables and fossil fuels
In June, European Commission President Ursula von der Leyen, called for a splitting of the energy markets stating: “This market system does not work anymore. We have to reform it; we have to adapt it to the new realities of dominant renewables.” The current marginal pricing system is not fit for purpose. In August, clean energy expert Michael Liebreich proposed creating separate Clean Power and Fossil Power Markets in the UK, pointing out that very high gas prices were preventing consumers from benefiting from low cost renewables generation.
Today, decoupling renewable energy pricing from fossil fuel costs is increasingly seen as a strategy to deliver the benefits of cheaper clean energy and insulate against unstable global markets. Dividing energy markets into a clean energy market and a gas generation market would give lower-priced clean energy more influence on consumer bills, reducing the risks posed by geopolitical events to household budgets.
A reformed system
Governments across Europe have attempted to implement solutions to address rising costs, but most of these are temporary at best, if effective at all. The governments of Spain and Portugal, backed with EU funding , introduced measures that lowered the costs of power generated by fossil generators with direct payments to electricity producers.
Unfortunately, this solution was unsuccessful, failing to reduce consumer bills. Even if implemented in a more targeted and effective manner, this kind of subsidy to fossil generators does not solve structural problems with the energy system.
Splitting the energy markets would put renewable energy generators into competition with fossil fuel generators, encouraging development of cost-effective carbon-free alternatives to the “balancing” function which natural gas provides in most grids.
New technologies can deliver reliable, cost-effective clean energy around the clock
As the need to decarbonise becomes increasingly urgent and the cost of clean energy continues to fall, wind and solar are growing rapidly as a share of the generation mix. In a decoupled energy market, this would theoretically be a good thing – the greater the share of low-cost renewables in the generation mix, the lower the prices for consumers.
However, despite significant interest and demand, technical limitations are beginning to pose challenges to renewable energy adoption. As explained by the LDES Council and McKinsey & Co., once the contribution of renewables to grid electricity reaches around 25 per cent , it becomes increasingly challenging to integrate due to the inherent intermittency of wind and solar generation. Gas generation currently plays a dominant role in balancing this intermittency – effectively we have created renewables-gas hybrid grids. To achieve the full benefits of a decoupled energy market, it is necessary to combine renewable energy with carbon-free alternatives to gas peaker plants in order to provide 24/7 clean energy.
Today, there are technologies available that can enable this. New long-duration energy storage technologies can store excess solar energy generated during the day and discharge it at night, allowing clean energy to power the grid around the clock.
Broad adoption of energy storage is beginning. For example, the Sacramento Municipal Utility District (SMUD) recently announced that it would deploy two GWh of ESS iron flow batteries to provide a grid energy storage solution. The systems will support SMUD’s 2030 Clean Energy Vision which aims to reduce fossil fuel use and maximise local solar generation without compromising reliability or affordability.
Energy storage systems will unlock the potential of renewables and create the pre-conditions necessary to reform energy markets. New technology and sensible regulatory reforms have the potential to reduce energy costs, cut carbon emissions and insulate the economy against volatile fossil energy prices.