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Taking the Carbon Out of Power Markets — Q&A with Manuel Baritaud

As countries around the world seek to address climate change, one obvious place to focus is power production.

 

Not only does electricity generation account for about 40 percent of energy-related CO2 emissions, but the power sector is also expected to play more of a role in reducing the share of fossil fuels in the global energy mix than any other, the International Energy Agency (IEA) explains in its latest World Energy Outlook.

Paris-based IEA, an autonomous agency whose dual mandate is to promote energy security and promote sustainable energy policies, predicts that renewables will account for about a third of global power generation by 2040.

Yet incorporating the volatile mix of wind, solar, hydro and other renewable power into electricity markets is no small task — creating challenges in maintaining secure and reliable power supplies. Part of the answer lies in market integration, says Manuel Baritaud, senior energy analyst in the Gas Coal and Power Markets Division at the IEA.

This is key for accommodating the lack of predictability of renewable energy sources, while also reducing the overall cost of renewable integration,” says Baritaud, who co-authored a recent report, Seamless Power Markets, that explores the challenges governments face in consolidating or coordinating power markets.

Ideas Lab spoke to Baritaud about the growing importance of renewables in the power sector and the role of governments and regulators in ensuring the transition toward so-called “decarbonized” electricity market doesn’t sacrifice energy security:

 

Given that 40 percent of energy-related CO2 emissions come from power generation, how important is it to develop renewable energy sources?

The transition to a low carbon economy will require all kinds of energy sources, including renewables as well as also nuclear and fossil fuels, combined with advanced technologies like carbon capture and storage (CCS). In order to be on a track for a 2°C Scenario — an emissions trajectory that recent climate science research indicates would give an 80 percent chance of limiting average global temperature increase to 2°C — the IEA recognizes that renewable energy sources alone will not suffice. The energy mix needs to be balanced. That being said, it is important to recognize that in all IEA scenarios, the share of renewable energy sources increases, from 2 percent to 30 percent in OECD countries. This is significant for reducing CO2 emissions.

The challenge lies in the timeframe for these technologies to become commercially available. Over recent years, we have seen that some renewable technologies have proven to be mature, while CCS is still lagging behind. Renewable technologies also have the advantage of being deployed quite rapidly, while nuclear needs more time from conception to full plant operation. Finally, renewable technologies can also help to displace existing polluting technologies and reduce COemissions more rapidly.

Considering the rapid deployment of renewable sources, it is key to analyze in detail the impact of these variable sources of energy on the power system and the markets.

 

Do the renewable technologies exist to bring about a rapid decarbonization of power systems, so that it’s more a matter of summoning the political will to integrate regional markets?

The integration of electricity markets has been a historical trend in the industry in Europe, as well as in parts of North America and Australia. A larger share of renewables actually increases the benefits of the regional integration of the electricity markets. This integration should reflect the need to have more dynamic and flexible power flows over larger geographic areas. This is key for accommodating the variability and the lack of predictability of renewable energy sources, while also reducing the overall cost of renewable integration — including backup generation costs.

Since some renewable technologies are quite mature (such as wind and solar PV), the regional integration of power markets can actually help to lower the overall cost of renewable deployment, making it more affordable.

Considering that the Transmission System Operators are regulated entities, markets will not spontaneously merge to capture the benefits of integration,  as would be the case in other competitive sectors. It took decades to develop a regulated framework for the electricity industry. So the role of government is key.

 

What is your assessment of progress in bringing renewables online, and how much of an obstacle do energy security concerns present for the decarbonization process?

The IEA report, Tracking the Clean Energy Progress, shows that renewable sources are the only technology on track for achieving decarbonization.

To be successful, decarbonization needs to fulfill a threefold objective: security of supply, sustainability and affordability of electricity. Energy security remains the first priority. Electricity is essential for our modern societies and reducing reliability is not an option.

The deployment and penetration of wind and solar resources are posing new challenges to the security and reliability of power supply. Their variability and lack of predictability leads to loop flows across borders and volatile power flows that can be perceived as a threat to the security of supply by some system operators. This is causing many issues in Europe, including at the border Germany shares with its neighbors. This is precisely why there is a need to better coordinate — or even merge — balancing areas.

 

Your report highlights the need for market consolidation and regulatory cooperation to create the type of expansive electricity markets necessary. What are the main challenges for market integration?

The most important challenge with large and integrated power markets is not technological. The solutions already exist — IT systems are available to ensure operations at large-scale energy system, such as GE Energy Management. The main barrier at this stage is institutional. The integration of balancing areas requires an alignment of the different regulatory frameworks involved. Some governments tend to prefer having steel on the ground in their jurisdiction, rather than relying on imports from neighbors, in case of system stress — even while they have already committed to share the same currency or have agreed to joint military forces.

Under what circumstances will cooperation, rather than consolidation, become the more practical solution?

When institutional barriers hamper consolidation, cooperation can be the solution. Consolidating system operators and markets is the most straightforward approach to ensure efficient real-time market integration in highly meshed networks. While this is technically feasible, institutional constraints in a number of areas will be difficult to overcome in the foreseeable future. Where consolidation remains blocked, accurately coordinating the various services provided across borders becomes inevitable.

A key finding of our report is that strong coordination of electricity security regulatory frameworks is required to achieve this. Electricity security lags market integration, and the lack of coordination of reliability standards is limiting further progress. Without a clear, common and sound regulatory framework on electricity security, markets cannot deliver the right price signals during scarcity conditions or provision flexible resources to complement variable renewable sources.

What is the main message that national governments should take away from this report?

The security of power supply is not about having steel on the ground in your own jurisdiction. Work with your neighbors. Create a strong regional regulatory framework for electricity security that enables the secure integration of real-time operations. This is true for Europe, but also for many parts of North America and other countries.

Manuel Baritaud is Senior Energy Analyst in the Gas Coal and Power Markets Division at the International Energy Agency (IEA), where he leads the Agency’s work on electricity markets and policy developments, with a special focus on market design, supply security issues, as well as the implications of climate policy for electricity systems.

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