CERA WEEK 2016

Houston – February 25, 2016

“How Europe is Managing its Energy Transition: Lessons Learned”

Rethinking the fundamental role of energy networks,
A priority following on from COP 21

Michel Derdevet

Secretary General, Member of the Executive Board of ERDF, University Lecturer at the Institute of Political Studies of Paris, Professor at the College of Europe of Bruges

With the energy transition under way, the networks are seeing their role taking on increasing importance in Europe. As well as having to deal with new generation methods and new uses – such as electric vehicles, these networks have a central place in tomorrow’s technological innovations. Smart grids will be essential for the success of the Union of energy and for transforming it into a real European industrial project.

In the wake of the success of the 21st Conference of the Parties to the United Nations Framework Convention on Climate Change (COP 21), the words must now be converted into actions! To do so, we must initiate, without delay, a Copernican revolution of the world’s energy models and a total overhaul of the generation and consumption methods, called for by a growing number of citizens around the world.

These involve wide-ranging technological, societal and economic challenges which will shape its success, and which will require three main elements: the development of renewable energies, an increased emphasis on energy efficiency and a revised role for the networks.

In this process, Europe has played a leading role, being the first continent, in 2001, to lay down renewable energy targets. And the Europeans have extended this commitment, by laying down targets by 2030 of a reduction of 40% of emissions of greenhouse gases and a share of at least 27% of renewables in the European energy mix. In fifteen years’ time, renewables should thus make up half of Europe’s electricity production.

Supported by a strong political ambition, the European climate-energy framework for 2020 was the primary vehicle of this policy as regards renewable energies. The Renewable Energy Directive of 2009, introducing specific and binding targets for each Member State, has been – and still is – the main lever that has allowed us to develop renewable resources and to encourage their integration. These ambitions in terms of deployment have also been supported by a policy focused on research and innovation – with, in particular, the Horizon 2020 programme – which have allowed and continue to allow the emergence of European excellence in developing and marketing new technologies.

The success of this policy is clear to see: the European Union is on track to achieve its 2020 targets and already, in 2015, achieved 16% renewable energy and 27.5% renewable electricity, four times more than ten years ago. In my country alone, in 2015, renewable generation of solar origin jumped by 25%, and wind power generation by 23.3%; together with hydraulic, renewable energies now account for 18.7% of French consumption (43,600 MW installed). This growth is not isolated: in Europe, wind represented 44.2% of new installed electricity generation capacity in 2015, for a volume of investment of around EUR 26.4 billion. According to the latest report published by the European Commission, 19 Member States (including Austria, Estonia, Sweden, Lithuania and Romania) could therefore exceed, for some substantially, their national 2020 target.

This commitment has helped build a strong European industry which has been gradually able to open up to a global market. If currently the two world leading wind power manufacturers are European, it is no coincidence, but the result of a visionary European policy and a well-adapted regulatory framework implemented in this field. It is a fact, and I am pleased to be able to say it here in Houston that the European Union now has 3 times more renewable electricity capacity per capita than the rest of the world. This winning bet that Europe made with regard to renewable energies has paid off well beyond our borders, and has confirmed the European Union’s role as a pioneer and leader in this field.

In line with this example, worldwide investment in renewable energy is ever-growing, with an increase of 17% in 2014.

Driven by a dynamic European market and rising global demand, the costs of renewable energy are falling all the time: Since 2008, the price of solar panels has fallen by 80%, while that of wind turbines has decreased by a third.

Finally, renewables create employment in our countries: in Europe, over a million people are employed directly or indirectly in the sector: per capita, this is twice as many as the world average. It is also important to note that renewables in general create more jobs than their fossil fuel competitors: thus, solar creates twice as many jobs as coal and gas for the same quantity of electricity generated.

Of course, Europe is not alone in the international market. The United States, South America, Asia: everywhere there is a strong and encouraging momentum towards the development of renewable energies. The countries of the Gulf and the Maghreb, with significant solar and wind resources, are successfully following suit.

Challenges to Overcome

  1. The Need for Economic Coordination

The massive development of renewable energies, however, throws down several challenges. Firstly, integration in the markets which must allow for a fair price for electricity production. The current overcapacity in the European electricity market, and the gap between the market price (currently around €28 per MW) and the feed-in tariffs for renewable energies (€60 to €70 in Germany) are neither satisfactory, nor sustainable inputs; because the major European power companies have been weakened, especially in those countries that continue to allow the governments to set and cap prices!

But, obviously, the markets need to adapt to renewables and not the reverse. We must therefore invent electrical systems that are sufficiently flexible and new, more liquid, markets in the short term which will give a favourable signal for investment in renewable energies.

The formation of a close to real time price signal must also allow other means of flexibility to be deployed, such as the adjustment of demand and the fair remuneration of production capacity available in peak periods; or storage, including via electric vehicles. The participation of consumers (and grouping of them through aggregators) is in any event an absolute prerequisite for developing these solutions.

Of course, all these initiatives will bear fruit only if renewable energies are on an equal footing with other sources, in particular fossil fuels.

That is why the establishment of a reformed carbon market, with a necessary world price of CO2, is an absolute prerequisite for the development of a price signal for investment in renewable energies. The establishment of a trans-Atlantic carbon price could be a first step in this direction…

Citizens also need to play a greater part in renewables and consumers need to be empowered. The era of the passive energy consumer is over. We must gradually move towards an energy system in which the consumer is an active player in the energy transition and benefits from market signals. We must also encourage participation from citizens through self-generation, but also cities and energy co-operatives.

We must also think about and integrate renewables at a European level. To minimise costs and increase our energy independence, we must no longer think of the Union of Energy as simply the sum of the Member States. European integration in particular involves greater interconnections -10% in 2020 and 15% in 2030- and more interregional cooperation. Here again, the European Union has made considerable investments to improve the interconnections between France and Spain in particular (through the Connecting Europe Facility programme and the Trans-European Networks for Energy) for a cost of EUR 225 million.

  1. The Second Challenge of the Technology and Innovation Challenge

In the future, we will need to further integrate renewables in the innovation and new technologies world. Europe must use its competitive advantages and move towards innovative technological and energy solutions. We all now have smart phones. Tomorrow we will also need smart power grids and smart homes, to ensure the transition to a “2.0” energy system.

Because, whatever solutions are found, what they will have in common is to have to fit into energy systems whose architecture is provided by networks stretching over millions of kilometres. Europe is very lucky to have built in the past century a truly interconnected system, both for gas and electricity, which “forms a system” and delivers energy under the best efficiency and cost conditions; in my opinion this is an advantage and an absolute imperative for the security of Europeans, their convenience and the competitiveness of our businesses – and, therefore, our jobs.

But the energy networks in Europe are subject to specifications that have been radically changed. In 2016, we are a long way from the Homeric battle which took place here in the United States, at the end of the 19th century between Thomas Edison, a supporter of direct current (DC), and George Westinghouse and Nikola Tesla, advocates of alternating current (AC) The networks must accompany decentralisation of the means of production to hundreds of thousands of sites scattered over the entire territory. In France alone, nearly 400,000 renewable producers are now connected to the ERDF distribution network; there were just a few dozen of them ten years ago. Since this period, the amount of power connected directly to the ERDF network (19,343 MW today) has jumped by 80%, mainly because of massive development of wind turbine and photo-voltaic capacity; and the French “distribution network” therefore has become a fantastic “collection network”, with backflow into the transmission network (RTE) increasing by 29% in 2015. The low-medium voltage networks are no longer therefore at the end of the line; they have become real “systems managers” having to manage complexity of a new kind because of the intermittent nature of renewable energy sources and the integration of new uses such as electric vehicles (1). And tomorrow they will have to continue to ensure solidarity between the Member States and the regions, and between the urban and rural areas. Finally, they will need to conserve equal access to energy services to protect the most economically weak citizens (2). One sees here the renewed interest in thinking about networks as permanent and relevant elements of solidarity between States, in Europe but also here in the United States; the intermittent nature of renewable energies can only be an encouragement to share them and overcome barriers, be they physical (the Rocky Mountains) or political. Because this is simultaneously a factor for economies of scale, solidarity and strengthened security between different areas.

From this point of view, a desire is sometimes expressed in Europe to develop micro-grids or private networks as is already the case in the United States. Seen as modern and local (“Small and Smart is beautiful »), their drawbacks should be pointed out given the economies of scale that the networks provide for managing the system and that of solidarity between territories and security of supply. At the present time, micro-grids are only really feasible through the use of tariff niches leading to implicit subsidies by other users of the network.

But, especially, for several reasons the networks provide an excellent field for the development of a European industrial policy with regard to energy. It should be noted that, given the heated debates that may exist around the energy mix (3), the networks are a consensual subject whose essential role is being increasingly recognised in ensuring the success of the energy transition. At the same time, they represent colossal amounts of investment, greater, according to the European Commission, than those required for generation. They therefore appear to be a fantastic lever for boosting sustainable economic growth. Finally, the networks are linked closely to major technological innovations, such as smart grids or storage.

For Europeans, the issue is therefore to build on the strengths of their internationally-recognised network industries. Simultaneously these models need to be strengthened, the regulations need to be adapted to the new situation and the necessary funding needs to be released. It is on this basis that smart grids, which will be a crucial component of Europe’s industry of tomorrow, can be deployed, serving individuals, communities and businesses.

  1. The Basics of the European Networks

Let us first recall a few basic facts that explain the critical role of networks in the energy transition that is under way. Since electricity cannot be stored, the network operators must ensure a balance between supply and demand in real time. If this balance is not respected, there is a risk of a variation in frequency occurring and therefore damage to the electricity facilities. Which may require carrying out localised load shedding (temporary electricity cuts) to avoid a widespread outage from occurring. To maintain this balance, the network operators coordinate the electricity generation resources of the generating companies. They must also take into account possible bottlenecks in regional transmission capacity (for example at the level of the Iberian Peninsula). The connections between the different national networks, called interconnections, therefore play an essential role in the security of supply and the security of the system, by constituting a mutual insurance against unforeseen hazards and forecasting errors. At the same time, the networks contribute to reducing generating costs by allowing the use of cheaper generating capacity.

However, in the past few years, fears about European energy supply have returned to centre stage. They concern natural gas because of the tensions with Russia, but also, a new phenomenon, electricity. Indeed, the development of renewable energy and the closure of conventional thermal power plants redraw the map of European generation capacity and the networks which are linked to it, while at the same time requiring that the intermittent nature of certain energy sources is taken into account.

To tackle this problem, maximum use must be made of the contribution of the networks with respect to the security of supply and pooling.

  1. Strengthening and Adapting the Networks

Firstly, adjustments to the regulatory framework are needed to encourage greater cooperation between the transmission system operators on pragmatic and regional bases. This especially involves improving the planning and deployment of interconnections and contributing to the compatibility of instruments dedicated to security of supply, such as capacity mechanisms (4).

This strengthening of cooperation between network operators should be accompanied by changes to the regulations: it would involve for example promoting greater cooperation between national regulators, encouraging good siting of power generation on the network to limit the needs for strengthening it, increasing the proportion of the part of subscribed power in the pricing or taking into account in the prices, R&D investment in the charges of network operators.

Redesigning the regulatory and pricing frameworks of the networks is very important, but not as simple as it might seem. Let us take the example of the initiatives of TESLA in storing electricity. The powerwall priced at $3,000 or $3,500 is a technological leap as regards value for money. And it can be cost-effective for purchasers, in a self-generation logic, by allowing them to save, among other things, the variable part of the network tariff. However, for the network operator, the costs of this self-generator are the same, because the costs of the network are largely fixed. And remember that the self-generator, even with a storage device, will continue to use the network as a backup and for an adjustment function. Accordingly, either the installation of storage (and more widely self- generation) will lead to losses for the network operator, or the storage facility will be funded indirectly by other consumers who will see their bills increase, or the fixed part of the tariff will increase to cover costs and avoid these cross-subsidies between users, but to the detriment of the current storage business model and self-generation.

However, other remuneration prospects for electricity storage exist by adapting the regulations and allowing these facilities to participate in the system services, to the equilibrium of the markets and the network, while conserving fair and equitable funding for the network. But this implies adapting quickly and radically our regulatory and tariff frameworks and TESLA’s innovations push us into speeding up moves in this direction. Regional situations will be decisive in the regulatory choices that will be made with respect to this issue. Storage will not have the same function in the United States, where the outage time is 240 minutes on average and in France where it is 60 minutes.

Although the improvement of the regulatory framework can contribute to facilitating investments in the networks and limiting costs, additional levers are indispensable, given the size of the amounts in question, quantified at 600 billion euros between 2010 and 2020 by the European Commission, of which 400 for the distribution networks alone. Possible measures could be to include public deficits in the calculation, the amortisation of investments in energy infrastructure or changes to the content of Solvency II (5) to no longer assign the same capital charges to infrastructure, to private equity and to hedge funds.

At the same time, it is also necessary to encourage cross-border cooperation between distribution system operators. The importance of these networks is actually still under-estimated at the European level although it is within their scope that tomorrow’s challenges will come about: 95% of renewable energy generation is already connected to them. They will therefore be in the front line for integrating the new modes of generation and consumption, such as electric vehicles or self- generation. They are responsible for collecting and supplying data that go hand in hand with the digital revolution. They guarantee coordination with the market players whose activities have an impact on the networks, such as aggregators, themselves given responsibility for being the interface between users, markets, producers and network operators in particular.

Finally, the actors of the territories have a major role to play in the energy transition under way in Europe. The European and national strategies for change will lead to a broadening of their fields of intervention, in the context of the deployment of renewable energies, the improvement of energy efficiency and the promotion of low-carbon transportation. To get the most out of the profusion of initiatives which have been launched all over Europe, but also to make known and put the results obtained in perspective, in the report that I submitted to the President François Holland of the 23 February 2015, I proposed a European forum of territories should be created, a permanent structure for exchanges at the European level which would systematise lessons learned and the emergence of good practices initiated locally. A forum of this kind would facilitate thinking about the local regulations and how they fit in with the best national and European regulations.

Another proposal in my report to the President of the Republic was the establishment of European innovative mobility corridors, designed to guarantee to users the existence of interoperable electricity, natural gas and hydrogen charging stations. A form of this proposal has recently been supported, since Portugal, Spain, France and the Benelux countries have already signed agreements for the establishment of these green motorways. TESLA is participating in this movement with the deployment of its network of Superchargers in the United States and in Europe. And it is imperative to have a concerted, planned approach, to ensure common interoperable standards, but also to be able to plan and organise the significant investments needed for the network that these quick-charge stations imply.

All of these developments and regulatory organisational and economic cooperation will then pave the way for a truly large-scale European project for smart grids.

  1. Smart grids as a European Industrial Project

The networks are on the eve of a major revolution with the deployment of communicating meters, connected objects and a multiplication of tools for managing demand. This meeting of the digital, telecommunications and energy industries is still new, but it already opens up huge prospects.

This will actually mean breaking out of the paradigm according to which the balance needed at any time between generation and consumption must be assured by generation. Henceforth, adjustment through consumption can become a reality, more than just for hot water tanks, by shifting the times for operating a host of electrical equipment (heating, electric vehicle charging, etc.). This management of demand appears all the more crucial since renewable energy is generally intermittent and does not contribute to the balance between supply and demand. There is thus a rapid increase in the volumes traded in the intraday markets, revealing the growing needs for flexibility.

On the European continent, more optimal management of demand could save 60 to 100 billion euros per year by 2030, enabling investment in production capacity, transmission and distribution infrastructure to be limited, and reducing operating costs.

However, the forms of action are varied, the business models still uncertain and the demonstrators in Europe both numerous and disparate. Be that as it may, smart grids are in fact a reality in many distribution facilities. Since 2002, nearly 459 projects have involved hundreds of European actors in 47 countries for a total investment of 3.15 billion euros. Among the 578 different sites concerned, 532 are located within the European Union. Half of the projects are still in progress for a total budget of more than 2 billion euros. An increase in the size of projects over time can also be seen.

Establishing smart grids will accelerate with the deployment of smart meters, of which almost 72 % of European consumers should be equipped by 2020. They will lead to a 10,000-fold increase in the volume of meter data in the residential market, to which must be added the development of communicating objects. The modification of the energy value chain generated by this inrush of Big Data will be a turning point for all the European energy industries, and for the 500 million European consumers and citizens!

The Emergence of a Big Data Logic
Annual production of electricity meter data
[giga-bytes/year – rounded data]

Michel Derdevet Houston 2016

The establishment of an ecosystem able to give value to these data and promote the emergence of « active consumers » taking ownership of their energy consumption and participating at the same time to the smooth functioning of the energy system is an important issue for Europe. To do so, it requires simultaneously guaranteeing the security of the data, contributing to the emergence of future business models for managing demand, implementing regulations that encourage these movements and ensuring the development of competitive European industrial sectors at the international level.

The global market for smart grids should double by 2020 reaching 55.8 billion euros annually. In this context, the European effort on the networks should be strengthened in two main areas:

1/ There is firstly a need to reorganise in a practical and regional way cooperation in the areas of regulations, funding and projects to contribute to the emergence of a favourable ecosystem.

2/ This is a necessary prerequisite to greater efforts in R&D and digitalisation, with the establishment of demonstrators on a much larger scale than today, or the establishment of energy data platforms by the operators of the distribution networks.

In this way, the networks could contribute fully to guaranteeing the security of supply, to implementing the energy transition and to maintaining energy at a competitive price for households and businesses.

Finally and most importantly, smart grids would then be part of a major industrial policy, generating growth and sustainable jobs (6).

(1) On the changes in use in the automotive field, see in particular Marc Prieto, “Europe de l’automobile : à l’aube d’un renouveau ?” (Europe of the automobile: At the dawn of a renewal?), Questions internationales, No. 72, March-April 2015, pp. 93-98. http://www.ladocumentationfrancaise.fr/ouvrages/3303331600725-la-mer-noire-espace-strategique

(2) See Rachel Guyet, “La précarité énergétique en Europe : approche comparative” (Energy poverty in Europe: comparative approach), P@ges Europe, 2 July 2014. http://www.ladocumentationfrancaise.fr/pages-europe/d000733-la-precarite-energetique-en-europe- approche-comparative-par-rachel-guyet

(3) See in particular the “Energy: the new frontiers” feature, Questions internationales, No. 65, January-February 2014. http://www.ladocumentationfrancaise.fr/ouvrages/3303331600657-energie- les-nouvelles-frontieres

(4) To compensate for the problems related to the choice of different systems by the countries of the zone, the capacity mechanisms are designed to ensure that generation capacity remains available in sufficient quantity to meet demand.

(5) Adopted in 2009, the goal of the Solvency II reform is to adapt the level of the equity of the insurers to the risks of all kinds to which they are exposed.

(6) For details of all these projects, see Michel Derdevet, Energy, a Networked Europe – Twelve proposals for a common energy infrastructure policy, Report to François Hollande, President of the French Republic, La Documentation Française, Paris, 2015, 133 p. http://www.ladocumentationfrancaise.fr/ouvrages/9782110099822-energie-l-europe-en-reseaux

Image d’entête : IHS

Publié par Michel Derdevet

Membre du Directoire d’Enedis, dont il est le Secrétaire Général.
Essayiste français spécialiste dans l’énergie, il est également enseignant à l’Institut d’Études Politiques de Paris et au Collège d’Europe de Bruges.