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Update: EU Energy Outlook 2050 - How will Europe develop in the next 30 years?

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Simon Göß studied Environmental and Resource Management (B. Sc.) at the Brandenburg University of Technology Cottbus and Sustainable Energy Technology (M. Sc. Honours) at the Delft University of...

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  • Nov 10, 2021
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Originally published here, co-authored by Huangluolun Zhou

With the current “EU Energy Outlook 2050”, Energy Brainpool shows long-term trends in Europe. The European energy system will change dramatically in the coming decades. Climate change and aging power stations are forcing the European Union and many countries to change their energy policy. In addition to political innovations, there are also significant changes in the energy market: Rising CO 2 certificate prices lead to higher profitability in renewable energies; Power Purchase Agreements (PPAs) are the key word here. What do these developments mean for electricity prices, revenue potential and risks for photovoltaics and wind?

The electricity markets in Europe are subject to constant change, which makes current price scenarios indispensable. This is the only way to correctly evaluate, for example, market developments, assets and contracts, investment decisions, PPAs or business models

The “EU Energy  Outlook 2050” shows the development of the “Energy Brainpool” scenario for the EU-27 as well as Norway, Switzerland and Great Britain. The actual processes in the individual countries can vary significantly. In order to be able to make well-founded decisions, detailed modeling of the individual national markets and the country-specific influencing factors, including sensitivity analyzes, are essential.

 

What does the European power plant park of the future look like? *

Installed generation capacities in EU-27 (plus NO, CH and UK) by energy source (source: Energy Brainpool, 2021; EU Reference Scenario, 2016; entso-e, 2021)

Figure 1: Installed generation capacities in EU-27 (plus NO, CH and UK) by energy source (source: Energy Brainpool, 2021; EU Reference Scenario, 2016; entso-e, 2021)

The power plant park in Europe has developed over many decades and was particularly dominated by fossil generation capacities (see Figure 1). Many of the power plants on the market have already reached a great age. They must be replaced by 2050, including all nuclear power plants. The only exceptions to this are power plants that are already under construction.

The current climate debate is having an effect. In the meantime, a total of 10 EU countries have decided to phase out coal in order to limit the negative effects of the high emissions. Well-known and proven technologies are available for the future: gas power plants, renewable energies and nuclear power plants.

Wind power and photovoltaics in particular continue to have great growth potential. These technologies are competitive today thanks to the sharp drop in costs over the past decade. This is also evident from the increasing number of PPA-based projects, especially for solar systems. Experts expect this development to continue. In the “EU Energy Outlook 2050” the proportion of these fluctuating renewable energies (FEE) will increase to around 65 percent of the total supply output by 2050. Renewables make up 76 percent of the power plant fleet.

Gas-fired power plants in particular will be added to controllable, fossil-fuel generation capacities at the European level in the future. This is due to the lower emissions compared to coal-fired power plants. The latter continue to lose importance even with carbon capture storage (CCS).

The capacities of nuclear and coal-fired power plants will decrease by more than 53 percent by 2050. Germany, France, Great Britain, Spain, the Netherlands, Finland, Italy, Ireland, Portugal and Denmark have announced coal exits for the future. As a result, a sharp decline in the currently installed capacity to around 18 percent by the year 2050 can be observed, especially with hard coal.

Overall, the proportion of the generation capacity of controllable thermal power plants will decrease from currently around 47 percent to around 24 percent by the year 2050. This has a significant influence on the structure of electricity prices, which are increasingly shaped by FeE.

 

Why will the demand for electricity increase until 2050?

Gross electricity generation and demand by energy sources EU-27, plus NO, CH and UK (Source: Energy Brainpool, 2021; EU Reference Scenario, 2016; entso-e, 2021)

Figure 2: Gross electricity generation and demand by energy sources EU-27, plus NO, CH and UK (Source: Energy Brainpool, 2021; EU Reference Scenario, 2016; entso-e, 2021)

The demand for electricity will increase by around 31 percent by 2050, as shown in Figure 2. The demand for electricity is increasing primarily due to the national hydrogen strategies, increased electrification in households and the rise in electromobility. According to plans by the European Commission, the majority of economic growth will take place in the tertiary service sector, which also requires more electricity. In the industrial sector, greater efficiency can prevent a significant increase in electricity consumption.

The amount of electricity produced by coal-fired power plants is falling sharply and will decrease by around 58 percent by 2030 and by around 91 percent by 2050. Production from gas-fired power plants will increase by around 25 percent by 2050. In 2050, wind and solar systems will generate around 46 percent of electricity. Around 35 percent of the electricity comes from controllable, fossil-fuel power plants. The remaining amounts of electricity are produced by controllable, renewable energies, such as biomass power plants or reservoirs. 80 percent of the electricity is generated emission-free. This would mean that the set climate targets would be missed.

 

The long-term development of raw material prices

Commodity prices (source: World Energy Outlook 2021 ("Sustainable Development") and own calculations by Energy Brainpool, 2021)

Figure 3: Commodity prices (source: World Energy Outlook 2021 ("Sustainable Development") and own calculations by Energy Brainpool, 2021)

The development of the most important commodity prices up to 2050 is based on the “Sustainable Development Scenario” (SDS) of the World Energy Outlook (WEO) 2021 of the IEA (IEA, 2021). Three goals are defined in this scenario: stabilization of climate change, clean air and universal access to modern energy. In particular, it is assumed that the majority of industrialized countries will reduce their CO emissions to “net zero” in 2050, thus limiting the rise in the global average temperature to 1.65 ° C.

Compared to the current level, in this scenario the prices for gas, oil and hard coal decrease continuously until 2030 (see Figure 3). In particular, gas prices are currently at an extraordinarily high level; The decline in the coming years is therefore all the more pronounced.

Since the last update of the World Energy Outlook a year ago, the assumed future gas prices have fallen slightly, while the price paths for coal and oil have remained almost unchanged. Compared to the WEO 2020, however, the CO 2 price assumed for the EU has risen sharply from the equivalent of just under 114 EUR / tCO 2 in 2040 to over 140 EUR / tCO 2 . As discussed in the next section, this 23 percent increase has a direct impact on the electricity prices to be expected.

In the WEO 2021, the IEA also introduced a new scenario, the "Announced Pledges Scenario" (APS). In contrast to the “Sustainable Development Scenario” (SDS), only the emission reductions that the governments have already committed to in the form of “pledges” are implemented here. There will therefore only be a reduction in global CO 2 emissions from 2030 onwards. In 2050, emissions will be more than twice as high as in SDS. With regard to commodities, the same development in CO 2 prices is assumed as in SDS. Since gas, coal and oil will be used even more after 2030, the prices in this scenario are higher than in SDS, which additionally drives the average electricity prices up.

A sensitivity scenario for the APS can soon be calculated and delivered on request.

 

Development of average electricity prices

Annual baseload prices and fluctuation range of national individual markets in selected countries in Europe on average (source: Energy Brainpool, 2021)

Figure 4: Annual baseload prices and fluctuation range of national individual markets in selected countries in Europe on average (source: Energy Brainpool, 2021)

Primary energy and CO 2 prices are particularly relevant for the development of the average, unweighted electricity prices between 2022 and 2050 . Due to the rising CO 2 prices, electricity prices will rise continuously from 2030 onwards. However, this development is being dampened by the high feed-in from wind and photovoltaic power plants. These can only partially be compensated by an increasingly flexible electricity demand, which increasingly leads to hours with low and more often also negative electricity prices.

Compared to the last edition of the EU Energy Outlook from June 2021, the calculated electricity prices increased by an average of 10 percent between 2030 and 2050. The reason for this is the increase in the assumed CO 2 prices shown above , based on the current WEO. The actual developments in the individual countries sometimes differ greatly from one another. This is shown by the fluctuation ranges shown in Figure 4. Due to the development of commodity prices, countries with a low expansion of renewable energies in particular have seen a greater increase in electricity prices.

Average monthly baseload prices in selected EU countries (source: Energy Brainpool, 2021)

Figure 5: Average monthly baseload prices of selected EU countries (source: Energy Brainpool, 2021)

If we look at the electricity prices on a monthly basis, the seasonality and volatility of the electricity market can be seen (see Figure 5). For the winter, the analyzes show rising prices, due to the temperature sensitivity of the electricity demand. In contrast, electricity prices are usually significantly lower in summer. This effect is reinforced by the increasing share of solar power generation, which has a price-lowering effect.

 

What revenues can wind turbines generate?

Average marketing values ​​and quantities for wind in selected EU countries (source: Energy Brainpool, 2021)

Figure 6: Average marketing values ​​and quantities for wind in selected EU countries (source: Energy Brainpool, 2021)

The marketing value is the average volume-weighted electricity price that wind power plants can achieve on the spot market. Only generation hours with positive electricity prices are taken into account (including 0 EUR / MWh).

As Figure 6 shows, the market value of wind energy will continuously increase from 2030 onwards. The annual increase is small, however, also due to constantly increasing capacities. The parallel generation by a higher number of systems reduces the electricity prices during these hours (merit order effect). The sales volumes (share of the volumes generated at electricity prices> = 0 EUR / MWh) decline only slightly on average in the EU, and in some countries even very significantly. The marketing revenues result from the product of the marketing values ​​and marketing quantities.

The many hours in which, despite the high proportion of renewable energies, controllable, fossil-fuel power plants set the price, enable increasing positive revenue streams. The fluctuation range of the markets shows how different the country-specific average revenue opportunities from wind turbines are.

In the white paper " Assessment of the electricity market revenues of plants with fluctuating renewable energies ", Energy Brainpool defines, among other things, the indices of marketing value and
quantities. These indices enable a realistic determination of the revenue potential of fluctuating, renewable energies on the electricity market.

 

What revenues can photovoltaic systems (solar) achieve?

Average marketing values ​​and quantities for solar in selected EU countries (source: Energy Brainpool, 2021)

Figure 7: Average marketing values ​​and quantities for solar in selected EU countries (source: Energy Brainpool, 2021)

The development of the marketing values ​​for solar energy is similar to the trend for the marketing values ​​for wind energy, but at a lower level (see Figure 7). The reason for this is the pronounced simultaneity effect of solar energy: the majority of electricity is generated during the daytime hours in summer. In hours when a lot of solar power is generated, the electricity prices and thus the revenues fall.

The sales volumes for solar energy remain almost constant on average in the EU, and they are also falling in individual countries. The wide range of fluctuations in the solar marketing values ​​in the individual states shows how much the revenue opportunities vary. However, it should be noted here that in a sunny country, high revenues are possible even with low marketing values. The reason for this is that the facilities are better utilized.

Solar thermal systems for power generation are a marginal technology in the scenario and will not be expanded on a large scale.

 

Increase in price volatility in detail

Development of demand-weighted baseload prices and quantiles of hourly prices in selected EU countries (source: Energy Brainpool, 2021)

Figure 8: Development of demand-weighted baseload prices and quantiles of hourly prices in selected EU countries (source: Energy Brainpool, 2021)

In the scenario, many factors lead to a significant increase in price volatility. Figure 8 shows the price volatility with the help of box plots, which describe the annual demand-weighted baseload prices and the quantiles of the hourly prices in the respective year. On the one hand, the generation costs of the controllable fossil power plants are increasing due to the rising CO 2 prices . On the other hand, the expansion of fluctuating, renewable energies has a price-reducing effect. As a result, from today's perspective, extreme prices occur much more frequently and are becoming a normal part of the electricity price structure of the day-ahead market.

The high extreme prices rise continuously over time, while the low extreme prices remain at a nearly constant level after 2030. The reason for this are the flexibility options, such as B. electrolysers, heat pumps and electromobility, which are becoming increasingly important for future power supplies.

 

Fluctuations due to weather risks when determining the marketing values ​​of fluctuating producers

In Germany and other European markets, due to the promotion of wind and solar, until now, when thinking about the weather risks of fluctuating renewable energies, the focus was only on the influence on the amount of generation produced. All price risks played no role due to the guaranteed feed-in tariff or market premium. For wind turbines, for example, large amounts of wind generate high revenues and little wind leads to low revenues. In order to estimate revenues, an expected amount (e.g. P50 amount) was consequently multiplied by the fixed subsidy.

However, this situation changes in the case of plants marketed on the market that generate their revenues based on fluctuating electricity prices. Since electricity prices also fluctuate with the weather, the influence of the weather must be taken into account twice. Furthermore, we show that, from the plant operator's point of view, there is a revenue-stabilizing anti-correlation of the two weather effects, and that weather risks can thus be systematically overestimated.

The effect of the anti-correlation becomes clear on the basis of the modeling results of a scenario calculation for the year 2021 using the weather years 2005 to 2016. Figure 9 shows the percentage fluctuations in generation volumes and marketing revenues around the respective mean. If you multiply the generation volume (in MWh) by the sales revenue (in EUR / MWh), you get the annual revenue of the plant (in EUR / MW / a). These are also given as a percentage and also in EUR / MWh, and relate to fluctuations in the revenue of the long-term average of the amount of electricity that can be generated (P50 amount).

A look at the figures shows a pattern: Windy years show high volumes with low sales revenues, years with little wind show low volumes with higher marketing revenues. This is generally due to the cannibalizing effect of renewable energies and can stabilize annual revenues.

Comparison of the influence of different weather years on the amount and value of electricity in 2021 by means of percentage deviations from the mean value of all weather years (source: Energy Brainpool, 2019)

Figure 9: Comparison of the influence of different weather years on the amount and value of electricity in 2021 by means of percentage deviations from the mean value of all weather years (source: Energy Brainpool, 2019)

For example, the generation volumes in the 2007 weather year are more than 16 percent above the P50 value, but the marketing revenue in EUR / MWh is 8 percent lower (see Figure 9). The annual revenue of the plant therefore only fluctuates by + 7.5 percent. Converted this is + 3.12 EUR / MWh deviation from the revenues that were planned with the P50 quantity as a long-term average.

In contrast, the generation volumes in the 2010 weather year are 10 percent lower. This roughly corresponds to the amount of P90. However, the lower volumes are more than compensated for by the more than 11 percent higher marketing revenues, and the annual revenues remain stable (+ 0.7 percent). However, if one calculates the expected revenues of a system by multiplying the P90 quantity (for the weather year 2010) only with the average marketing revenues, one systematically overestimates the weather risk and ignores this anti-correlation, which stabilizes the revenues.

Using Figure 10, however, when comparing the weather years 2010 and 2016, it also becomes clear that this anti-correlation is not the same in every weather year. It can be overridden by simultaneous solar feed-in. For example, compared to 2010, wind feed-in was more strongly distributed over hours with simultaneously high solar feed-in compared to 2010, so that marketing revenues hardly increased.

Overall, there are fluctuations in revenue specific to the weather year, which reflect both weather-related volume and value risks. If the generation volumes from P90 (e.g. 2010) or P50 weather years (e.g. 2009) are used to estimate weather risks, it is advisable to consider these in combination with the expected price effects. Otherwise, weather risks can be overestimated.

The values ​​shown will change significantly in the future due to changing power plant parks and the resulting cannibalization of renewable energies. Read more about this in our white papers “ Power Purchase Agreements I & II ”.

Comparison of the weather risks in different markets in 2020 based on the weather years 2005-2016 (source: Energy Brainpool, 2020)

Figure 10: Comparison of the weather risks in different markets in 2020 based on the weather years 2005-2016 (source: Energy Brainpool, 2020)

 

Fluctuations due to different scenario assumptions

Trends in the different scenarios of selected EU countries (source: Energy Brainpool, 2021)

Figure 11: Trends in the different scenarios of selected EU countries (source: Energy Brainpool, 2021)

Energy Brainpool offers a variety of different closed scenarios. Figure 11 shows the different trends of the scenarios. The fluctuations relate to the assumptions on the development of commodity prices as well as the power plant fleet and e-mobility and other flexibility options (progressivity).

Figure 12 shows the associated results of the electricity prices for the respective scenarios.

Development of electricity prices in EUR2020 / MWh of the respective scenarios of selected EU countries (source: Energy Brainpool, 2021)

Figure 12: Development of electricity prices in EUR2020 / MWh of the respective scenarios in selected EU countries (source: Energy Brainpool, 2021)

 

* EU-27 plus United Kingdom, Norway and Switzerland, depending on the evaluation, the significant countries were selected to determine the mean.

 

Sources:

[1] EU Reference Scenario, 2016: Energy, transport and GHG emissions - Trends to 2026 [online] https://ec.europa.eu/energy/sites/ener/files/documents/ref2016_report_final-web.pdf [last accessed on November 1st, 2021].
[2] IEA, 2021: World Energy Outlook [online] https://www.iea.org/reports/world-energy-outlook-2021 [last accessed on November 1 , 2021 ].
[3] entso-e, 2021 [online] https://tyndp.entsoe.eu/ [last accessed on 01.11.2021

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