Network Costs & Renewables: A Euro View

As can be seen, TSO & DNO costs in the UK are much lower than, for example, Germany. A possible reason for this is due to the high levels of RES (30%) in Germany. Another reason could be 900 DNOs in Germany vs 13 in the UK, fragmentation carries a cost. An important point to note with respect to Germany, is that network costs 2007 through to 2013 are relatively unchanging. This point will be revisited later. Turning the data in Table 2 into Euros per month (assume 3.5MWhs/year per household and thus (3500/12) x network costs Euros/kWhr):

Germany = 3500/12 x 0.0623 = 18 euros per month ($20)

UK = 3500/12 x 0.0360 = 10.5Euros per month ($12)

Given the "real" UK figures from Table 1 (Euro5.85 to Euro11) the Eurostat data looks to be in the "ball park". We can then say that network costs in most EU member states are somewhere in the range 10 to 20 Euros per month per household. The consumption figure of 3.5MWhr is realistic for Germany and the UK. It is somewhat lower in Italy (2.5MWhr/year) and somewhat higher in France (electric heating plus growing A/C in the summer).

Exceptional Network Costs

TSO & DNO costs in Spain are "impressive". There are various reasons for this. There is a low level of connectivity between Spain and France, only two double circuit 380kV lines (plus the recently commissioned HVDC link). This means that at times of high RES generation, there is nowhere for the energy to go which in turn means constraint costs, these being "socialised" i.e. placed on everybody's bill. At a recent EU conference in October 2014 it was agreed that this "problem" would be addressed, quickly. The EU has been trying to address this problem for 20 years. Lack of action being mostly due to EdF foot dragging.

In 2014, Denmark hit 40% RES penetration with few problems and no constraint, due to high levels of inter-connection with other countries plus large amounts of switchable load within the country (mostly district heating based on CHP but with back-up electrically heated hot water storage tanks). Network costs in Denmark (7.66eurocents/kWh) are similar to those in Germany (30% RES penetration) and somewhat lower than Belgium, a country with a large number of energy problems (many of their nuclear reactors are off-line due to reactor vessel cracks) and with limited amounts of RES. The Belgians are focused on off-shore wind as a solution to their energy problems and the rise in network costs 2007 to 2013 will be (partly) reflective of this. High network costs may also be a reflection of distribution network activity which is focused on undergrounding large amounts of LV overhead network in suburban areas.

Other EU states with transmission problems due to regional concentrations of RES include the UK and Germany. In the UK, RES problems resolve into moving Scottish wind down South. Scotland is connected to England via two double circuit 400kV lines which have an inadequate capacity given the increase in the Scottish wind parc. This is being addressed through the construction of a west coast HVDC link (to be followed by an east cost HVDC link). Costs will be socialised, i.e. all consumers of electricity will pay for this out of their bills. In Germany, the "problem" is also North South (Wind up north) and will be resolved through overhead HVDC lines and again costs will be socialised. So far, there is little indication (based on changes over time) that these costs have worked their way onto UK bills. The Germans are still locked in planning disputes with respect to their north - south HVDC interconnectors and it will be some years before project costs impact on household bills. Note that all off-shore transmission costs covering the German off-shore wind build out have been socialised but do not yet appear to be impacting on end user charges.

Impact of RES on Network Costs

A reasonable assumption is that as RES grows there will be a need to reinforce both transmission and distribution networks. Examples of transmission related activity in response to RES growth have been outlined in the previous section. Given that Europeans tend to socialise network costs one would thus expect to see in the period 2007 to 2013 some increase in network costs, given generalised growth in RES.

Table 3 below takes as base year 2007 and looks at how network costs have changed per year as a percentage of that base year. Data for the UK and France is missing due to a lack of points (see Table 2). In the case of the UK, it is clear even with the data points available that network charges declined in absolute terms as RES grew.

Table 3

It is clear that costs in Spain have risen. These correspond to rising RES (mostly wind and PV) and increasing constraints. Thus the rise in network costs could be attributed to a rise in constraint costs.

By contrast, German network costs show little change (2013 a 1% increase compared to 2007). However, in the period 2007 to 2013 the Germans installed roughly 25GW of PV, mostly connected to the distribution network. This raises the question, given the large amount of PV being installed, why did German network costs not rise? One answer might be: if a network is robust to start with, the network impact (and hence costs) of RES are small. Italy in that period has declining network costs - but also saw a massive rise in renewables, not least PV. Did RES in Italy thus make it cheaper to operate the Italian network? Avoided reinforcement costs? One thing is for sure, the rise of RES in Italy had not impact on costs.

Denmark by 2013 was well on the way towards the 40% RES penetration of electrical power generation which it achieved  by end-2014. A 24% rise in network costs (2007 - 2013) corresponds to the installation in the same period of an additional 700MW of off-shore wind (roughly 20% of the wind installed base). The section titled "RES & Standby Power" profiles the actions the Danes have taken (and continue to take) to integrate more RES into their network. There is little PV in Denmark and it can be assumed that the rise in network costs is mostly associated with integration efforts covering on and off-shore wind farms and CHP systems.

DNO connected RES has macro effects. These  are most clearly seen in Germany. Pre-2010 CCGTs were profitable due to the lunch-time peak. This no longer exists (most of the time) having been replaced by PV. Cost to the DNO, minimal. Cost to the TSO, minimal. Losers: companies with CCGTs (EON, RWE etc). This raises the question:" should EU governments compensate private companies that made an investment decision (CCGTs) knowing that government policy was to support RES and that RES was growing?" There was nothing preventing large German utilities investing in RES. But they did not (and collectively account for less than 5% of RES investment in Germany). In common with utilities globally, German ones want to be treated as a "special case" and there is much talk of "welfare queen" style programmes such as capacity markets.

An IEA View of RES Costs

The IEA produced a report in 2014 called: "The Power of Transformation - Wind, Sun and the Economics of Flexible Power System". Page 14 of the executive summary describes a simulation of what happens when 45% RES (they called it VRE) is added to a system quickly. Extract:

A share of 45% VRE in annual generation was added to the system overnight and only the operation of the remaining system was allowed to change (Legacy case, see Box ES.1). In this case, total system costs increase by as much as $33/MWh or about 40% (rising from $86/MWh to $119/MWh,.

Re-expressing the above into Euros/Eurocents this suggests network costs of 7.8eurocents/kWh (similar to the 6.23eurcoents of Germany's now with 25% RES penetration) rising by 3eurocents to roughly 10.8eurocents to get to 45% RES/VRE penetration. Given Germany is at 25% RES (i.e. 55% of the way to 45% RES penetration) then additional network costs for the German households based on the IEA simulation will be 1.35eurocents/kWhr (6.23+1.35 = 7.58eurocents/kWh). Restating this based on 3.5MWh/year consumption gives Euro22/household/month. Denmark has reached 40% RES penetration with network costs per household per month of Euro22 which suggests that these figures are "within the ballpark".

Italy & PV

Italy as of 2012 had 18GW of PV. Shown below is a chart showing how the generation /load profile would look if PV was doubled. How to handle this load variation? Italy has plenty of hydro and imports in the range 15 to 25% of its electrical power needs from countries to its north. The mid afternoon to late afternoon ramp looks very much like the  standard "evening peak" which all EU TSO have to handle on a daily basis.

Source IEA.

RES & 'Standby Power'

European DNOs do not and never have provided "standby power" with respect to RES. The question needs to be restated and has two parts:

1. How is the variability of renewables in Europe addressed.

2. What costs are incurred in addressing this variability.

The answer to Question 1 has 4 parts.

Part 1: The European transmission network, with some exceptions, is quite well interconnected and excess power (due to RES) in one member state can be exported to another (exceptions - Iberian peninsular - France). For example, between Denmark and the countries that interconnect with it (Norway, Sweden, Germany and soon the Netherlands). Across the EU more interconnectors are being built. For example, Belgium - Germany although sharing a common border have no 380kV lines despite the fact that just across that border from Belgium is one of the largest concentrations of power stations in Europe. Given the on-going Belgian power problems one supposes that this work will be accelerated. Note: Germany is a net exporter of power circa 33TWh/year.

Part 2: The Danes have invested substantially in energy "sinks" such as district heating hot water tanks. Overall there are 6000+ district heating systems and the hot water tanks at many installations have 10MW heater elements. Other EU member states have yet to follow this lead. However, German municipalities with CHP/district heat networks and ambitions for energy independence (e.g. Munich, Frankfurt, Hamburg etc) are likely to follow Denmark's lead.

Part 3: Both Germany and Denmark now have very fast ramping fossil stations (that also have performances of up to 46% efficiency). In the case of Denmark modifications to existing coal stations have led to ramp rates of up to 3-4% of rated output per minute and can cycle down to 10-20% of rated output. Recently commissioned CCGTs in Denmark have similar ramp rates. Recently commissioned German coal/lignite stations have ramp rates similar to those in Denmark. As a PS: it would be a mistake to think there is any kind of "fossil renaissance" in west Europe - there is not. The current coal stations being built (mostly in Germany and the Netherlands) are likely to be the last and will be used to support RES. The one completed at Moorburg (owner Vattenfall) is one such example and Vattenfall has talked about the fast ramp being used to match changes in RES output.

Part 4: The incorporation by most Euro TSOs of advanced day-ahead weather forecasting into the operation of power system control and dispatch. National Grid in the UK at the end of 2013 stated that it had no control problems with the existing RES installations. In February 2015 Elia/50Hz noted that it had radically changed its view of how much RES its network could handle (in the 2000s - 4% - now they regularly handle 30 to 40%) given developments in forecast software. In real time, the Danish power system control centre compares the actual output of RES against the prediction made the day before. The error of actual vs. predicted is then used to forecast the output of RES some hours ahead. It is claimed that this approach almost eliminates errors in system operation. The box below gives a National Grid view (UK) as of end-2013.

In summary, TSOs use a toolkit to address RES variability. There seems to be some agreement that an upper limit to RES penetration has yet to be reached, even in places such as Denmark. Costs due to RES have been socialised. If there is a pattern it is that RES attached to distribution networks seems to have little impact on costs, e.g. Germany - more or less static, Italy falling network costs. In the case of transmission-attached RES, the cost impact (e.g. Denmark) is passed through.

Addressing Question 2: What costs are incurred in addressing RES variability. Costs cover a number of areas. This means that the question needs to be split into a number of segments.

Cost 1: Including fast ramping either into existing stations or as a feature of new stations is an additional cost (to the company that owns the station). Same comment for systems to allow low running rates.

Response: the new fossil stations built in Germany were designed in the mid-2000s(when RES penetration was low and RES not seen as a "problem") flexibility was an inherent part of the design. Thus the fast-ramp & low run rates were seen by the power company as attractive features (rather than a cost). The modified stations in Denmark are owned by Dong (state owned) - & thus the decision to modify was made on the basis of a societal good & probably on the basis that one of the main suppliers of wind turbines in Denmark is Vestas which is a...... Danish company.

Cost 2: Companies with fossil stations that run at low running rates do not make so much money.

Response: that would be a cost to the company then? - does society need to ensure that companies make a living? If that is the case, then PWR would be glad to get directions to the nearest government that will give it guaranteed money.

Cost 3: System balancing costs & Constraint Costs

Response: TSOs in the EU place tenders (in the case of National Grid - monthly) for system balancing services. This market is "lively" and a wide and growing range of companies (traditional generators through to DR providers) submit offers. If there was zero RES on the system, TSOs would still need to tender for system services. In terms of constraint costs the answer is again provided by the National Grid's Nigel Williams:

"98% of payments to companies to stop generating when the grid is getting overloaded go to coal and gas, not wind".

National Grid also has a response to the issue of "standby power" for large systems i.e what happens if a 600MW nuclear generating unit fails.

"the much larger size of the new reactors incurred more costs to the grid, as we have to increase the capacity to hand to ensure the network would cope if the reactors tripped offline"

Most RES is embedded and of a relatively small size (compared to a 600MW unit). This means that the kind of "standby power" one needs for large stations is not required in the case of a failure of a given RES unit. Balancing costs happen mainly due to changes in load - which is part and parcel of existing network costs.

Cost 4: Market Balancing & Imbalance Costs

The UK and Germany offer interesting and contrasting approaches to the "how to get balance on day-ahead/intra-day markets" i.e. markets where energy is bought and sold in-advance. In the UK all RES above a certain size (typicall those that "enjoy" Renewables Obligation Certificates - ROCs) sell their energy through a PPA to one of the large generators. The RES is rolled into the large generator's portfolio and market imbalance actions occur as part of normal company activity. PPAs are starting to emerge in Germany but remain rare and RES makes up less than 5% of the installed base for large generators. Does that mean that in Germany RES gets a "free ride?" No more so than in the UK where any "imbalance costs" are absorbed  by the large generators - but is this a "cost?" if you roll back on fossil generation (less spend on fuel) due to a rise in RES output in your portfolio?

Network Reliability

It is often claimed that more RES makes networks less reliable. That being the case one would expect that Euro' networks as RES grows would become less reliable. The chart below speaks for itself. Note that the leaders in terms of RES (Germany 30% and Denmark 40%) both have the most reliable networks. In fairness, the networks are NOT reliable because of high levels of RES - they are reliable because that is the way they have been engineered. Nevertheless, high penetration of RES does not make these networks less reliable.

Conclusions

Network costs in Europe vary considerably between different MS. There is no clear rationale with respect to these differences. Changes in network charges over time cannot be attributed only to RES. The country with a high penetration of RES, Germany, has seen little change to network charges during a time frame when around 42GW of RES was installed - much of it on the distribution network. Network costs fell in Italy in the same period when proportionately similar amounts of RES were connected. Costs also fell in the UK - probably due to the regulator getting tough with the network operators and the fact that most RES connected to MV/HV/Transmission networks had to cover 100% of connection costs.

At a TSO level, the impact of RES on operations has been minimal. According to the TSOs they have few problems incorporating RES into their systems. RES and network services are likewise not seen as a problem given competitive markets for offering ancillary services.

This leaves the day-ahead and intra-day "balancing" markets where the RES "non-problem" resolves itself into a portfolio problem rather than a fundamental problem.

In terms of "what does it cost" a Danish household is paying around Euro22/month in network charges for a RES penetration of 40%, Germany with 25% pays Euro18 and if the IEA is right, this will rise to Euro22/month for a penetration of 45%. It has been asserted that adapting power networks for high levels of RES has correspondingly high costs. The European experience does not bear this out.