Policy brief: Energy system integration

The European Commission aims to "achieve decarbonisation at the lowest possible cost” thanks to “the smart integration of renewables, energy efficiency and other sustainable solutions across sectors”. [gopixa / Shutterstock]

“Sector coupling” is the new energy buzzword in town. In essence, it means bringing different energy carriers, infrastructure and consumption sectors closer together in search of more renewables, greater efficiency, and lower carbon emissions.

With its European Green Deal, tabled in December 2019, the European Commission has set out a wide range of policy initiatives to make Europe climate-neutral by 2050.

Among those is “the smart integration of renewables, energy efficiency and other sustainable solutions across sectors” which, according to the Green Deal, “will help to achieve decarbonisation at the lowest possible cost”.

The notion of “energy system integration” is mentioned only once in the Green Deal. But the concept has already reached buzzword-status and is often used interchangeably with other expressions such as “smart sector integration” or “sector coupling”.

Put simply, it means bringing together the electricity and gas sectors on the energy supply side and linking them with major energy consuming sectors on the demand side – such as transport, buildings, households, industry and agriculture.

These sectors currently operate in silos and continue to rely chiefly on fossil fuels, which are responsible for the bulk of human-made global warming emissions.

Linking them all together in a “hybrid” energy system combining gas and electricity is part of the latest thinking in Brussels to extract deep emissions cuts from transport, buildings and industry, which are considered “hard-to-abate” because they cannot easily be electrified.

Fuelling the hype, the EU’s sector integration initiative received its own dedicated strategy in June. As an “appendix” to that document, also a hydrogen strategy was realeased, setting out the envisioned role for hydrogen as, among other things, a “key enabler” of sector integration.

So what is the fuss all about? EURACTIV explores the main issues.

(Edited by Frédéric Simon)

The EU’s sector integration strategy was developed chiefly by Kadri Simson, the EU’s energy commissioner.

“To speed up the deployment of clean energy across the economy, (…) you should look at how to facilitate the smart integration of the electricity, heating, transport and industry sectors,” Commission President Ursula von der Leyen wrote in Simson’s mission letter.

The commissioner swiftly responded to that call. “By June 2020, I will present a strategy for smart sector integration which will promote stronger integration of the electricity, heating and cooling, transport, gas, industry, and agricultural sectors – making it easier and more efficient to incorporate renewables into all parts of the energy sector,” Simson said in her opening speech at the European Parliament.

The Commission further raised expectations by linking the sector integration strategy to the development of hydrogen, another energy buzzword.

I see a pivotal role for hydrogen,” said Frans Timmermans, the Commission vice-president in charge of the Green Deal, in a speech on 21 November. Hydrogen will be “an enabler of sector integration,” added the Commission’s Director-General for Energy, Ditte Juul Jørgensen, during a speech at the same forum.

Commissioner Simson later confirmed that hydrogen would be a “central element” of the Strategy for Energy System Integration, while other renewable and low-carbon gases, electrification, building renovation and digitalisation, play important roles as well.

The initial term ‘sector coupling’ seemed to imply a binary coupling of the gas and electricity grids. BloombergNEF, a research firm, says that can be boiled down to electrification – direct and indirect:

  • Direct involves rolling out electric vehicles in transport, and spreading electric heating systems like heat pumps in buildings and some parts of industry.
  • Indirect involves a switch to ‘green hydrogen’ – produced by electrolysis using renewable electricity – for instance as a fuel to provide heat for industrial processes.

But several industry players see coupling more broadly, as a way to integrate energy supply with the main sectors on the demand-side, i.e.: transport, heating, buildings, industry and agriculture.

When announcing the strategy, Simson herself referred to “electricity, heating and cooling, transport, gas, industry, and agricultural sectors”, which includes both the energy production and use sectors as well as the transmission grids lying in between.

The final strategy defined energy system integration as “the coordinated planning and operation of the energy system ‘as a whole’, across multiple energy carriers, infrastructures, and consumption sectors.” 

The terms ‘sector integration’ or ‘energy system integration’ arguably better represent this broader scope.

Put simply, sector integration boils down to one word: synergy.

The idea is that integrated sectors can use each other’s strengths (e.g. the scale at which electricity can be produced renewably, the portability of non-electric energy carriers, the storage capacity of the gas grid, or the aggregation of demand in district heating systems) and minimise energy waste (e.g. by using waste heat from data centres, or avoiding curtailment of renewable electricity).

That way, the efficiency of the system as a whole is optimised and decarbonisations is achieved “at the lowest possible cost”, as the Green Deal puts it.

In the strategy, the European Commission listed three main synergies of smart sector integration:

  • A more “circular” energy system, to increase the overall efficiency of the energy system – for example the use of industrial waste heat or waste heat from data centers to heat buildings, for instance through a district heating network.
  • Direct electrification of sectors that currently still rely on fossil fuels, to increase the use of renewable and low-carbon electricity – for example through the use of electric vehicles in transport, or of heat pumps for space heating in buildings.
  • Renewable and decarbonised gases and fuels to replace fossil ones, especially in hard-to-decarbonise sectors such as air transport and heavy industrial processes. Such fuels include hydrogen produced from renewable electricity (also called indirect electrification), and biomethane produced from agricultural wastes.

Visual representation of energy system integratio. Source: https://ec.europa.eu/commission/presscorner/detail/en/fs_20_1295

By far the largest share of renewable energy is produced in the form of electricity. Deep decarbonisation could therefore be achieved by adding more electricity in the energy mix.

The figure below, by the International Renewable Energy Agency (IRENA), illustrates the higher penetration of renewables in an electrified energy system.

Although renewable electricity helps decarbonise the energy system, a big increase in variable energy sources like wind and solar can also destabilise the electricity grid.

Sector integration can help address these challenges by providing “flexibility” to the grid, for instance using home or car batteries, and electrolysers to store excess renewable energy in the form of hydrogen or hydrogen-derived gases.

As such, the synergy is truly bi-directional and facilitates the integration of renewable electricity.

In its simplest form, direct electrification means using electricity for purposes that were previously fuelled by other energy carriers – using electric vehicles instead of fossil-fuelled ones for instance.

However, using electricity can be difficult or inefficient, for instance in certain industrial processes that require very high temperatures, or in heavy-duty transport where the heavy weight and limited range of batteries are dealbreakers.

In those cases, “indirect electrification” is an option, in which electricity is converted into another form of energy first – for instance hydrogen – through a process called water electrolysis.

The benefit is that this way, renewable electricity can be used to produce molecular energy carriers. These can be combusted or used in combination with fuel cells as a lighter alternative to batteries to drive electric processes.

Indirect electrification can also help to replace non-energy demand for fossil fuels. Examples include industries such as steelmaking and fertilisers, where hydrocarbons such as fossil gas are used as a feedstock – not for the energy they contain, but for the molecule that they are.

The major downside of converting electricity into hydrogen is that every conversion step carries losses. Indirect electrification is therefore by definition less energy efficient than direct electrification.

Still, this option makes sense in cases where carrying batteries or directly using electricity are simply not feasible – for example in aviation.

But indirect electrification is just one pathway to produce renewable and decarbonised gases. The two other pathways that are explicitly metnioned in the Commissions energy system integration strategy are:

  • Biomethane produced from agricultural wastes.
  • “Decarbonised” gases obtained from fossil fuels using Carbon Capture and Storage, i.e.: “blue” hydrogen.

Apart from supporting the uptake of renewables in the energy system, the other major promise of sector integration is to save energy in absolute terms

One way of doing this is to use waste heat in one sector as a supply source for another, for example through district heating systems. Heat that is released by data centres, supermarkets or industry can for instance be used to heat houses that are connected to a district heating system.

Another way in which sector integration can avoid “wasting” energy, is by avoiding curtailment of renewables – the deliberate curbing of renewable energy generation when supply exceeds demand.

Integrated sectors can for instance facilitate demand response or grant access to storage capacity of one sector to another, thereby making more use of existing infrastructure, such as home or car batteries and the gas system.

The latter is thought to be especially important for seasonal variances, where batteries or demand response provide no real alternative to molecular energy storage.

EURACTIV explains five key enablers of energy system integration, the first being hydrogen.

“Hydrogen is maybe not the silver bullet, but might be the missing link,” Said Tudor Constantinescu, principal advisor of the Directorate-General for Energy, during a EURACTIV event on sector integration.

As explained above, hydrogen, as a gas that can be produced from renewable electricity, can facilitate this exchange of energy between different sectors.

“Hydrogen, if produced through electrolysis of water using renewable energy, can provide flexibility as a storage medium while reaching hard to abate sectors as an energy carrier or feedstock,” Constantinescu wrote in an opinion piece on the molecule.

Green, blue or grey?

It is important to realise that hydrogen is not an energy source, but an energy carrier that can be produced from different energy sources, using a variety of production pathways.

Whether or not hydrogen is a clean energy carrier depends on two main aspects of the production process: the energy used to complete the process, and the “by-products” that this process creates (e.g. oxygen or carbon dioxide) as well as how they are dealt with (with or without carbon capture and storage).

When hydrogen is produced from 100% renewable energy, for instance through water electrolysis using renewable electricity (i.e. indirect electrification), it is labelled “green” or clean”.

“Grey” hydrogen is the exact same molecule, but was produced from fossil fuels in a reaction that produces CO2 as well.

Hydrogen is called “blue”, or “low-carbon”, if it is produced from fossil fuels without releasing CO2 in the atmosphere, for instance thanks to Carbon Capture and Storage (CCS) technology, or by using a process called pyrolysis which produce solid carbon instead of CO2 as a by-product.

Although not renewable, blue hydrogen can provide the same flexibility and stability services as their renewable equivalents, and help decarbonise sectors that are hard to electrify.

However, processes to capture carbon also require energy, which increases costs and diminishes overall efficiency. Besides, the captured CO2 also needs to be safely transported and stored, which adds to costs and further reduces efficiency. Blue hydrogen production processes furthermore do not address the risk of methane leakages during natural gas extraction or transportation.

By far the largest share of hydrogen today, is produced from natural gas through a process called Steam Methane Reforming (SMR). Electrolysis accounts for about 2% of global hydrogen production.

An integrated energy system implies a decentralised grid where energy flows freely between consumers, producers and storage solutions. That requires “reverse flows” of energy running from distribution to transmission levels.

And that means connecting the electricity and gas networks in a hybrid system.

“Combining the electricity and gas infrastructure – for us in the Commission it’s clear that it’s the way to go,” said Klaus-Dieter Borchardt, deputy director general in the Commission’s energy department during a EURACTIV event last year.

“A hybrid system based on two pillars, in our view, is more resilient and would really add to security of supply,” he explained, citing the “storage capacity” of the gas grid as an added value to a system.

That view is endorsed by the Dutch grid operators TenneT and Gasunie, which released two studies on the integrated planning of gas and electricity infrastructure.

“If we want to cope with the increasing fluctuations in the energy network, we must seamlessly coordinate our gas and electricity infrastructures,” Said Han Fennema, CEO of Gasunie, the Dutch gas grid operator, in a comment to the studies.

“By linking the networks of TenneT and Gasunie, we can provide the required flexibility for the energy system and also keep the system reliable and affordable.” he explained.

But national grid integration is not sufficient to achieve climate objectives, said Manon van Beek, CEO of TenneT, the Dutch electricity TSO. “This cannot be done without an integrated European energy system,” she said in a statement.

An integrated energy system also has a local dimension, with buildings playing a key role on the side of energy end-users.

As consumers start switching massively to electric vehicles, homes are increasingly becoming like small energy supply and demand units, providing both a charging point for refueling and bringing added flexibility to the grid by discharging back to the grid during peak hours.

While rooftop solar panels are turning our homes into decentralised energy supply centres, home batteries and heat pumps also provide flexibility to the grid by helping consumers manage their energy demand.

Meanwhile, neighborhoods that are connected to district heating systems use otherwise wasted heat streams, boosting the overall efficiency of the system – especially during winter time.

The uptake of such technologies could be accelerated by taking an integrated approach to building renovation. In addition to passive insulation, building renovation programs could focus on installing home batteries, solar panels and smart meters, some argue.

The physical installation of storage, production, transmission and metering infrastructure is only half the story. System optimisation will also require continuous monitoring and control of these technologies and their interactions.

That requires “making gains on digitalisation,” said EU energy Commissioner Kadri Simson.

Digital solutions could for instance support demand response, or unlock the potential storage capacity of millions of distributed home and car batteries.

Accurate real-time insights and projections of renewable generation and energy demand could benefit owners of electrolysers, batteries and other storage and flexibility solutions.

And at a systems level, smart control centres could “optimise” the operation of the entire system, by calculating which form of energy is most valuable where at each moment in time.

As BloombergNEF puts it, the success of sector coupling will depend on the uptake of new sources of demand-side flexibility, such as “dynamic” electric vehicles that recharge their batteries when demand for power is lowest, and other “smart” heating systems or household equipment that can respond automatically to pricing signals.

This is why many argue that “dynamic” energy pricing is a necessary prerequisite to allow the emergence of demand-side flexibility solutions. After all, only real-time energy prices can reflect supply and demand at any moment in time and reward demand-side flexibility, proponents say.

Although real-time energy pricing is far from reality in many European countries, the European Union nevertheless obliged energy companies with over 200,000 clients to provide their customers with at least one offer for dynamic price contracts. 

“Customer choice is fundamental,” said Andreas Flamm, Director at Entelios, one of Europe’s leading energy management solution companies. “People should be able to choose freely whether they prefer opting for a variable electricity price or a fixed one,” he told EURACTIV in an interview.

But price signals are just one dimension of an integrated and decentralised system.

An integrated EU energy market allowing seamless cross-border trade in electricity is also a fundamental requirement, a point often made by Nordic countries, which see the availability of cross-border power cables as a key elements of an integrated European electricity market.

Favourable market access for small-scale renewable producers are another important element, together with modernised regulatory frameworks.

An integrated European energy system will have to deal with differences in national regulatory systems. Some countries may for instance adopt targets to mix hydrogen in their gas grids, while others might not.

While EU regulators accept national differences – because of different climate or legacy infrastructure, for instance – these discrepancies also create new challenges to interconnectivity on a European scale.

Specific challenges also emerge from the ambiguous roles of new components such as electrolysers and storage providers. Since those can be net producers of energy at certain times and net consumers at others, they are at risk of being disadvantaged by having to pay taxes twice.

The Commission is also considering looser state aid rules for hydrogen projects, by labelling them Important Projects of Common European Interest (IPCEI). The IPCEI framework allows state funding for large-scale, cross-border industrial projects deemed crucial for the future of European industry. The most well-known is an IPCEI on batteries.

All five enablers come with their own specific challenges. Here are just a few:

  • Hydrogen is light, but takes up a lot of space unless pressurised or cryogenically cooled, which requires additional energy, and therefore costs.
  • Digital solutions such as smart meters help optimise the system but raise issues related to privacy and cybersecurity.
  • District heating systems can put to use locally available waste or renewable energy streams, but they require hot water pipeline infrastructure which can be costly or inconvenient to install, for example in historical city centres.

But one challenge overshadows them all. Whether in the form of electricity, gas or fuel, Europe needs to produce much more renewable energy in order to reach climate neutrality by 2050.

According to BloombergNEF energy sector coupling will require a 75% increase in renewable electricity production alone. Other research, meanwhile, point to a significant rise in the production of green hydrogen.

The need to massively scale up renewable energy production has often overshadowed the potential of energy efficiency solutions as a crucial way to reduce demand.

Still, all projections point to a massive increase in renewable energy production to replace existing fossil fuel-based assets. This has triggered heated debates over the relative share of electricity and gas in the future energy mix.

The European Commission foresees that low-carbon electricity – from renewables and nuclear – will meet 53% of total energy demand in Europe by 2050. And even the electricity sector admits that 60% of demand at best could be met by low-carbon electricity by 2050, leaving at least 40% for low-carbon fuels or molecules.

This, in turn, is fuelling heated debates over the different production pathways to generate decarbonised and renewable gases in sufficient quantity to fill in the “electrification gap”.

In the biogas sector, the scalability of non-controversial sources such as agricultural waste is limited. Larger scales can be achieved but quickly meet resistance from those who worry about negative side effects on land-use, food production and deforestation.

And when it comes to green hydrogen, excess renewable electricity is only available during limited periods of time – often insufficient to make a business case for investing in an electrolyser.

Dedicated renewable electricity production – such as offshore wind farms – could provide a better business case, but proponents of “blue” hydrogen point to the risk of “green” hydrogen competing with direct electrification, which is more efficient.

At the end of the day, falling technology costs will be a major driver in guiding the choices of market participants as well as politicians – much like they did with wind and solar power.

BloombergNEF, for instance, points to rapidly falling cost of electrolysers as something that could quickly change the market dynamics for clean hydrogen production.

The Commission, for its part, believes that energy system integration “is necessary if we want to achieve a deep but also cost-effective decarbonisation of our economies”.

But what do the numbers say? A 2018 study funded by the Commission found that the average annual cost of an integrated energy system was €85 billion lower than in a “basic decarbonisation scenario” between 2030 and 2050.

“The lower cost is achieved thanks to the introduction of hydrogen as an intermediate fuel and its particular role in transport,” the study states.

According to a study by Aalborg University commissioned by Danish engineering firm Danfoss, savings will primarily result from reduced fuel usage.

“Investments in efficiency measures across the energy value chain will decrease fuel consumption and operation and maintenance costs, more than offsetting the increases in investments,” the study states.

  • In April, rumour had it that the strategy would be delayed due to the coronavirus crisis, but the EU’s energy chief, Kadri Simson, later confirmed that it would be launched by the end of June, as planned.
  • Until 13 May, the EU executive held an online public consultation to identify “benefits or synergies” of system integration as well as “main barriers”. More specifically, the Commission requested ideas on the role for electricity, (waste) heat, renewable and decarbonised gases and hydrogen, but also asks how energy markets, energy infrastructure and digitalisation can contribute to a more integrated energy system.
  • On 8 July, the strategy was officially presented, accompanied by a dedicated hydrogen strategy and the launch a clean hydrogen alliance, that brings together industry leaders, national and regional ministers as well as civil society to “build up an investment pipeline for scaled-up production” and support demand for clean hydrogen in the EU.
  • The European Parliament keeps track of the “legislative train” – the timeline and documents related to the strategy here.

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