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This Is What the Utility Death Spiral Looks Like

The German mega-utility RWE provided another dismal reminder of the painful transition European power companies are undergoing.

According to 2013 financial results, the utility lost more than $3.8 billion last year as it cycled down unprofitable fossil fuel plants due to sliding wholesale prices. The yearly loss is actually quite historic; it’s RWE’s first since 1949 when the German Republic was formed.

This follows poor earnings news from Vattenfall, a Swedish utility with the second-biggest generation portfolio in Germany, which saw $2.3 billion in losses in 2013 due to this same “fundamental structural change” in the electricity market.

The problem is well documented: high penetrations of renewables with legal priority over fossil fuels are driving down wholesale market prices — sometimes causing them to go negative — and quickly eroding the value of coal and natural gas plants. At the same time, Germany’s energy consumption continues to fall while renewable energy development rises.

RWE’s CEO Peter Terium called it “the worst structural crisis in the history of energy supply.”

To make matters worse for utilities, their commercial and industrial customers are increasingly trying to separate themselves from the grid to avoid government fees levied to pay for renewable energy expansion. According to the Wall Street Journal, 16 percent of German companies are now energy self-sufficient — a 50 percent increase from just a year ago. Another 23 percent of businesses say they plan to become energy self-sufficient in the near future.

It’s a real-world example of the “death spiral” that the industry has so far only considered in theory: as grid maintenance costs go up and the capital cost of renewable energy moves down, more customers will be encouraged to leave the grid. In turn, that pushes grid costs even higher for the remainder of customers, who then have even more incentive to become self-sufficient. Meanwhile, utilities are stuck with a growing pile of stranded assets.

When unveiling today’s dismal earnings, RWE’s Terium admitted the utility had invested too heavily in fossil fuel plants at a time when it should have been thinking about renewables: “I grant we have made mistakes. We were late entering into the renewables market — possibly too late.”

As power company executives collectively gnash their teeth, green energy advocates are praising the tumultuous shift these utilities are enduring. Although both sides disagree on the ultimate value of the outcome, the underlying situation is undebatable: Germany is in the midst of a massive “structural” change that is ripping gaping holes in the traditional utility business model. And now the cash is bleeding faster than ever.

In a shareholder document from last September, the German utility EnBW illustrated how bad the bleeding has gotten. EnBW has the fourth-biggest generation pipeline in the country, and has been forced to make a serious shift in its own strategy.

The first graph shows how far forward prices for conventional power plant generation have plummeted since 2011. As the profitability of fossil fuel plants continues to fall, EnBW concluded in a strategy document that it needs to “develop new business models…without delay.”

EnBW offered another snapshot of how bad things are getting for utilities. These two graphs show the gross margins from coal plants (clean dark spread) and gas-fired plants (clean spark spread) after accounting for fuel purchasing and carbon allowances. Both have taken a serious hit, but natural gas has fared worse as fuel costs remain high and market prices for power fall.

Do these graphs remind you of anything?

Europe’s biggest utilities are falling down a rabbit hole and could soon find themselves swimming in a pool of their own tears. Many of them already are.

Over the last five years, the top twenty utilities in Europe have lost half their value. Recent poor financial results, stranded assets and mass selloffs of power plants highlight how tough things have gotten for power providers. But there are signs of change.

In its own strategy document, EnBW made a simple declaration about its future: “Conventional business models of larger power supply companies no longer work.”

By 2020, the utility plans to cut its electricity generation and trading business by around 80 percent. It will try to make up for the decline by investing further in wind power, transmission and distribution projects to connect renewables, and by working on the consumer level to implement services like home automation.

Ben Kellison, GTM Research’s senior grid analyst, said EnBW’s approach “provides a window into one possible path in which the value of energy trading and peaker plants systematically erodes, pushing large utilities into more service-oriented work.” 

RWE is also headed in this direction. That utility, which is Germany’s second-biggest, said last fall that it was planning to divest many of its large-scale fossil fuel plants and implement a “prosumer” business model to help integrate renewables projects. These emergency declarations are the only way some big power companies can ensure their future.

The German experience is just the beginning of a long, tumultuous shift for the broader utility sector. But it highlights the question: will American utilities soon deal with the same issues? With much lower penetrations of distributed renewables and less aggressive promotion laws, the U.S. power sector won’t face the same kind of violent death spiral in the near term. But the same forces driving change in Europe are starting to raise concerns within the utility sector here.

There’s a scene in Alice’s Adventures in Wonderland when the Mock Turtle and the Gryphon ask about Alice’s exploits. She replies: “It’s no use going back to yesterday, because I was a different person then.” 

That may be how some utilities in Europe are feeling now — finally reaching the point of no return where looking back is not an option.

American utilities have the benefit of learning from that first-mover experience. Will they use it to land safely in a wonderland of distributed generation and consumer empowerment? Or will they fall down the rabbit hole, not knowing where they’re headed until its too late?

Those are the questions we’ll be asking at Greentech Media’s Grid Edge Live conference this summer. Come join us.

greentech mediaGreentech Media (GTM) produces industry-leading news, research, and conferences in the business-to-business greentech market. Our coverage areas include solar, smart grid, energy efficiency, wind, and other non-incumbent energy markets. For more information, visit: greentechmedia.com , follow us on twitter: @greentechmedia, or like us on Facebook: facebook.com/greentechmedia.

Stephen Lacey's picture

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Discussions

Bob Meinetz's picture
Bob Meinetz on Mar 6, 2014 5:17 pm GMT

Stephen, I’m not sure what the initials for “B.S.” in German are, but I believe there’s still an “S” in there somewhere.

You write:

The problem is well documented: high penetrations of renewables with legal priority over fossil fuels are driving down wholesale market prices — sometimes causing them to go negative — and quickly eroding the value of coal and natural gas plants.

Without any basis you then assign credit to the success of renewables, when credit rightfully goes to the regressive “legal priority” you cite – which is not only making baseload generators close up shop, but sending German electricity prices and carbon emissions through the roof. As I recall, neither were intended consequences of Andrea Merkel’s renewable future.

You maintain that the value of coal and natural gas plants has eroded, as Germany only builds more of them. Would Alice approve of this Wonderland? What went wrong? (These are rhetorical questions – you’ve never responded to any reader comments on TEC and I don’t expect a change in that policy, especially when there can be no reponse).

Below: The new Moorburg Coal Plant in Germany’s Renewable Wonderland.

Schalk Cloete's picture
Schalk Cloete on Mar 6, 2014 8:16 pm GMT

The thing I’m concerned about here is the fact that renewable energy technology-forcing is making jobs in the utility industry both less financially attractive and more difficult at the same time. Obviously, this makes the utility industry a much less attractive workplace. I really cannot see any reason for bright young engineers to go and work for a German utility in the current environment. 

This is a major problem because intermittent renewables make the overall economy more (not less) dependent on skills and manpower in the utility industry. Just another worrying trend to watch as we continue to abate CO2 in the slowest and most expensive way available…

Bas Gresnigt's picture
Bas Gresnigt on Mar 6, 2014 11:07 pm GMT

no reason for … engineers to go and work for a German utility … a major problem because intermittent renewables make …

The bright young engineers should not go and work for the present big utilities, as those have far more engineering staff than they will need!

The big four utilities missed the boat, and I doubt whether they are capable to catch the next boat.
So the big four utilities will have to fire engineering staff in the future, and will become less and less significant in the German electricity market.

To the excuse of their present boards, one can put forward that their predecessors managed to loose all sympathy for their utility at the public, by installing nuclear in the eighies while the public opposed it strongly. So they have little chance now. Especially since the public is aware that they must pay, as taxpayer, for the nuclear mash (waste, etc) that those big utilities create.

Those young engineers should go and work for one of the about 100 small/local utilities that deliver 100% renewable. Those grow and get more market share. Most being cooperations, village utilities, etc. Such as the one of Schoenau, or München, or ..

they should start their own renewable energy (installation, maintenance, consultancy, management) company, etc. or…

they should start at one of the grid management/operator companies. As development and implementation of smart grids is quite exciting new stuff.

Bas Gresnigt's picture
Bas Gresnigt on Mar 7, 2014 1:44 am GMT

Nadir,

Cheap German electricity
Yes, so we in NL import a lot of it and sell to nuclear UK where electricity is expensive.

Consumers in Germany pay a lot of tax on the electricity they buy, in addition to the 6cent/KWh Energiewende levy. If you take that tax off, then government needs to tax other things, e.g. more VAT…
There are comparisons with USA electricity prices that show that German households spend a lower share of their income for electricity than US households in New England…

An alternative would be nuclear. The full cost picture of the planned nuclear plant in UK (so calculating also the value of the many subsidies) show that the citizen in UK will pay ~3 times more per KWh nuclear electricity than the German citizen for renewable…

We in NL do little regarding Kyoto and just burn fossil, so our electricity is somewhat cheaper; 22 vs 28cnt/KWh. The difference is <1% of the poor German household income. 
For that amount the Germans get a feel good (with 27% below the 1990 reference, they surpassed Kyoto targets widely) and will be freed of their fear for nuclear in 2023 (Germany was hit by Chernobyl, and many Germans have connections in the Chernobyl region there and know how disastrous the accident is).
Btw. USA does far worse than even NL. It produces now ~10% more GHG. NL is ~8% below the Kyoto 1990 reference.

Big incumbent electricity utilities in problems
That is a non issue, as there are ~100 other utilities that can deliver. The electricity market is a free market, so weak inefficient companies brake down. The grid operator together with the regulator guarantee that electricity supply will continue, even if a big utility collapses. There is a range of measures in place for such cases.

Note that the electricity supply to customers in Germany is 4 times more reliable than in UK, and 8times more reliable than in USA (while USA does not count brake downs due to extreme weather such as the polar vortex or hurricanes).

CO2 releases
Germany is the only major country that already reached the -20% Kyoto target! It is now at -27% level.
This graph which covers the last 6 years, shows that the decrease of CO2 release continues.

The last few years we had cold winter & spring, so it did rise. Those are fluctuations. As the share of renewable grows each year with ~1.5-2%, it is inevitable that the downward trend will continue.

Results
There is no doubt that Germany will reach 80% renewable generated electricity in 2050, which is far better than UK, USA, etc.
And, taking into account the decrease of the costs of solar+wind+storage while the trend with nuclear is upwards. with much lower electricity prices than nuclear countries!
(new nuclear is now already much more expensive than renewable)

Bas Gresnigt's picture
Bas Gresnigt on Mar 7, 2014 2:06 am GMT

Bob,

More coal plants?
German utilties build flexible efficient plants and close even more (base load) coal plants. 
Not strange as they burn significant less coal nowadays (check the graph in my previous post in response to Nadir).
The new plants can also burn mixtures with waste & biomass, which gives them some future.

What went wrong?
Nothing. Older, more polluting, and less flexible power plants can no longer compete. Same with gas plants.So those are closed.

Generating electricity is a free market activity for utilities here, only restricted by:
 – strong environmental rules, which imply a.o. that only low temperature coal burning such as with the circulating fluidized bed process in combination with effective (cyclone, etc) filters is possible;
 – some additional rules such as asking consent to the regulator at least 6 months in advance if the utility wants to close a power plant.

 

Schalk Cloete's picture
Schalk Cloete on Mar 7, 2014 4:13 am GMT

You left out the most important part of my message: solar/wind technology-forcing make the economy more (not less) dependent on traditional utilities. 

Fluctuations in output mean that traditional utilities now have a much more challenging job matching supply and demand on a regional level. The fact that there are still many times when solar/wind output is essentially zero means that all staff are still required. 

Yes, market forces are now signalling that utilities should cut jobs (especially when it comes to gas plants that are most suited to balancing solar/wind). However, given the fact that solar/wind are totally dependent on fossil fuel backup (whether local or imported), makes this a recipe for disaster. 

Sure, grid reliability is good at present because Germany has built out an enormous oversupply of generating capacity and is surrounded by countries with lots of dispatchable generation (low solar/wind), but if market signals created by solar/wind technology-forcing cause utilities to scale down operations, this situation will change rapidly.

Germany is now (unwillingly) considering an expensive capacity market mechanism in order to prevent this from happening. Naturally, if such a market mechanism is included to restore utility profits to levels required for sustainable operation, the burden on consumers will grow even more. 

Nathan Wilson's picture
Nathan Wilson on Mar 7, 2014 4:51 am GMT

It is a recurring claim by opponents of nuclear power that renewables are cheaper.  Wind in the central US is cheaper than nuclear (with no energy storage or transmission cost added), but in most other places nuclear is cheaper.  For example, this recent  government study from the UK forecasts that new build nuclear is cheaper than wind and solar, and forecast that the cost of power from new nuclear will continue to fall as the years pass.

In contrast, I noticed that in another thread, you supported your claim of increasing cost of nuclear power with the inflation adjustment that is built into the new Hinkley Point nuclear contract.  This strikes me as misleading, since you claim that renewables will continue falling in cost in the face of strong inflation.

More importantly, the cost of nuclear power from a given plant will not generally rise with inflation.  In fact, any long-lived infrastructure with low-operating costs (including nuclear plants) make a good hedge against inflation, since the future operating costs are a small percentage of the levelized cost.

But it does raise the question of why the inflation adjustment was put into the Hinkley contract. It makes very little difference to the present value of the proposed investment.  My guess is that it is there to boost future profitability of the plant, at a time when curtailment is expected to be high.  Curtailment is bad for profitability of all non-fossil power plants.

As I’ve said before, I think the “merchant generator” business model is only optimal for fossil fuels.  The “regulated public utility ownership” model promises the best value to consumer from long-lived plants with little or no fuel cost (nuclear or renewable).  The much loved “distributed generation” model will only work well when distributed generation is small and most energy comes from dispatchable fossil fuel.

donough shanahan's picture
donough shanahan on Mar 7, 2014 1:36 pm GMT

RWE and others are divesting from all energy investments at the moment including high profile withdrawl from offshore wind farms.

The problem here is that wholesale prices are indeed cut by renewables. However this is due to an overcapacity on the electricity market at the time meaning the market is flodded with electricity. In other words all suupliers are in negative territory. Renewables can claw out of this becuase the have an additional revenue source, the FIT. This means that the retail price of German electricity does not come down despite negative wholesale prices. With the FIT, renewable based utilities would be seeing the same sort of graphs as above.

The enormous overcapacity of German electricity is not a good thing.

donough shanahan's picture
donough shanahan on Mar 7, 2014 11:19 am GMT

They maybe closing more plants but perhaps the newer plants are bigger than the old.

In any case both coal consumption, production and imports/export are up in Germany in 2012 and 2013 seems the same (the first half certainly)

http://www.eia.gov/countries/country-data.cfm?fips=gm

Bas Gresnigt's picture
Bas Gresnigt on Mar 7, 2014 2:59 pm GMT

Nadir,
The issue is whether to build new nuclear.
So I compared with the only new (and less unsafe) NPP about which good figures are known (UK has to ask the EU permission for the big subsidies, so those became public).

A comparison with the written down, unsafe, subsidized French NPP’s is not possible as the numbers are not available. We only know that France:
– taxes electricity far less (~50% of our and German prices are varying taxes).
– intents to bring down the share of nuclear (closing two reactors in 2015) and that government spent billions searching for a nuclear waste store (after two breeders failed to deliver acceptable performance).

Nuclear energy saves lives”
A few words:
T
he Hanson study is highly biased.
Using similar biasing one can easily state that the opposite is true.
Quite a number of radiation scientists (even NYAS?) estimate that Chernobyl alone will kill ~4-8million people in the period to year 2200 (Cs-137 takes 300years to reach 0.1% of its initial radiation level). Even in countries that are 1000miles away, there are substantial numbers of extra pre- and perinatal deaths, Down syndromes, congenital malformations, etc.

Recently even WHO recognized that Fukushima will kill substantial numbers.

 

Bas Gresnigt's picture
Bas Gresnigt on Mar 7, 2014 3:13 pm GMT

You entangle small fluctuations (mainly due to cold weather) with the significant long term trend:

 

Bas Gresnigt's picture
Bas Gresnigt on Mar 7, 2014 4:04 pm GMT

…government study from the UK forecasts that new build nuclear is cheaper than wind and solar…
That goverment study is intended to support governments decision to build a new NPP.

If you followed what happened last months, then you know that the extreme high strike prices for wind and solar (much higher than the FiT’s in Germany), will not materialise. I followed it because I had the idea to start a solar farm in Cornwall near the coast, as that would bring really huge profits with those strike prices.

But government will start auctions at which you can bid at which strike price you are prepared to deliver. They assign only a restricted volume (=money). This implies that solar & wind will be restricted in UK, as the amount of available money for the wind and solar strike prices will be low.

So the solar and wind costs in the comparison tables are fake.
As well as nuclear costs, comparing with the Hinckley agreement conditions.

…boost future profitability of the plant, at a time when curtailment is expected to be high…
UK government guarantees that there will be no curtailment for the new NPP during the 35year period.
Many with me find the inflation corrected (£92,50/MWh to be corrected for inflation since 2012) strike price appaling (here some paper statements).

The fact that no nuclear plant is built now in the western world without all kinds of (semi-)government support, indicate that nuclear is not viable in a competitive environment.
In the US the rate payers pay a levy in advance, used for the risky investment in the new plants.
So the rate-payers will loose all money if the investment goes wrong (which happened often in the history of NPP building).

Nathan Wilson's picture
Nathan Wilson on Mar 7, 2014 4:27 pm GMT

I scanned through the WHO document, and did not see an actual number of anticipated deaths.  The document certainly does not show the “net fatalities”, which is to say, the fatalities from Fukushima radiation, minus the number of lives saved by not burning fossil fuels which were displaced by the Japanese nuclear industry (i.e. even in Japan, nuclear power has likely many saved lives).

Here are some quotes from the report:

Outside the geographical areas most affected by radiation, even in locations within Fukushima prefecture, the predicted risk remains low and no observable increases in cancer above natural variation in baseline rates are anticipated.”

Some health effects of radiation, termed deterministic effects, are known to occur only after certain radiation dose levels are exceeded.  The radiation doses in Fukushima prefecture were well below such levels and therefore such effects are not expected to occur in the general population.”

The estimated dose levels in Fukushima prefecture were also too low to affet fetal development or outcome of prenancy and no increases, as a result of antenatal radiation exposure, in spontaneous abortion, miscarriage, perinatal mortality, congenital defectes or cognitive impairment are anticipated.”

As with the Chernobyl accident, the psychological impact of the Fukushima accident may outweigh other health consequences (150).”

It is of utmost importance to prevent reactions that themselves carry risk (such as self-administration of potassium iodide), to allay unnecessary fears (such as avoidance of breastfeeding because of health fears), and to promote healthy coping mechanisms (such as social solidarity).”

In other words, fearmongering by opponents of nuclear power may cause more harm than radiation.  The report is silent on the issue of the harm (and numerous fatalities) caused by overly widespread evacuation; but this and the large negative health effects of increasing fossil fuel use are destined to become a major part of the lessons learned from the accident.

Bas Gresnigt's picture
Bas Gresnigt on Mar 7, 2014 4:31 pm GMT

Schalk,
Matching supply and demand at regional levels is the task of the grid operator, not the utility.
Only backward countries did not separate those functions.

Utilities power plants just have to obey the commands from the gird operator.
Furthermore utilities have installed new flexible plants, that are easy to up-/down regulate fast, and closed most old base load plants.

… solar/wind are totally dependent on fossil fuel backup…
Pumped storage (~35 local facilities) & varying hydro from Austria, Switszerland, Norway, Sweden are available as well as international connections (capacity upgrades going on), as well as increasing battery capacities.

So I do not expect that your point will become an issue.
Apparently the German regulator neither.

Nathan Wilson's picture
Nathan Wilson on Mar 8, 2014 4:17 am GMT

“…no nuclear plant is built now in the western world without all kinds of (semi-)government support…”

Meaningless.  For the most part, no pollution control or worker safety is ever implemented without government support/mandate.  If left to market forces, the entire world would be as polluted and coal powered as China.  Nuclear is cost effective compared to other clean energy sources, and has more proven technical viability at high penetration than any sustainable energy source (except hydro, the potential of which is tiny compared to energy demand).

“…  rate payers pay a levy in advance … the risky investment in the new plants…”

Remember the Shoreham fiasco?  Back the 1970s private companies built a state-of-art nuclear plant to provide clean energy to New York.  The anti-nuclear lobby mobilized and had the plant shut down at great cost to society.  So why should any company gamble its own money on the whim of the public?  If the public wants clean energy, they’ll have to pay to mitigate the risk that their own fickleness and irrationality produces.

The very existence of the anti-nuclear movement proves that nuclear is viable, otherwise, why bother to speak out?  There is no one bothering to protest cold fusion or warm-dry-rock geothermal or space-based solar power.  Nuclear is a proven viable alternative to fossil fuel, and working against it is effectively working against the best interest of the environment and human health.

Paul O's picture
Paul O on Mar 7, 2014 8:27 pm GMT

I wonder why cold weather has no similar effect in next door France…Hmmm! Nuclear Power.

Schalk Cloete's picture
Schalk Cloete on Mar 7, 2014 10:53 pm GMT

In the end it is the utility that must supply the electricity demanded by the consumer through a complex mix of power plant operation, electricity trading and transmission network management. Currently, power plant operation is becoming increasingly complex due to the need for more flexibility while the most flexible plants (based on NG) are making huge losses, trading is becoming more challenging as negative prices from renewable surges become more common, and the demands on transmission networks are becoming greater as expansion is becoming an increasingly important mechanism for mitigating intermittency.

About the dependency of wind/solar on fossil backup, the question is whether the grid will function if all solar/wind were given a capacity credit of 1 and all superfluous fossil capacity was retired. I think not.

I guess we will have to wait and see how the fight between utilities and politicians turns out. In the end, the politicians are more dependent on the utilities than the utilities on the politicians. As a result, I expect the capacity market to be implemented on a regional level fairly soon with broader implementation over the next few years, thereby transferring the large Energiewende burden currently impacting the balance sheets of utilities to consumers. Only time will tell though…

Nathan Wilson's picture
Nathan Wilson on Mar 9, 2014 12:32 am GMT

Why use central generated power at home when it’s cheaper to make your own…”

Are you saying that in your market, it’s cheaper to go off-grid, and power your home year-around with battery-backed self-funded solar power, while discarding any excess electricity it produces?  

Or is it just that with federal and state subsidies and incentives, net-metering policies (i.e. using the grid for free energy storage, time-shifting, seasonal leveling, and cloudy-day backup) allows owners of grid-connected solar systems to save money?

These are very different things.  Solar electricity users in the second group are completely dependent on utilities, so they better hope their utility doesn’t fall into a death spiral.

It’s great that solar power has come down so much in price, but this obsession with self-generation, however sexy, makes it all too easy to ignore the reality that a robust grid is the key to making electricity the indispensible tool that it is, and making it for the lowest cost to society with the lowest pollution. All users should help pay for that grid, and the costs are proportional to the peak, not the average load.

Bob Meinetz's picture
Bob Meinetz on Mar 8, 2014 5:15 pm GMT

David, you would do well to look at the history of the utility industry, which has never had a “business as usual”. It’s been constantly evolving for over one hundred years, and what you see now is hardly outdated but a pinnacle of acheivement, modeled the world over.

Renewable energy will be completely dependent on a working, functioning grid – or it will be horrendously inefficient and polluting. Visit any one of the 170,000 or so Americans who is currently off the grid, and behind the house with the solar panels you’ll either find a tank of propane, a diesel generator, or a wood pile.

Why use central generated power at home when it’s cheaper to make your own with no transmission or distribution losses? Simple – it’s more efficient, even with transmission losses. For all the times when you won’t be able to rely on solar, you’re going to be firing up a generator and creating far more carbon.

If the idea of being dependent on a utility gets under your skin, there’s no one forcing you to be connected to the grid. As you say yourself, “stop whining and get with the program” – but don’t kid yourself you’re doing the environment any favors.

Bas Gresnigt's picture
Bas Gresnigt on Mar 8, 2014 6:53 pm GMT

There is a big difference between

  • regulations, such regarding the cleannes of the smoke of a coal plant; and
  • the subidies that a nuclear plant requires.

The agreements regarding the planned nuclear plant at Hinckley show, that each MWh that it produces will be subsidized for ~70%!
So if the plant produces a MWh in 2023, sold at the wholesale market for €55/MWh (which is high, as the Futures show that the expected price will be lower) the plant gets ~€167/Mwh for it, which implies that government subsidizes 167-55 = €117/MWh in 2023.
That is: 117/55 = 2.13 times the value of its production is subsidized. The subsidy going up with inflation…

At 2023 solar+wind will produce for ~€45-55/Mwh which imply only storage need subsidy which is calculated by German scenario studies to be ~€10/MWh.
So at that time government can subsidize ~10times more MWh if produced by wind+solar+storage than if produced by nuclear.

Remember the Shoreham fiasco
There are many more such fiasco’s.
They show that it is really a risky investment, and the rate payer may loose all the money he paid for it, while he even doesn’t get a real interest for the investment.
A huge subsidy. Comparable to those at Hinckley in UK..

Bas Gresnigt's picture
Bas Gresnigt on Mar 8, 2014 7:02 pm GMT

Renewables push wholesale price down…
It is far more correct to state; over-production push the price down.
That over-production is not because of renewable, as those develope in line with the long term scenario (except the extra 10GW solar in 2011+2012, which surprised government).

The main reason is that the 4 big incumbent utilities did not believe the planned fast development of renewable, and built more power plant capacity than needed.

So it is even more correct to state that the (unplanned) build of new power plants by the utilities push the wholesale price down.

Thomas Gerke's picture
Thomas Gerke on Mar 8, 2014 11:12 pm GMT

Research it abit and you’ll find that france winter heating demand (only relativly few hours in most years) is not covered by nuclear baseload power plants…

How does France meet it’s significant winter heating demand? With fossil fueled plants or imports.
In 2013 Germany was the number one source of imported electricity for France. 

Thomas Gerke's picture
Thomas Gerke on Mar 8, 2014 11:22 pm GMT

You equate the requirement of a service (dispatchable power) with the need for a traditional organizational structure (“utility” / big power company) eventhough there is no real connection.

Schalk Cloete's picture
Schalk Cloete on Mar 9, 2014 6:15 am GMT

Could you name an economically viable method to supply this service on a multi-GW scale without utilities and their centralized generation, trading and transmission capabilities? As I see it, the large centralized power plant will remain the most economical source of dispatchable power for decades into the future and the best way to operate and coordinate these plants and bring the product to market is through a centralized utility. Even energy storage in the form of pumped hydro or large flow-battery farms would be best operated at large scale as part of the generation portfolio of a utility. 

Bas Gresnigt's picture
Bas Gresnigt on Mar 9, 2014 7:28 am GMT

“… best way to operate and coordinate these plants and bring the product to market is through a centralized utility.
That is less economic then what we have in Netherlands (NL), Germany, etc

The grid is a natural monopoly. So in NL the grid is owned and operated by a state owned company; Tenant. In Germany the situation is the same, only there grid operator companies can be private. So our Tenant also owns and operate ~25% of the German grid. Tariffs (profit) is controlled by government regulator.

Production and selling electricity is not a natural monopoly. So anybody can start an utility and compete the others off the market, which happens sometimes. Electricity delivery is guaranteed by the rules of the regulator. E.g. forbidden to sell electricity, which availability you did not secure for next 6 month, either via your own plants or via buying futures.

So in NL, I can chose from 20 utilities. The old incumbents, but also utilities that deliver only nuclear generated electricity, or only wind electricity, or only renewable electricity, or electricity for 100% generated in NL, or the cheapest, or the one that offers me a better price for my roof top solar produced electricity, or ….

This relative new situation (since ~1995), also brought lower prices.

Thomas Gerke's picture
Thomas Gerke on Mar 9, 2014 8:52 am GMT

“Even energy storage in the form of pumped hydro or large flow-battery farms would be best operated at large scale as part of the generation portfolio of a utility. “

As Bas Gresnigt has pointed out:
The electricity generators are coordinated by the grid operator. Those are seperated entities. 

The most economical ways to provide dispatchable power in a RE-dominated electricity system are commonly known to be distributed CHPs (industrial, commercial, residential) and demand-response. Storage is already becoming viable as a balancing power & voltage stabilization grid service provider. 

The market for residual load (what’s left after wind & solar) experiences steady reduction of full load hours… within a decade there might not even be room for a few gigawatt operating 8760 days / year.  By 2050 it’s expected that residual load has to be provided only at about 3500h a year.

That requries flexibility and power capacities that make sense without many full load hours (CHPs mainly). Will this require a utility? Well it certainly requires a grid operator. But for “coordinating” power production we have something called infromation technology. 

Clayton Handleman's picture
Clayton Handleman on Mar 9, 2014 11:16 am GMT

I think that a market based system that works with real time bid – ask for source and load is much better than a centrally planned and operated utility.  There are countless examples of central planning giving way to distributed paradigms as the technology and / or knowledge made it feasible.  Computing is the most obvious of these.  I recall begging my friend not to dump his retirement account into Digital Equipment Corporation only to watch helplessly as he flushed his retirement down the toilet in service of  his inability to recognize that the old paradigm was being erased in favor of the new.  

The Nasdaq exchange is instructive.  It took trading electronic decades ago.  Computer power has gone up orders of magnitude since.  I can see no reasons that a distributed load shouldn’t be served by a network of distributed sources.  Without that there is no free market for electricity. 

The trading system may need to be managed centrally but I think that the generation paradigm can and will transition much as computing has over the years moving from central generation to distributed. 

 

Bas Gresnigt's picture
Bas Gresnigt on Mar 9, 2014 1:33 pm GMT

… it is the utility that must supply the electricity demanded by the consumer through a complex mix of power plant operation, electricity trading and transmission network management…
This is true in backward countries only.
In up-to-date countries, such as Germany & NL, it is primarily the responsibility of the grid operator together with the regulator. Even if the utility brakes down, the customer will get his electricity.

The utility has no responsibility for the transmission network at all. In line with that, he also doesn’t manage it. Transmission network is a natural monopoly which should be separated off from the other activities (producing, trading, selling electricity)  which can be done in competition with other utilities and local cooperations that employ a local wind turbine, etc.

If you do not separate, than the old utilities will mis-use their network monopoly to delay progress, such as consumer installed solar, wind, batteries. And it seems they do in some parts of USA (AZ?).

Nathan Wilson's picture
Nathan Wilson on Mar 9, 2014 5:05 pm GMT

David, it’s great that you have an off-grid solar system, and really great that you are able to minimize your use of fossil propane.  That’s a great model for individuals who don’t want to be part of the system.  

But you have not demonstrated that your system is actually cheaper (or cleaner) than utility scale clean energy (nor have you documented how much of your solar energy is discard, since using PV energy to replace solar water heater energy also counts as waste).  As the SEIA reports demonstrate quarter after quarter, utility scale solar is still cheaper by a factor of two, further, utiltity wind is almost another factor of two cheaper than solar.  I believe utility scale equipment is much more likely to be recycled, should have much longer service life and lower maintenance cost.  Grid connected demand averaging can result in much lower energy waste via less energy cycled in and out of in-efficient storage and less system over-sizing via sharing of reserves and geographic solar/wind averaging.  Plus utilities can build pumped-hydro storage that is potentially much cheaper and cleaner than chemical batteries (especially those involving heavy metals like lead, which are among the worst things we put in land fills – even with recycling, about 10% of the material in lead-acid batteries never makes it back into new products).

“…those with the impression that unlimited power is a birthright, … the idea of having an energy budget …”

How to determine the budget?  If we build clean energy at utility scale (i.e. internalizing all energy costs), then each individual can set his/her own energy budget based on their financial budget. 

Bas Gresnigt's picture
Bas Gresnigt on Mar 9, 2014 4:32 pm GMT

As we have much cheaper and much faster to implement CO2 free methods to generate electricity (wind+solar+storage);
why should we add more (dangerous, at least for our fetuses and heredity) radio-activity to our biosphere??

Especially since wind+solar+storage do not add heat to the bioshpere, while nuclear adds even ~2.5MWh heat for each consumed MWh.

Bob Meinetz's picture
Bob Meinetz on Mar 9, 2014 7:24 pm GMT

Thomas, can you provide data or links to back up your contention that

france winter heating demand (only relativly few hours in most years) is not covered by nuclear baseload power plants?

Researching claims made by an author is not typically the reader’s responsibility. Thanks.

Thomas Gerke's picture
Thomas Gerke on Mar 9, 2014 7:59 pm GMT

Hi Bob, 

well it’s very simple. In winter time a maximum of 59 GW of nuclear net-generation capacity is available in France, but demand usually peaks between 70-85 GW during the winter (80-100GW during a cold spill). France also has quite some hydro, but if it really gets cold coal, gas, oil & imports provide demand. 

Check out the February 2012 cold spill at this excellente french data portal: 
http://www.rte-france.com/en/sustainable-development/eco2mix/national-da...

Bob Meinetz's picture
Bob Meinetz on Mar 9, 2014 8:32 pm GMT

Thomas, even at the zenith of France’s cold snap in February 2012 nuclear was providing 60% of its electricity needs. To allocate its demand to different sources – for example, to say hydro powered French heaters and nuclear powered French refrigerators – is pointless, and the raison d’etre of France’s electric heat is cheap nuclear energy.

During a cold snap they simply don’t have enough, so the reasonable solution would be to build more nuclear and be able to rely less on dirty German coal-fired energy.

Bas Gresnigt's picture
Bas Gresnigt on Mar 9, 2014 8:59 pm GMT

raison d’etre of France’s electric heat is cheap nuclear energy.”

Raison d’etre is the warm French winter. Heating is only needed during a few days/weeks. So investment in a central-heating boiler doesn’t pay off.

Except in the North-East (the Alsace) near Germany. There you find heating with decent decent central-heating boilers burning gas or oil as the climate is colder, more like that in Germany.

Importing cheap electricity from a.o. Germany during a cold snap is fine. Why extra investment which doesn’t pay off as hardly utilized.
And France tries to bring down the share of nuclear…

Schalk Cloete's picture
Schalk Cloete on Mar 9, 2014 9:03 pm GMT

May I ask whether you work in the electricity generation/distribution industry? You don’t have any information in your profile. I don’t work in that industry and get most of my information from research and reading the business descriptions on the websites of large power companies. So if you have a great deal of first hand experience that contradicts this information, it would be nice to hear. From what I understand, however, utility companies are generally involved in the generation, trading and distribution of electricity and natural gas. 

On to the other points in your comment, could you describe in a little more detail how  the customer will get his electricity if a major utility “breaks down” and tens of GW of dispatchable capacity goes off line?

About the separated transmission network in “up-to-date” countries like Germany, how does the business work, i.e. what are the major sources of revenues and expenditures? How does this link with the extensive power distribution networks that E.ON, RWE and EnBW claim they operate?

What do you think of the capacity market now being discussed in Germany?

Thomas Gerke's picture
Thomas Gerke on Mar 9, 2014 9:07 pm GMT

Well,  I didn’t say that nuclear  did not  provided the bulk even in during the cold snap. But the additional demand that is very specifically electric heating related, is simply not covered by nuclear.
That’s just a fact…  not intended as a anti-nuclear argument.

Now you claim that a “reasonable solution would be to build more nuclear to meet that demand”, on the other hand is a pro-nuclear fantasy IMO.

Building a nuclear power station that is only operated for a few hours (<2000h) would have very high generation costs. That’s because nuclear power stations are capital intensive and have high fixed operational & maintainance costs. 

The moral of the story:
When honestly talking about a long term transition to a low carbon energy supply (with RE or nuclear) the winter “heating gap” is a real challange that won’t be solved by simply “adding more capacity”. 

The sensable solution is:
1. reduce winter heading demand (efficient building require 70-90% less heating&cooling energy)
2. add heat storage (to decouple production & demand)
3. perhaps add syn-fuel powered CHPs 

At the end of the day, a truely RE or nuclear dominated energy system (not just electricity) will look very similar… 

Bas Gresnigt's picture
Bas Gresnigt on Mar 9, 2014 10:05 pm GMT

I worked some time at an utility /  power plant that burns coal.

..distribution of electricity…
That once was also a responsibility of the utility. No longer!!
In up-to-date countries it is the task of the grid operator, which is a fully separated organisation.

…how  the customer will get his electricity if a major utility “breaks down”…
The regulator requires that utilities ensure supply of electricity up to 6 months in advance.  
The utility can do that buying options & futures at the whole sale market in Amsterdam for NL.
If the utility fails, the regulator then has in principle 6 months time before an emergency may occur.

Nowadays there is enough spare capacity and/or import options, so the regulator arranges an utility that takes the customers. 

In the real exceptional situation that there is not enough other capacity, the regulator may oblige power plants to stay open while the utility/owner is bankrupt. It then pays operational costs for the plant and will add those to the debt of the bankrupt utility/owner after subtracting with the payments of the customers (so it may lower the debt).

Bas Gresnigt's picture
Bas Gresnigt on Mar 9, 2014 10:17 pm GMT

What do you think of the capacity market now being discussed in Germany?
The utilities love that idea, as shown at their outcry in Brussels last autumn.
But it increases costs for the customer without any added value.
Present practis is much cheaper and ensures reliable delivery as well:

If the grid operator and regulator find it necessary to arrange spare capacity, then they start negotiations and arrange the cheapest/best for the period necessary.

E.g. at the closure of 8 NPP’s in spring 2011 (after Fukushima), they arranged (and payed for) 3 fossil power plants as spare capacity. Those could (re-)start within a few days/week. In winter of 2011/2012 only one power plant was asked to re-starp and run as spinning reserve during some weeks.
The arrangement stopped at the end of the winter.

Bas Gresnigt's picture
Bas Gresnigt on Mar 9, 2014 10:25 pm GMT

…the extensive power distribution networks that E.ON, RWE and EnBW claim they operate?
Remarkable, as they do not manage a part of the German national grid.
But they may operate some local grids (e.g. Vattenfall runs the Berlin grid). If they do they must do that via a seperated off entity with chinese walls between those and the utility.
Can you show that claim?

Kevon Martis's picture
Kevon Martis on Mar 9, 2014 11:18 pm GMT

Over a 60 year lifespan this statement is laughably false, particularly for a low wind and solar CF region like Germant. Wind+solar+storage is not cheap, fast or proven to be a 100% replacement for dispatchable generation for anything more than trivial amounts of power anywhere on earth.

This is nothing more than faith-based energy.

Bob Meinetz's picture
Bob Meinetz on Mar 10, 2014 1:04 am GMT

Thomas, the reason that extra demand is not covered by nuclear is that it’s not available. Hence, France (and Germany) have to turn to fossil fuels, which should be a last resort.

It’s true that it’s less economical to run a nuclear facility at less than full power – analogous perhaps to an airline using a 747 to service a Milan to Bordeaux route. And while efficiency improvements can help overall, they still don’t relieve the problem of having a large expensive plant running only part of the time, and buying fossil energy to fill the gaps.

Synfuels, on the other hand, could be generated using excess nuclear during warm summer months, although for France to completely replace fossils it will still require more nuclear capacity. Of course wind/solar can contribute to generating synfuel, and in sufficient quantity we open a door to virtually unlimited, clean transportation.

 

Schalk Cloete's picture
Schalk Cloete on Mar 10, 2014 4:42 am GMT

Here are some links:

E.ON

RWE

EnBW

Schalk Cloete's picture
Schalk Cloete on Mar 10, 2014 5:11 am GMT

Here is a good article about the longer-term need for a capacity market. 

Currently, the market in Germany is being distorted by subsidies that are forcing the deployment of renewable energies that cost 4 times the wholesale price. This distortion has created an environment where clearly more cost-effective conventional operations are being undermined prematurely, leading to poor capital utilization in the medium term and insufficient investment in the longer term. These effects are detrimental to society as a whole and the capacity market is needed to correct for this. 

Ideally, we would get a simple technology neutral climate change policy and drop all subsidies (e.g. just get out the way and allow the ETS to do its job). Unfortunately, however, it appears as if Europe is going down the road where additional intervention is needed to address the negative effects of previous intervention. The resulting bureaucracy and inefficiency can seriously undermine European competitiveness.

Bas Gresnigt's picture
Bas Gresnigt on Mar 10, 2014 9:09 am GMT

Thanks!
I’m surprised.

Here a picture of the areas that the 4 major grid operators in Germany run:
– Tennet (=Dutch state owned grid operator);
– Amperion;
– 50Hertz;
– EnBW TNG

Separation in Germany less strict than in NL.
– RWE still owns Amperion
– EnBW still owns TNG
– E.ON sold its grid to Tennet after accusation of mis-use by EU.
– Vattenvall sold 50Hz to Elia.

In NL proposals to put Chinese walls between the grid dept and the rest of the utility were not accepted. So utilities had to sell their grid to the state (=Tennet).

Bas Gresnigt's picture
Bas Gresnigt on Mar 10, 2014 9:02 am GMT

For next years more than enough capacity in Germany:
– pumped storage makes losses;
– export at record levels.

Utilities nust ask permission if they want to close a plant 6months in advance. Regulator can then postpone (with compensation payments, etc).

If that happens more often, then a capacity market may become cheaper.

The proposed scheme of the advisory committee (and incumbent utilities) implies, that a plant can compete with lower prices because it gets capacity payments that other do not get. Hence distorts the market, as it then can compete plants with lower cost price (who do not get capacity payments) out of the market.
A lot more study should be done.

Btw.
1. The distortion of the German market is caused by the major utilities who assumed that Germany would not continue with the Energiewende and started to build far more capacity than needed according to the Energiewende.
High FiT’s for renewable have nothing to do with this. Neither the renewable expansion (share increases ~1.5%/year) as that could be read in the scenario long time ago (in ~2000).

2. The most cost effective conventional operations / plants, the new flexible lignite plants at the lignite mines, do make a profit. One can also state that those compete the older (coal, gas, ?nuclear?) plants off the market.

3. I fail to see why the resulting low whole sale prices are detrimental for society.
Our Dutch Aluminum smelter was competed off the market because German smelters enjoyed the substantial lower whole sale electricity prices in Germany (so we now increase our inter-connection capacity with Germany in order to import more).

Bob Meinetz's picture
Bob Meinetz on Mar 10, 2014 3:26 pm GMT

Clayton, I’m sure you recognize the fallacy of suggesting that every “new paradigm” will replace an existing one based on one example. Failed paradigms outnumber successful ones by the thousands.

Utilties occupy a very distinct niche in the capitalist landscape, being the closest thing to a government agency as any corporation can be. Their profits are tightly controlled, they’re the most regulated industry in the country, and their CEOs earn less than any other industry.

For that reason their success has always been a thorn in the side of the free-market crowd, which assures us that unfettered capitalism is the answer for everything, that everyone would be happy if government would just get out of the way, and other associated fictions. Like the right-wing-inspired trend sweeping education, the distributed generation movement is a thinly-veiled, pseudo-populist guise for privatization, and denies poor Americans the level playing field which is supposed to be offered all of us.

The poor need dependable, affordable electricity. They don’t need to be subsidizing wealthy yuppies and their overvalued, trophy solar arrays.

donough shanahan's picture
donough shanahan on Mar 13, 2014 1:38 pm GMT

Have I not commented on this exact same graph before to this exact same poster proving that this graph is wrong? Oh yes, yes I have. 

Stop posting false data.

Bas Gresnigt's picture
Bas Gresnigt on Mar 13, 2014 11:04 pm GMT

Germany rejected the idea of a capacity market for the next years.
Scenario studies showed such is not necessary.
So it will generate unnecessary costs.
Of course the utilities love it, as it would allow them to keep their overcapacity & old plants up and running.

It may become necessary at ~2030 (50% renewable), but even that is dubious taking into account the expected decrease in battery storage costs during the next 15years.

Bas Gresnigt's picture
Bas Gresnigt on May 22, 2014 11:11 am GMT

@Jarmo,

“…Grids and power companies are natural monopolies…”

Partly yes for grids but not for electricity generation, neither for selling electricity to consumers.
Just check the model used in NW-Europe.

There is full seperation between grid ownership & management and power companies.
The costs of the grid are a separate item on the bill and that money flows to the grid company.

Grid companies are either government owned (in NL) or private (Germany) but then under government control which limit their earnings. Germany also has many cities that own the grid in the city.
E.g. recently Berlin had a referendum whether the city should take over the local grid from the Vattenfall subsidiary; the main argument in favor of a take over was that the holding company Vattenfall also exploited nuclear power plants (the greens lost).

Power companies operate in a free market. They can sell their electricity at the whole sale market or sell themselves to end-customers.
Many utilities that sell electricity to end-customers do not produce themselves but secure delivery by buying futures on the whole sale market.

So as a consumer here in NL I can choose one of the ~20 supplier that can deliver me different flavours of electricity: 100% nuclear generated; 100% wind generated; 100% renewable, a supplier that pays me more for the electricity I feed back into the grid, small supplier, cheap supplier, etc.
In Germany the choice is even bigger.
As with cars, there are sites that compare between suppliers that help me to choose.

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