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Secure supply of electricity and weather-dependent electricity production

Societal interests create different solutions

growth analysis, September 8, 2015
Summary
Investments in electricity grids, storage and production are needed to ensure a secure supply of electricity. This has become an increasingly important issue in many industria­lised countries, where many plants need to be closed down because of their age and be replaced, at least in part, by weather-dependent electricity production. Weather-dependent electricity production presents a challenge for old electricity systems since it is difficult to predict the production of electricity at a given moment. There are several solutions to this challenge, such as the introduction of a capacity mechanism that secures a surplus of electri­city, electricity storage in batteries, and extension of the electricity grid.
The questions asked in this report are how countries handle an increased share of weather-dependent electricity production and why countries have chosen a specific approach.
Secure electricity supplies are determined by national interests

None of the countries covered in this report has complete faith in the ability of the market to secure electricity supplies. The OECD has also studied this issue and concluded that a pure electricity market would lead to unnecessarily high electricity prices and make the transition to an ecologically sustainable electricity system more difficult. This is because, basically, the distribution of electricity is considered to be a natural monopoly and strong national interests linked primarily to business and economic policy prevent the creation of an integrated electricity market. Instead, the problem is how such national interests can be identified and how interventions in neighbouring countries affect the prerequisites for the national electricity supply.

The electricity markets have different structures

The electricity markets of the countries analysed in the report are constructed in different ways. Many countries have a legal distinction between production and distribution, in the same way as Sweden and the rest of the EU. This is so that companies that own the electri­city grid cannot benefit their own electricity production. Other countries have a vertically integrated electricity market, where production and distribution are owned by one compa­ny. This simplifies planning. The US presents a mixed picture where the states have a huge influence over developments.

Many countries have some form of capacity mechanism

In order to secure electricity supply, several countries have chosen to create some form of additional production capacity which is used when power demand is unusually high or when there is a major drop in production capacity. The traditional way of doing this has been through a strategic power reserve, like the one used in Sweden. In recent years, some countries and some states in the United States have chosen to create capacity markets to secure a power reserve. Moreover, less electricity consumption (consumption reduction) can be both part of a strategic reserve power and a capacity market.

One main reason for introducing a capacity mechanism is to create a power reserve with­out electricity prices becoming politically unacceptable. On a pure market, it is likely that investment in reserve capacity can only be justified by very high electricity prices. Another reason for introducing a capacity mechanism is that it is a way of retaining power produc­tion that would otherwise be unprofitable in the electricity system.

Batteries for storing electricity are being promoted as a business interest

South Korea and Japan are countries with a strong battery industry where extensive efforts are being made to make batteries a central part of secure electricity supplies. Batteries facilitate the management of variations in production and demand. This is also the case in Germany where an increasing number of the households that are investing in photovoltaics are also investing in battery storage.

The electricity grid has been neglected in many countries

Brazil, Japan and China are examples of countries that have been noticeably affected by inadequate transmission and distribution networks. The fact that the electricity grids in these countries have always been underdeveloped makes the integration of weather-dependent electricity production particularly challenging in these countries. In a number of countries, weather-dependent electricity production cannot be utilized because the electri­city grid cannot handle it, even though weather-dependent electricity only constitutes a small share of the total electricity production.

Ultimately, this is a political issue

The Swedish electricity system is integrated with the Northern European electricity grid. Sweden will therefore be affected by the choices other countries make with regard to an increased share of weather-dependent electricity production. At the same time, conditions in Sweden, with extensive hydropower and a large energy-intensive industrial sector, are unique. Compared with many other countries, Sweden has excellent opportunities to produce more wind power on land in good wind locations. All in all, this means Sweden could become a major exporter of electricity. At the same time, there is a risk that a more integrated electricity market could lead to higher electricity prices and reduced competi­tiveness for energy-intensive industries. This means the question of increasing weather-dependent electricity production is ultimately a political issue since there is a risk of different societal interests clashing with each other.

The two main questions that must be asked are:

  • Should a pure price signal on electricity markets be pursued even though this would lead to higher electricity prices for consumers, at least over the coming decades?
  • Should policy instruments that have been designed to reduce the risk of high electricity prices be introduced when investments in electricity production are not made through marginal pricing?

At present, Sweden has chosen the second strategy with an electricity certificate system and a strategic power reserve whose function is to keep electricity prices down. This is also the strategy chosen by other countries in our vicinity although their choice of approach is based on other priorities.

http://www.tillvaxtanalys.se/en/home/publications/direct-response/direct-response/2015-09-08-secure-supply-of-electricity-and-weather-dependent-electricity-production-societal-interests-create-different-solutions.html

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