The energy transition, electricity prices and hydrogen

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network.

The EU's hydrogen strategy will be presented on 8 July, alongside a related initiative to integrate the various components of the energy system. [petrmalinak / Flickr]

Hydrogen from electrolysers is a 3-in-one energy carrier delivering three solutions to three important emergency energy transition problems, write Mike Parr and Simon Minett.

Mike Parr is director of PWR, a UK-based company providing market research and technical support in the field of renewables and energy efficiency. Simon Minett is founder of Challoch-Energy, a consulting firm.

EU institutions are failing to see the bigger picture with respect to the energy transition, failing to identify looming problems and have adopting a piecemeal approach which is wholly unsuited to the climate emergency and the very urgent need to rapidly decarbonise.

Sectors such as transport, heating, industry, have plans and strategies, developed semi-independently of one another and with varying levels of detail and completion. The hope is that these piecemeal policies and actions will, somehow, mesh nicely together.

However, a piecemeal approach does not work when making the large-scale very fast changes that are needed to de-carbonise Europe’s energy system, a key action in addressing the climate emergency. The clue why this is not so lies in the last word of the previous sentence. Given the circumstances in which the EU finds itself, the phrase “energy transition” implying the gradualism associated with a piecemeal approach, is wholly inadequate.

The correct phrase to describe what is needed is: emergency energy realignment – EER. Emergency situations require rapid and coordinated action. By extension this also means an honest understanding of the current energy situation, a clear view of where we need to be, a strategy and set of tactics to get there and coordination between different energy areas that encompasses production, transmission and consumption. As will be shown, this is not happening, silo thinking still prevails, which has consequences.

Moving to specifics, there is general agreement on the requirement for vastly more renewables of all sorts with a consensus  that wind both on and off-shore and photovoltaics will be the main areas of expansion (the Clean Planet for All – COM(2018) 773 and its supporting documentation).

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The problem with electricity prices

However, some important elements of the energy panorama are being ignored. For example, so far there has been only modest discussion of the large ravine into which wholesale electricity prices have fallen as renewable electricity starts to dominate electricity markets.

This is not a small detail but a rapidly growing chasm that is undermining the business case for renewables.

For example, wholesale prices in Germany are regularly in the range €10 to €30/MWh which is far less than the levelised cost to build either on-shore wind or utility scale PV. Price ranges such as €10 to €30/MWh can last for more than 1 month (Germany mid-March to mid-April 2020 – source: ENTSO-E).

The situation is no better in other member states such as Spain. The correlation between high renewable output and low electricity prices is very clear. For example, the correlation coefficient for Germany 1st January to 8th April 2020 is -0.91. This is a very good correlation and shows that as renewables increase wholesale prices go down.

Collective wisdom

At a European level, the collective response to growing renewables and surplus electricity can be classified as “conventional wisdom”. The accepted “view” is that demand response, more batteries and more cross-border connections will solve the “what do we do with lots of electricity from renewables” problem. These three tools can’t and won’t solve the problem for the following reasons.

Output from a given wind farm, only de-correlates with another wind farm over distances greater than 600km. A circle with a 600km radius centred on Hamburg covers much of Germany, Benelux, most of Northern France, most of the North Sea, a lump of the UK and a good bit of Poland. Most of the wind farms in that area have temporally similar outputs. This is a reality. Data from the ENTSO-E transparency platform is available, free, to anybody who cares to prove this.

How do improved cross-border connections solve this problem? Which could be characterised as an electrical “pass-the-parcel/surplus electricity” game, which some east European countries do not like, ask Poland.

Demand response and batteries are useful tools for addressing variable generation output in time frames from seconds to 24 hours. They cannot compensate for multi-day high/low renewable outputs and will thus have modest impacts on low wholesale prices.

Where does this leave us?

The emergency energy realignment faces two problems which have to be solved fast: low wholesale prices that will go lower as renewables increase and increasing amounts of “surplus” electricity. Germany exported around 12TWh of electricity in the period 1st January to 8th April 2020 because of high renewable output and low demand (due to the impact of the virus).

Expressed another way: Germany experienced in early 2020 how energy systems will evolve if nothing is done. Furthermore, during 2019 the country covered 46% of its demand for electricity with renewables, less than half-way towards having a coverage close to 100%. The pricing problems in 2019 and 2020 are but a taste of things to come, if nothing is done.

Once upon a time

When electricity markets were first designed they were based on goods and services markets. A market in goods is characterised by a store of raw materials, a production process that is deterministic and driven by demand, a supply chain that acts as a storage system for finished goods and demand. Electricity markets only vary in that in the pre-renewable days, the store of raw materials was a pile of coal, gas pipeline or oil tank. Deterministic generation was instantaneously linked to demand by a power network. This arrangement worked because of the fuel store.

We are now in a situation where deterministic generation is shrinking and stochastic (variable) generation (i.e. renewables) is growing. Demand is forecastable but lacks significant deterministic demand (totally different from forecastable) to buffer renewable output. The panorama is changing but those looking at it, do so either through telescopes and see too much detail or are unable to put the changes that they see into context (what did it look like before?) and appreciate how the new renewable panorama might eventually look.

Hydrogen, renewables and the see-saw

As noted in the previous section, the EU is moving ineluctably towards an all-renewable future for electricity generation. This demands large-scale dispatchable load in each EU member state that can absorb hundreds of gigawatt hours if not terrawatt hours of electricity on a daily basis. Demand response and batteries lack the scale and the multi-day capacities that are required (they are still needed for intra-day balancing).

This leaves only one technology that can provide a solution to the storage problem, electrolysers producing hydrogen. These systems when powered by renewable electricity provide solutions to three problems:

  • low electricity prices,
  • what to do with surplus electricity
  • how to de-carbonise “difficult” industrial sectors and heat

The low electricity price problem is solved as follows. Renewable owners want high electricity prices, electrolysers owners want low electricity prices. When there is a surplus of electricity (and low prices) electrolyser operators will crowd the market and drive up electricity prices – which will find a balance that delivers a business case to either side of the See-Saw.

The above solves the surplus electricity problem and provides hydrogen to decarbonise the difficult industrial sectors. There is a household oil called “3 in One” (lubricates, cleans and prevents rust).

Hydrogen from electrolysers is a 3-in-one energy carrier delivering three solutions to three important emergency energy transition problems and it can do that in a timely fashion because electrolyser technology (invented in Europe) has been used, at scale, since the late 19th century.

EU-wide innovation support is key to electrolysis in Europe

The German government should support the establishment of an EU-wide framework for green hydrogen to keep electrolysis manufacturing competitive, write Matthias Deutsch and Andreas Graf.

Matthias Deutsch is a senior associate at Agora Energiewende, a German think …

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