IEA chief economist: ‘1970s’ power grids need urgent rethink

The relative importance of the power transmission and distribution system is changing, says Laszlo Varro. Distribution is now the most exciting part of the system, because residential solar and electric cars come at the distribution level, he argues. [Friends of Europe / Flickr]

Electric vehicles could revolutionise Europe’s electricity system, but an outmoded network regulation could hamper progress, according to Laszlo Varro, chief economist at the International Energy Agency.

Varro spoke on Monday (19 June) of the potential for electric vehicles to provide the storage capacity seen as essential in integrating variable renewable power into Europe’s electricity network. However, addressing industry insiders at the annual conference of the electricity utilities’ association Eurelectric, he cautioned that they could also become part of the problem.

Today, 85% of the electricity for electric vehicles comes from fossil fuels, Varro said, higher than the average for overall electricity production. “This is an example of uncoordinated, non-smart charging – basically Mr Smith driving home and plugging in at home at seven o’clock in the evening.”

High volume uptake will require a dense network of charging points, he said. More broadly, he spoke of the need to address what he sees as an outmoded regulatory regime applied to the power grid.

Contrary to a buzzword going around the conference in Portugal, the large majority of renewable power production is not decentralised: “Your mental image should be of a big empty piece of land in the desert in Mexico…and in the case of wind, the direction of technological innovation is that windmills keep getting bigger and bigger. These are power plants…and they need an electricity network.”

However, the majority of networks are still following a regulatory regime that is “completely inadequate” for the new system we are heading into, Varro said.

Laszlo Varro spoke to on the sidelines of the Eurelectric conference in Estoril, Portugal.


You spoke of a network still working according to a 1970s paradigm..

The [EU’s] market reform package is very much moving in the right direction, but what is very much trapped in the 1970s is network regulation. The electricity network is a hugely capital intensive asset, with $250 billion of capital investment every year into the global electricity network. And there is still a large number of countries where the structure of tariffs is not reflective of the general infrastructure of the network. So very often the network cost is paid by a per kWh charge, which is charged on the amount of electricity which is distributed from top down.

Now of course with the new electricity system, you will have a solar panel on your rooftop, and your neighbour will charge is or her electric car, and your other neighbour will have a battery in his garage or maybe a heat pump, so you have a much broader variety of both production and also flexibility sources in the system. And with a conventional network tariff system, when you buy an electric car, you pay more for the network, because you pay for every kilowatt hour that your car will charge, despite the fact that your electric car can be a very valuable asset to the network…We think regulation of the electricity network will have to be adjusted to the emerging new technologies.

So you’re essentially talking about how the network is going to be paid for?

Exactly. Somebody is putting in $250bn a year into electricity networks [globally], and this is not an amount of money where you can just say ‘oh, governments will pay for it’. No, you have to have a regulatory regime in which the electricity network is an effective investment for private investors.

As far as Europe is concerned, network codes are more or less in place now…

Yes, in terms of the transmission network, Europe has made quite remarkable progress, so certain things that just a couple of years ago were radical ideas are now being implemented, for example the way market coupling is now operational across almost the entire continent is a major achievement…

The emerging cross border trade in system services is also a very positive development. But the closer you get to real time, the less market integration we have, and as you have higher and higher shares of renewables, the real time dimension becomes more important. Renewable production is reasonably predictable four hours ahead, but even 24 hours ahead it becomes much less predictable…this is something where progress still needs to be made.

I would also say that the relative importance of the transmission and the distribution system changes, because up until quite recently, distribution was a neglected stepchild of the electricity system, it was seen as a passive part of the system.

Distribution is now the most exciting part of the system, because residential solar panels come at the distribution level, electric cars come at the distribution level, even a lot of wind comes at the distribution level. So the distribution system becomes multidimensional and more dynamic, and I think there’s still work to be done to transform the distribution system for a new clean energy structure.

Does that mean that you’ve got a distribution system that is a much more dynamic part of the system, and electricity is being traded within this small area, does that mean the need for a massive transmission system will reduce over time?

No, we don’t think this is a substitute. Around two-thirds of electricity consumption is taking place in large cities. A place like central Paris is not going to be self-sufficient from decentralised renewable energy, the density is just too high.

So densely populated urban areas or heavily industrialised areas like North Rhine Westphalia in Germany will always rely on energy flows coming from the outside. Today these energy flows primarily take place in the form of fossil fuels, pipelines transporting oil and gas, But in the future these will increasingly be electricity flows coming from the outside.

So these cities are also going to be high capacity storage facilities thanks to electric vehicle uptake ?

Yes, certainly parking electric cars will introduce a substantial amount of flexibility into the system, but a parking electric car does not produce energy. It can store it, and help manage the power system, but something else will have to produce the energy.

You implied that using kW/h as a unit for pricing is an outdated way of looking at the whole system…

For network capacity you need to reflect the time and the location, so using the electricity network 2 o’clock at night is not the same cost as using it at noon. And buying electricity in a region that has a big factory and has to take electricity in, that’s a different utilisation than when you use electricity in a suburb where everyone has a solar panel and you have to take the electricity out.

We think that regulation should move in a direction of having a proper reflection of the value of location and the value of time.

The European Commission remains committed to the idea that scarcity pricing is the solution to all investment shortfalls, while many in the industry have been suggesting that a two-market system might be needed to ensure sufficient investment in back-up generation capacity…

Scarcity pricing is certainly a very important precondition for investment into flexible capacity, and adequate flexible capacity is very important for renewables integration. We addressed this question in our electricity security action plan, and our key finding was to put first things first: you have to improve the functioning of wholesale markets, and you have to have scarcity pricing that properly reflects system conditions.

That means also politically?

I try to avoid making political judgements on what is palatable and what is not. But certainly there are concerns among stakeholders about whether scarcity pricing alone is sufficient.

So capacity markets are seen as a safety net to make sure the lights stay on. But I don’t think they should be used as a substitute for having proper scarcity pricing. They can complement it.

Isn’t there a danger in introducing capacity markets of locking in conventional generation capacity, and jeopardising the uptake of clean energy?

Capacity mechanisms have a rich history. They were pioneered 15 years ago in the north-eastern United States, and there are good examples and bad examples.

If your question is ‘can things go bad?’ – yes, they can. But there are also historical examples of capacity markets operating in a market-based, cost-efficient fashion.

Where – given estimates for uptake of electric vehicles – do you think we are going to be in, say, 2030 in terms of renewables integration and the change it will bring?

Electric vehicles are still heavily reliant on government policies. On average there is a €5,000 per car subsidy in every European country where there is a meaningful electric car market. And we have seen in the past two years the Netherlands, Denmark, Germany, when government introduce incentives the market accelerates. When they cut back incentives, the market decelerates.

We think electric cars will continue to need policy support for several years. Technologies are improving, costs are coming down, but the support is still essential.

We also think, given the very high efficiency of the electric engine, that in the next 10-20 years, electric cars are not going have a very large impact on average annual electricity consumption in Europe. But they will have a significant impact on the flexibility and the capacity balance of the electricity system.

Even at the early stage of penetration their charging can have a significant impact on the electricity network. This could be a negative impact, but it could have a fantastically valuable positive impact if it is managed appropriately.

Subscribe to our newsletters


Want to know what's going on in the EU Capitals daily? Subscribe now to our new 9am newsletter.