“We need more intelligent metering systems”

Expert Interview – January 22, 2024

An excess supply of renewable electricity at peak generation times leads to price cannibalization. When the supply is greater than the demand, negative electricity prices are the consequence, i.e. the monetary value per kilowatt hour (kWh) on the electricity market falls so sharply that system operators actually have to pay for feeding their electricity into the grid.

Several European markets have been experiencing negative electricity prices more and more frequently at midday on sunny days.

What solutions does the market offer? And what role can flexibilization potential as well as supply and demand management on the producer and consumer side play?

These are the questions we put to Josephine Steppat, analyst at Energy Brainpool, at the Forum Solar PLUS 2023.

Many European countries are seeing an increase in instances of price cannibalization, i.e. negative prices at the electricity exchanges at peak generation times. What problems does price cannibalization cause?

Plant operators who want to sell electricity in the market, and specifically at the electricity exchange, encounter these negative prices when production is at its peak. If negative or low prices prevail at midday, this negatively affects the profitability and financing of projects. That’s a problem for system operators.

What market mechanisms could counteract price cannibalization?

The demand for electricity can be made more flexible. We have always had a relatively stable load profile. While demand at night is very low, it rises in the morning until midday, falls in the afternoon, and then rises again in the evening. This is a typical demand curve. If we can make this demand more flexible and, in particular, shift demand to around midday, when PV electricity production is high, this will definitely help. Electrolyzers can generate demand precisely during these hours, which is why we need to speed up their deployment.

E-mobility also plays a role, because electric cars can be charged during peak generation times. To make the supply side more flexible, electricity produced at midday can be stored until the evening or night.

Does demand from private consumers also play a role in these economic models?

Definitely. The questions are: How likely are we to exploit the flexibilization potential in the private segment, and will demand drive consumers to adapt their behavior? Most people still have fixed electricity rates as opposed to rates that react to the energy exchange prices. To implement flexible pricing, we need more intelligent metering systems, i.e. smart meters, to be installed across households. This would allow dynamic contracts, i.e. coupling consumer prices to the energy exchange prices. To drive the shift towards dynamic pricing, a new bill has been drafted to oblige electricity providers to offer dynamic tariffs.

What do you expect will be the impact of the electrification of the heat and energy sectors on the frequency of negative electricity prices?

There is no doubt that the number of hours with negative prices can be reduced. We simulate electricity prices until 2060 using various scenarios. One scenario is based on political decisions. Another scenario assumes a stronger increase in flexible demand than other scenarios. Comparing these two scenarios shows that around a third of negative electricity prices could be prevented with a more flexible demand, i.e. by employing e-mobility, heat pumps and electrolyzers.

How does cannibalization affect the current investment climate for renewable energies?

It has been slowing down the expansion of PV systems, especially those intended for marketing the electricity at the energy exchange. At the same time, the demand for PPAs is increasing because it provides a fixed remuneration even during negative hours.

To what extent can energy shifting solve the problem of price cannibalization?

With energy shifting, the balance between supply and demand can be restored. This creates a more regular price structure and decreases market volatility.

Who should be looking at energy shifting, who can employ it?

Energy shifting is interesting for system operators. It allows them to shift their load profile, so that they do not have to feed electricity into the grid when prices are negative or low. This is achieved with a battery storage system. System operators can also decide to sell any excess solar electricity at midday by using a hydrogen PPA and using the electricity for electrolyzers. That being said, energy shifting is also interesting for investors who want to invest in large battery storage systems and exploit the price spreads in the market. Adding many storage devices will lead to shifting, because the electricity is distributed throughout the day, leading to prices being leveled out.

Once smart meters have been rolled out and dynamic tariffs have been implemented, energy shifting could also be exciting for end consumers who will then have an incentive to adapt their demand.

What are the challenges and what is needed to implement large-scale energy shifting?

The biggest hurdle is the investment costs. The prices for battery storage alone are relatively high and there is still some uncertainty as to how the market will develop. The rollout of smart metering systems to end consumers is also still a challenge. Bureaucracy can also be a challenge. Legal advisors who work in this area have told us that the bureaucratic burden is still high.

Let’s take electrolyzers, for example: The EU has approved two Delegated Acts under the Renewable Energy Directive (RED II) to set down the rules of what constitutes green hydrogen. There are other criteria that apply to electrolyzers: There is a simultaneity obligation for the production of electricity and its use by electrolyzers, on an hourly basis – but how do you measure that? There are still no regulations for this.

Josephine Steppat spoke to Sarah Hommel de Mendonça.

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