IEA: Utilities must rise to challenge of increasing renewable energy deployment

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Utilities must rise to the “challenge” of increasing renewable energy deployment, while disruptive threats posed to utility companies by distributed generation and renewables should be kept to a minimum, according to top names at the International Energy Agency (IEA).

Launching the 2014 edition of the IEA’s annual Medium Term Renewable Energy Market report, IEA executive director Maria Van Der Hoeven and Paolo Frankl, head of the IEA’s renewable energy division, spoke at an online seminar this morning. The pair presented a series of figures and charts showing deployment in recent years by global region accompanied with a set of forecasts under differing scenarios.

The overall thrust of the report’s finding was that following years of explosive growth including a “strong” 2013, policy uncertainty threatens the growth of renewable energy generation in many parts of the world. In turn, this threatens global efforts to meet climate change goals and to aid energy security. The IEA expects annual growth in renewable power to slow down and stabilise after 2014. According to the report, this could put “renewables at risk of falling short of the absolute generation levels needed to meet global climate change objectives”.

While in 2013, renewable energy comprised around 22% of new generation capacity worldwide, the rate of capacity growth is stalling, Van Der Hoeven said in her presentation. In developed markets in particular, net capacity additions are seen levelling off in coming years, in contrast to exponential growth trends observed to extend until 2030. Within the OECD, the growth of renewables has been historically driven by strong policy support including decarbonisation and retirement of conventional power plants, Van Der Hoeven said.

In stable markets, rapid renewable deployment has been associated with high support costs. Moreover, increased renewable energy deployment often requires the scaling down of existing electricity markets which can put incumbent utilities under severe pressure. These concerns are increasing policy and regulatory uncertainty. By contrast in the dynamic markets of the developing world, however, renewables are becoming competitive in an increasing number of circumstances, according to the IEA’s findings.

When the session was opened to a Q&A, PV Tech asked how these utilities under pressure could solve this problem, especially in regions such as the USA where investor-owned utilities are often effectively rewarded financially for spending on infrastructure. Sources in the US including analysts and industry figures have alleged that some utilities use obstruction tactics to prevent rapid solar deployment, when instead they should be seeking out new business models and ways to benefit from the changing energy landscape.

Van Der Hoeven said, “The problems can be solved. The point is how to solve them and how fast to solve them, and that means that utilities in a stable market, for instance like in the European market, have to change. Because there will be new kids on the block, more PV, more wind offshore and onshore and that means that given the variable character of these new sources, utilities have to find new ways to balance the grid. Of course that means more infrastructure, to fit new infrastructure and also seeing that interconnection is there, smarter grids and storage facilities. All these things together are possible to cope with the problem, or the challenge rather, of intermittent renewables.

“It needs creative thinking and its part of the new market design,” Maria Van Der Hoeven concluded.

While Paolo Frankl agreed that there is a threat to incumbent utilities from distributed generation and said that utilities would have to face this threat, he argued that it was important utilities were not treated unfairly and should be given every opportunity to mitigate the disruptive threat of technologies such as solar and wind. He said however that the approach of utilities toward this threat was however often far less negative than might be widely thought.

“…the change towards more distributed generation is [only just] starting, but it’s going to stay. So the utilities have to change their business models, whether they like it or not.

“My second comment is that they’re already doing that. Even those who publicly say that they are very concerned that they are threatened, they are already starting to [think of a] strategy and at the same time there are much more proactive utilities in the US, which has seen much more aggressive change in their business models,” Frankl said.

“Having said that, equally important is that the process is not too disruptive and that it is fair for them [utilities] as well. It is in nobody’s interest that the change is too rapid and then the whole system of distribution and supply falls apart. Which means electricity tariffs may need to be changed.”

Frankl went on to suggest a range of options that could be considered:

“Probably you will have a mix of instruments that you can use – slightly raising the fixed charges or making the fixed network cost in proportion to peak capacity, having a different pricing structure during the day, overall the policy objectives should be: incentivise the value of PV to the system and overall in general terms this means to try to incentivise that PV supply matches demand. The first thing is to focus on the right class of customers. In particular the commercial customers, and less so the household. The second aspect in the longer term would be to provide more flexibility to the system, for example using energy storage but even more importantly, demand side management and some grid reinforcements are crucial factors for that.”

Maria Van Der Hoeven also added that market dynamics are radically different between stable markets, where new generation must supplant old, and the developing world, which often comes from a situation of very little power generation and infrastructure.

“When you look at Europe, for instance, it’s very diverse and there are a couple of options to price the value of flexibility and that’s where, gas-fired powered generation and combined cycle gas plants come in,” said Van Der Hoeven.

“It’s a problem in Europe where you see a decrease of this kind of plant and the renaissance of coal. New generation in Europe can only enter the market at the expense of established players. This is something utilities need to be aware of because renewables are here to stay.”

According to Maria Van Der Hoeven, there were three key points to take away from the report.

  • The growth of renewable energy capacity is the most promising chance to meet global emissions targets.
  • However, the rate of renewable energy capacity growth is slowing.
  • It would be a mistake to just focus on electricity as the sole focus of renewable energy growth – heating for example should also be considered vitally important to the global energy mix.

Maria Van Der Hoeven: “I have said several times this year that the rapid growth of renewables has been a success story for increasing energy security, and for mitigating climate change. Will I be able to repeat that next year? It depends on policy makers. Just when renewables are becoming cost competitive in some areas, policy uncertainty is rising in some key markets, stemming from the cost of deploying renewable energy. Governments must distinguish more clearly between the past, present and the future. As costs are falling over time, many renewables no longer need high incentives, rather given their capital intensive nature, renewables require a market context that assures a reasonable and predictable return for investment.”

“…annual growth in new renewable power is seen slowing and stabilising after 2014, putting renewables at risk of falling short of the absolute generation levels needed to meet global climate change objectives.”

The IEA report can be purchased online here.

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