The transition in the power markets

We are all involved in the energy transition in one way or another. This is a good article by Giles Parkinson of writing on the Echo Netdaily website about how energy efficiency could be reshaping power markets forever. What do you think?


How energy efficiency will reshape power markets

The fossil fuel industry has been obsessed by its battles with renewable energy – wind and solar in particular – as it struggles to prop up its disintegrating business model.

But in Europe, another more dangerous nemesis is emerging – energy efficiency, an unfashionable yet economically alluring investment that analysts at Citigroup say could reshape power markets for ever, and remove fossil fuels as the primary driver of market prices.

Energy efficiency has long been held by its enthusiasts as the most obvious lever to reduce emissions, and save costs. A megawatt hour of electricity not used is the cheapest form of abatement, they say, and have even coined a term – the “negawatt” – to market the idea.

But try as they might – and despite the almost immediate returns on investment from energy efficiency – the idea never really captured the attention of the public or politicians. And the powerful fossil fuel generators in Australia used their regulatory influence to ensure that any major initiatives were quietly jettisoned.

In Europe, however, the opposite has occurred, and Citigroup says the combination of EU-wide energy efficiency targets, its renewable energy policies and the emergence of ultra efficient appliances and zero carbon homes will have a big impact on power markets.

In effect, the combined impact will be to significantly reduce demand to the point that fossil fuel generators will largely lose their pricing power.

“Say goodbye to power prices fully driven by fuel prices,” the Citigroup analysts write in a new report (and no, we are not allowed to provide a link).

“Renewable output is set to continue growing as demand falls,” the report says. “This will squeeze the market share of conventional power companies, making thermal power, which is today the price setter, a marginal contributor to power price formation.

“Power prices will increasingly be driven by weather patterns (temperatures, rainfall, wind and sunshine), which are in practice not yet forecastable or hedgeable for more than a year. Thermal will be a contributor to price formation when supply/demand is tight. Overall power prices will remain under pressure.”

The Citigroup analysts also suggest the market will also have to “say goodbye to peak demand too,” as the combination of reduced residential demand, lower lighting demand, and an increase focus on demand side response and storage development will likely result in peak demand becoming gradually less pronounced.

This is a radical reshaping of energy markets, but one that Citigroup says is poorly understood.

The analysts say that government agencies, institutions, nationals market operators and corporates are still forming policies and business plans based on assumption that demand will grow (an echo of the bogus demand assumptions that drove the over-investment in Australia networks and fossil fuel generators).

They point out energy efficiency has already reduced demand by 109TWh (terawatt hours) or 3.8 per cent from 2010-15.

“In our view this is only the beginning,” the analysts say, suggesting that LED lighting, A+++ appliances (22% more efficient than currently installed one), housing efficiency, and other technologies could reap an additional 257TWh of energy savings by 2020, cutting total European power demand by another 9.2 per cent.

Just for context, that is more than the total annual demand in Australia. Offset against rising population and economic growth, this will still deliver a 1.1 per cent per annum reduction in power demand between 2015 and 2020.

It says the gradual substitution of large appliances (fridges, washing machines, dishwashers, dryers) with appliances that today offer some 20-40 per cent higher energy efficiency than existing models should lead to some 87TWh of electricity savings over the next five years. That is equivalent to entire energy consumption of Belgium.

An increase in LED technology penetration levels to 55 per cent could lead to an extra 47TWh of savings. That is equivalent to the entire energy consumption of Portugal.

“Thermal power plants (coal and gas) will be squeezed between growing renewables and a shrinking market and will become marginal on a merchant basis (some of them may find a second life as ancillary service providers to the grid),” the analysts write.

They expect thermal power output to fall from 42 per cent of power production today to 34 per cent by 2020, with non-renewable power capacity to fall by a net 51GW by 2020 and by a net 123GW by 2025.

Thermal load factors will fall as well, from 36 per cent in 2015 to 30 per cent in 2020, meaning that there will be fewer plants and they will be used less.

The correlation between power prices and coal and gas commodity prices will diminish, and instead power prices will be influenced by the weather and availability of renewable resources (hydro, wind and solar).

The analysts also warn that despite the closure of coal and nuclear, gas-fired generation will likely fall 24 per cent over 2015-2020. “This suggests that Europe is not an unlimited sink for excess global LNG,” they write.

And they also caution against the need for capacity payments and other measures to “incentivize security of supply” (new forms of subsidies for fossil fuel plants). “Our analysis suggests (these) might be over-emphasised in light of likely consumption patterns,” they write.

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