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How energy efficiency will reshape power markets

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energy-efficiencyThe 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.

citi EE

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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  • Mike Dill

    When I get my PW2 installed my grid demand at peak will be zero. A few more energy star appliances and the only thing left to cut will be the connection charge, and that may happen in a few years also.

    • MaxG

      We’ve done the same… waiting for my energy-efficient devices from Germany — all of it; stuff you do not even get in AU.
      Connection fee will become a non-issue, once I do not get the basic FiT any more; then we’ll cut the cord for good.

  • Malcolm M

    Could this also lead to stranded hydro assets ? In Tasmania most of the hydro stations are designed with high capacity factors. They are small power stations on relatively large rivers, and in seasons of high flow (such as 2016) need to operate 24/7 to minimise spilling, which means they provide base load regardless of the spot power price. There is limited capacity in these stations to provide higher value services into the mainland market, such as peaking and frequency control and stability (FCAS). Only the Poatina and Gordon power stations appear to provide these higher value services, and use of these needs to be minimised until their dams are fuller. However, in the Snowy Scheme the Murray and Upper Tumut stations appear to be into these high-value markets, and indeed appear to provide most of the FCAS for Victoria and NSW. These Snowy stations were designed for a 20% capacity factor, which provides more flexibility in the use of their capacity. Perhaps some of the Tasmanian stations need additional generators so they too can reduce their capacity factor and get more into the FCAS market.

    • Farmer Dave

      Malcolm, I’m not sure that any Tasmanian generator can provide FCAS to the mainland. The Basslink connector is a high voltage DC cable, and its possible that the conversion station in Victoria that converts the DC to AC can only follow the grid frequency, not attempt to control it.

  • Tim Forcey

    ECONOMIC FUEL SWITCHING

    Uh, what about “economic fuel switching”?

    For example when one switches from petrol to electricity to power one’s car?

    Or in Australia, when one switches from using gas to heat one’s home to using your heat pump (aka reverse-cycle air con)? (See: https://theconversation.com/hot-summer-nights-and-cold-winter-evenings-how-to-be-comfortable-and-save-money-all-year-long-51046)

    Electricity demand from those sectors is increasing and will continue to increase, in Australia.

    See: http://energy.unimelb.edu.au/__data/assets/pdf_file/0018/2035116/Five-Years-of-Declining-Annual-Consumption-of-Grid-Supplied-Electricity-in-Eastern-Australia.pdf

    Interesting times for sure!

  • A1

    what is organic in the graph?

    • organic is natural increase in demand, as population and economy grows.

  • George Darroch

    I’m not sure that this counts transport, which has a very significant energy demand – most of which will come from grid-linked generation.

    • So, Citi says of EV:
      Our anaysis suggest that, at a market share of 20% of the total car stock in Europe by 2030, EVs could add 4-6% to demand, with an non-material impact to 2025. There is a very long way to come from the current levels of 0.1% of the European fleet, but, as we have seen with other disruptive innovations in the correct environment and once barriers are sufficiently lowered, the pace of take-up can be very rapid.
      in other words, not much impact until after 2025, beyond the time frame of this report.

      • Ian

        Why would Citi be so pessimistic about EV? How quickly can battery factories be set up? If enough players see this as worth while, construction of battery manufacturing capacity could be ramped up very quickly indeed. The technology is not very difficult as Panasonic and Tesla, as a test case, are demonstrating. The uptake of EV is purely a factor of confidence. EV purchasers need a good price and manufactures need good volumes to bring down the price. The Europeans are possibly recognising this dilemma and trying to kickstart the process with subsidies and restrictions on ICE vehicles. Once EV confidence levels increase to a certain tipping point then the production of vehicles will toggle from ICE to EV. The spanner in the works, though, would be confounding factors like vested interests in Oil, backlash from ICE vehicle owners regarding resale values,or lithium supply shortages, these things may flatten the uptake of EV manufacture and sales.

        We know how other technologies have arisen and what the drivers and pitfalls to change have been, why predict the future uptake of EV, why not manage it. Subsidise the battery factory build-out, subsidise the first adopters, penalise the ICE vehicle industry. Do we really need to be like lame ducks waiting for things to happen?

        • Ian

          It has occurred to me that if EV adoption rate is primarily confidence issue, and if that rate can be managed and influenced by governments or other interested parties then some motivational questions need to be asked.

          1. Is conversion of transportation to EV the RIGHT course of action? For every ICE vehicle currently produced should we be substituting an EV? Or should we have some sort of autonomous Über transportation system or massive spending on high speed mass transit systems?

          2. Is substituting EV for ICE, the most desirable course of action? The only places where people can be free and almost truely independent is in public open spaces, like the beach or on the open road in a car. Even city squares,parks and national parks are largely controlled and restricted in their use. We live in suburbs and commute to work because we like the independence and freedom that this brings.

          3. Without redesigning all our cities and built up areas and starting from scratch, can we switch to any other mode of transport other than EV if we want to stop using oil and other fuels for transportation?

          Seriously, what were world leaders doing in Marrakech? Being followers chasing after targets and tallies or leaders thrashing out these fundamental questions.

          • Rod

            I like the Japanese, and some Northern European countries’ model. Combining cycling and public transport. Huge secure bicycle parking stations at transport hubs.
            I recall seeing a map of circles depicting a 10 minute bike ride feeding current Melbourne railway stations. It captured about 90% of the metro area.

            If Musk really does care about the environment and not the dollar, he should consider a plug and play battery/motor replacement for ICE vehicles. ICE out, battery pack in.
            I’ll be hanging on to my current ICE vehicle until I can go down that path.
            And I think Alec Baldwin would make a great President.

  • Brian Tehan

    As Tim Forcey said, the move to all electric everything, including transport and industry will create a new demand.
    In terms of building efficiency in Australia is a long way behind Europe. In fact, in some areas, around where I live energy inefficient houses are being replaced with new houses, supposedly built to 6 star (but not) that are 5 to 7 times the size of the War Service homes they’re replacing. These houses require a lot more energy than the older housing, so no efficiency gain there.

    • Cooma Doug

      The entire transport industry in Australia (the biggest travel per capita nation) would be 40% of the present electricity grid load. Efficiency and innovation will reduce the load by 40% but also reduce infrastructure costs of the major network. Ie…that which remains
      The reality will be that transport will be the poles and wires of the residential world and as each car plugs in, it will be a net energy addition, not a load.

  • jnffarrell1

    The spot market for LNG will not justify large export infrastructure in Saudi Arabia or the USA. Moreover, smart scheduling of hydropower will maximize available power during forecastable peaks in demand. Further, local energy storage in batteries will allow cities to reduce demand by a factor of two during bad weather. Furthermore, battery packs in homes will allow homeowners to reduce their demand on the grid to zero. Hence no need to guarantee long term (highway robbery) prices to ’emergency’ backup suppliers.

    • Rod

      “smart scheduling of hydropower will maximize available power during forecastable peaks in demand.”
      Totally agree. NSW, Victoria and Tasmania have a huge advantage and opportunity to increase their Wind and PV and leave Hydro for when it is needed. Hydro suppliers would be paid well for covering peaks and low RE periods.

  • MaxG

    The more people talk about ‘smart’ the more stupid they actually are. “Australia, the smart country”; yeah right. The buff heads we have in power, and the clowns who vote for them — really smart.
    Thinking for myself, I hope as many as possible dodge the grip of any leeches; what I am seeing here in the country is the multiplication effect; if one has a battery and here the story, the other come around the do the same (slowly, but surely).

  • Geoff

    CRIKEY.
    Another “if my Auntie had balls she would be my Uncle” article from Giles.

    • Rod

      If you mean stating the obvious then yes this is for most regulars here.
      However you would be amazed at how many people (even PV owners) who don’t see the benefit (financial or otherwise) of energy efficiency measures.

      • Brunel

        The media is more interested in what Kim Kardashian is wearing or not wearing than knowing which is a cheaper way to heat a house in MEL.

    • Ian

      Now,now Geoff, don’t get your knickers in a knot. If Europe keeps saving energy , first with lights out in Belgium, then Portugal, which country would be next, France, Germany, Netherlands? No wonder the British Brexit’ed . Europe will be a dark place indeed!

  • Alan S

    Realising the benefits of energy efficiency has been a slow but steady process over 50-odd years.

    When fluoro tubes arrived, a few people realised that with a bit of work you could save half your lighting bill. When compact fluoros with bayonet/screw bases were introduced, a few more realised you could save money with no effort at all. When LEDs dropped in price, many more realised how much energy you could save with superior light quality.

    Now those with PV systems on low FiTs are working out the optimum time to use high consumption appliances. Time interval metering and optional load shedding will result in further savings.

    When fewer are studying physics at school it’s good to see people take an interest in electrical matters and energy conservation – if only because there’s a dollar involved.

    • Brunel

      There is no efficiency rating on ceiling fans in AUS.

      Aluminium or plastic blades would use less electricity than steel blades.

      • Rod

        Good point and they can use a bit of power too. About 100W on high.
        You can buy very efficient fans but they are very expensive.

  • Robin_Harrison

    A growing market in home generation and energy efficient homes and vehicles to people who are, or are about to become, extremely energy use aware.
    It just gets better.

    • Rod

      “who are, or are about to become, extremely energy use aware”
      This is key. The motive (increase export, decrease import) and the means, (monitoring) will encourage many PV owners to double down on efficiency.
      The instant payback may cause a continuous improvement process.

      I like to call it “how low can you go?”. Our household of 3 is down to 4KWh use per day. (exported 16KWh and imported 1.6KWh yesterday, from our 2.6KWp system). Replacing our fridge with a smaller, inverter type might lower that a bit but realistically we are probably as low as we can go.

      • Robin_Harrison

        Well done. You don’t have to go much further in efficiency when you’re running on free. Our system runs a house and 2 cottages (energy efficient, passive solar) on about half the energy of an average suburban house and we’re not remotely short on facilities. However we are above the frostline in the subtropics so it’s not that difficult.

        There is so much waste in conventional systems, Free energy is quite attractive and becoming more affordable at an amazing rate.
        It’s great to see this inevitable transition picking up speed.

  • Brunel

    Where can I recycle my old wires, transformers, landline phones, heaters, computers?

    I called up a place and they want me to pay for the privilege of giving them metal!

  • onesecond

    Good news, but EVs and turning heating to electricity has not been discussed. Those applications will serve as an electricity demand boost.