Renewables Update

Series: Considering the True Acceleration of Electricity System Reform
Vol.9: Renewable electricity development in the European market in Japanese

13 January 2017 Tomas Kåberger, Chair of Executive Board, Renewable Energy Institute

An electricity grid requires balance between production and consumption. If that fails, the voltage or frequency will not be stable and there may be power cuts. Thus, the fundamental rule of a competitive electricity market is that any contract between a buyer and a seller of electricity must define who is responsible for balancing the amount of electricity fed into the grid and how much is consumed.

Usually the supplier takes the responsibility and tries to balance the consumption of his customers. When the supplier fails, the Transmission System Operator (TSO) has to correct the imbalance by paying a power plant or a consumer to increase or decrease production or consumption to achieve balance. The TSO will then pass on the cost to the company that failed to keep the balance.

In practice, consumption as well as availability of solar and wind power being predictable, balance responsible companies usually manage quite well to keep their balance using the market for power generation. The most difficult problem for the TSO occurs when large nuclear power plants or other large power plants are shut down because of unpredicted technical failures.

Still, to make this market function smoothly the power electricity companies need to have market places to trade electricity.

The most used is the day-ahead spot market. This is the market used as the reference for consumers who are not using fixed price contracts. There is a short-term market used by the traders to correct their balance during the day, and there is the regulating power market used by the TSO for short term correction, where the cost is passed on to the suppliers who failed to balance their customers.

All are fully transparent. You see different websites like http://www.nordpoolspot.com .

For investors in power plants, as well as for those who invest in electricity intensive industrial processes, long term contracts are important to reduce risks. They have established a set of long term contracts. One market place for such contracts in Europe is operated by Nasdaq, visible at http://www.nasdaqomx.com/commodities .

Balance responsibility, the independent TSOs are the important legislated components. The establishment of the market places are the result of the ambition to create an efficient market that minimise the cost of electricity supply.

In Europe, renewable power was initially supported. They now provide low cost electricity and are out-competing large thermal power plants. While the large thermal plants have lost value, smaller flexible thermal plants, often co-generating heat and electricity, are adapting to the fluctuating market prices.

Old electric power companies have lost their assets as old power plants have to close. Decisions have been taken to permanently shut nuclear reactors where investments in the order of 100 billion yen were just completed. There are new coal fired power stations that have lost most of their value even before they have come into full operation as competition and low cost renewable power has reduced electricity prices. New on-shore wind is built at a total, unsubsidised cost of 4-5 yen/kWh while off-shore wind power is now offered at 6 yen/kWh.

Many of the old power companies are now investing in new renewable power. But it is important to note that the renewable energy technologies can be built in a decentralised way owned by individuals, co-operatives, small companies or electricity consuming industries. With an independent operator of the electricity transmission system, they are able to use the system with exactly the same rights and duties as the old power producers.

These opportunities, and the resulting low prices, have given households and electricity consuming industries wonderful benefits.