Saturday, October 28, 2017

base load to base cost - and back again?

This week the government of my province, Ontario, released its latest Long-Term Energy Plan. There's not much in it that I haven't commented on before, rather specifically, so in this post I'll discuss some international energy events of the past month to try and put Ontario's decisions in a broader context - not for the benefit on Ontario, but for the jurisdictions copying mistakes made in the past decade around the world.

The Cost of Energy Review produced by Dieter Helm notes the 2008 CCA "commits the UK to reduce emissions by at least 80% by 2050."
The review will provide recommendations as to how best to minimise the costs of energy consistent with the overarching objectives, taking account of the costs and benefits of the recommendations. It will set out options for developing and enhancing energy policy.
The very meaty meat of the lengthy report's digestible Executive Summary:
The measures necessary to reduce the costs include: the unification of the capacity and FiTs [feed-in tariffs] and CfDs [contract for difference] auctions on the basis of equivalent firm power (EFP); the gradual reforms of the structure of FiTs and CfDs in the transition to their eventual abolition; and further enhancements to competition in the wholesale and balancing markets. There should be significant reforms of the regulation of transmission and distribution focused on the role of system operators at the national and local levels, and the replacement of the specific licences for distribution, supply and decentralised generation with a general licence. A default supply tariff should be required and the margins published. Finally, carbon prices and energy taxes should be harmonised. 
19. This package of measures is a major shift from the original market design and regulation model at privatisation, and moves on from EMR. It would create a simpler, more competitive structure fit for the new purposes. Instead of low-carbon technologies being grafted onto the fossil fuel-based system, the new world is radically different, backed up by new smart technologies, data and smart energy networks and services. A common carbon price would significantly lower the cost of decarbonisation and greatly enhance incentives.
The bombshell there is "equivalent firm power" being valued.

      (ii) The single equivalent firm power capacity auction

114. The second way in which renewables policies lead to higher costs of energy is the different treatment of different technologies and the exemption from the system costs caused by intermittency.

115. The first-best solution to this problem is to integrate the FiTs and low-carbon CfDs into the capacity markets, and make all technologies bid on an EFP basis. This directly confronts those that cause intermittency costs with the costs they cause, just as a carbon price confronts those that emit carbon with the costs they cause.  [page 114]
I interpret as saying technology specific adders (FiTs and CfDs) should be rolled in with the existing capacity market (one Helm feels successful). This is significantly different than the paradigm seeing one price for energy, and another for capacity - and that paradigm does seem designed to subsidize energy with no capacity value.

On October 17th the government of Australia released an electricity platform that I felt was treated rather harshly in most press (particularly by American news organizations) - which its dubbed the National Energy Guarantee:
The Guarantee is made up of two parts that will require energy retailers across the National Electricity Market to deliver reliable and lower emissions generation each year.
  • A reliability guarantee will be set to deliver the right level of dispatchable energy (from ready-to-use sources such as coal, gas, pumped hydro and batteries) needed in each state. It will be set by the Australian Energy Market Commission (AEMC) and Australian Energy Market Operator (AEMO).
  • An emissions guarantee will be set to contribute to Australia’s international commitments. The level of the guarantee will be determined by the Commonwealth and enforced by the Australian Energy Regulator (AER).
...we are not picking winners, we are levelling the playing field. Coal, gas, hydro and biomass will be rewarded for their dispatchability while wind, solar and hydro will be recognised as lower emissions technologies but will no longer be subsidised.
The responses to the policy announcement mostly communicated the biases of the responders. This is somewhat due to a lack of meat on the policy which was only sketched out in a brief letter. It's also due to the political situation in Australia, but I'll not address that here. The impetus for a change in direction is better known: outlined in AEMO’s [Australian Energy Market Operator] recent advice there is an increasing concern that there is currently insufficient incentive to both drive investment in new flexible, dispatchable resources and maintain existing such resources. This will be exacerbated in future years as current dispatchable generation (such as coal and gas) exits the market.
The ESB [Energy Services Board] is proposing the development of an obligation on retailers to meet a percentage of their load requirements with flexible and dispatchable resources, that is, resources that can be scheduled by the market operator depending on the real time operating needs of the system. This would allow both new and existing generation to meet the dispatchability requirement, and provide a greater incentive to maintain existing plant which is necessary for the secure and reliable operation of the power system....
A related policy approach may be occurring in the United States, where the Secretary of Energy has proposed the Federal Energy Regulatory Commissions (FERC) "take swift action to address threats to U.S. electrical grid resiliency."

While most fervent advocates of wind and solar treat policy announcements rolling back, or eliminating, preferential pricing and/or quotas for their favoured sources, the Australian policy sketch, at least, shares some ideas with Michael Liebreich's Six Design Principles for the Power Markets of the Future – A Personal View.
...wind and solar are variable resources. For all that they can produce cheap power on average, they are unable on their own to meet demand when the sun is not shining and the wind is not blowing. Their integration into the power system therefore depends on the presence of other technologies – demand response, power storage, flexible fossil plants or interconnections with neighbouring systems. Someone has to build and run these, and they too must be able to earn their cost of capital.
If it means anything, “base-load” means generating capacity that is rarely if ever switched off, indeed which is expensive or impossible to switch off. When coal and existing nuclear power plants were the cheapest sources of power, and before the risk of climate change was well understood, that might have been acceptable. But now, if consumers are to gain the cost and climate benefits from super-cheap renewable power, what is needed is flexible, dispatchable power by way of complement, not inflexible base-load that crowds it out.

So, if the actual or de facto nationalization of our power system is the wrong answer, and an atavistic yearning for the simplicity of base-load is the wrong answer, what is the right answer?

Truth be told, no one knows...
Market design for the unknown is presented as far more complex than the gaming of most markets that occurs today.

I do want to note some conflicts in these papers/suggestions.

Helm cheers the announced 2025 end of coal-fired generation in the United Kingdom as, "a belated but welcome step to recognise that switching away from coal is the cheapest way to decarbonise." That statement is far too confident - how it's replaced determines the expense. The Australian National Energy Guarantee proposal says nothing about coal - probably as there is an element of the ruling party that is pro-coal: but it certainly does not guarantee coal's future. The U.S. chatter of supporting coal seems more silly than anything at this point - demanding a 90-day on-site inventory at plants that might not actually use that much fuel over many years.

Liebreich's design principles include a note on financing that explains a pricing benefit of quotas: "in order to produce power at these low prices, renewable energy projects need access to cheap debt, and that requires guaranteed income for long periods – 15 years or more." I'll note in order for nuclear or big hydro - baseload - plants to access cheap financing, they need commitments for much longer than that.

I've browsed Ontario's new Long-Term Energy Plan and found little I am motivated to expand on, but I do want to point to previous work I relate to it.  I didn't find any new numbers - most of the planning figures came from the IESO's  (Ontario's system operator) September 2016 Ontario Planning Outlook. Future supply mixes aren't dictated but will be determined by IESO's ability to run market-based technology agnostic procurement. I wrote on the themes last November.

I have some quibbles with political statements in the document, but overall I think Minister Thibeault produced a positively neutral document, for which I am grateful.  I am particularly pleased the "beastly" 10,700 non-hydro renewables target is found nowhere in the document - although a dubious jobs claim of "as many as 10,700" is.

Ontario's plans have included refurbishing 10 more nuclear reactors, at the Darlington and Bruce sites, for some time - but this is the first LTEP that indicates the reminder of Ontario's electricity system may take into account the very large baseload supply component provided by existing nuclear and hydro-electric generators. That low-emissions baseload had Ontario's electricity sector greenhouse gas emissions down 75+% from 1990's level in 2015, and 2017's emissions will likely be half 2015's level.

Maybe baseload is still a thing - in which case rolling FiTs and such into capacity mechanisms into firm capacity mechanisms makes a lot of sense.

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