Integrating renewables — the differing approaches of Europe and Asia

Last year marked another nail in the coffin for coal and other fossil fuel based energy sources. In 2018 Germany generated more energy from renewable sources than from coal. Meanwhile, in India, investments in coal have reportedly fallen to a „standstill“, according to the FT, with power capacity additions falling each year since 2016 (see graphic, source FT). In less than a decade, solar and wind are expected to contribute 40% to India‘s energy mix, from 16% today, even as coal’s share falls to 38% (57% today).

The reason behind this change is the drop in the scost of solar energy, which is now substantially cheaper than coal. This milestone will trigger a further expansion in solar, as noted in my previous article.

Solar (or wind) power is, however, not an exact substitute for coal based energy. Fossil fuels are generally stable power sources, while solar and wind are seasonal and often unpredictable. How countries (or regions) therefore integrate renewables into the grid is at least as important as the growth of renewables itself.

A wholesale replacement of coal or nuclear with renewables comes with immense challenges. The most obvious is the grid’s need to stabilize the grid, something done very well by fossil-fuel based “baseload” energy sources that now find themselves no longer economical. Another challenge is the necessity to match demand with (increasingly variable) supply that itself is increasingly distributed. A more recent weakness that the growth of renewables, particularly distributed solar, has exposed is how weak grid infrastructure is at the edge.

Solving these challenges requires a mix of responses, from grid upgradation to managing dynamic supply and demand. What emerges is the need to transition the grid from a system that manages a largely unidirectional flow of electrons to treating the grid as a network, where both demand and supply are variable and electrons can flow in any direction.

The question then is how do two countries achieve the steady state required by a balanced grid? Germany and India offer two very different approaches.

Germany, and indeed most of Europe’s approach, has been to allow the „market“ to balance the grid. Establish a market for energy and related services and set a price for grid balancing, frequency regulation and the like. Then allow companies to provide the necessary services. How the service is provided is then less relevant.

India has taken a different approach to manage variability — by trying to avoid it. Instead, India’s current policy response has been to change the nature of renewable energy from variable to stable, such that a like-for-like replacement of fossil fuels is more easily possible.

India has started to hold IPPs accountable for variability in the energy they deliver, but will soon go further. Policy initiatives encourage the addition of energy storage to solar/wind hybrid projects and the government has issued some solar PV tenders that require storage. While these tenders are so far in isolated areas such as mountains (Spiti) or islands (Andaman islands), and a policy is not yet fully defined, most companies we work with in the sector expect the government will eventually mandate some level of energy storage in upcoming PV tenders. This opens up a market conservatively estimated at 50GWh per year, for storage.

The two approaches offer the respective countries very different economics.

Germany has borne a hidden cost to its energy transition, which replaced relatively cheap stable, predictable power for more expensive power that was neither stable nor predictable. The gap has been filled, after the fact, through addition of storage, DERMS (demand energy management), and through innovative new business models such as Virtual Power Plants. The more deregulated approach, however, has allowed startups such as Next Kraftwerke, Limejump and Tiko to disrupt the traditional industry and emerge as potential challenger to traditional utilities. Europe has also invested into understanding and predicting energy demand and supply, from variable sources. For the higher cost, one gets greater flexibility.

India’s approach makes the economics more transparent. The calculation now is not coal vs. renewables, but coal vs. stable renewables integrating both a power source and storage.

Seen this way, we are still some way away from solar achieving grid parity. While solar prices have fallen to as low as USD 2.5–3.5c/kWh, what is needed is a hybrid solar + storage solution that costs USD 7–8c/kWh (close to coal, which is at USD 6.8c/kWh).

Other countries are following a similar path. In a very recent development, Hawaiian Electric announced a series of large solar-plus-storage projects.

The projects, which now await regulatory approval, would add 262 megawatts of solar and 1,048 megawatt-hours of storage distributed over three islands. The company said the projects will provide power “in place of volatile prices of fossil fuels,” which it quotes at about 15 cents per kilowatt-hour.

India, US and other countries ability to take a different route at the outset to integrating renewables is in no small measure due to the different economics of solar in India (which is substantially cheaper than in Germany) and because countries today undertake this transition at a different point in renewables’ cost curve. Solar + storage as cheap as coal is within the realm of reality today, while it was not even a few years ago.

This latest set of projects in Hawaii illustrates this well: “from 2016 to 2019 solar-plus-storage PPA prices in the state dropped by 42 percent”, to the point where combined pricing is now selectively lower than fossil fuel based energy.

That being said, the two approaches are not mutually exclusive and will eventually converge. Europe has already started to integrate storage into utility-scale solar and companies such as Sonnen have made successful forays into residential power backup. Similarly, countries in Asia will eventually face the same challenges of managing flexibility that Europe has already addressed.

We will still require flexibility. Integrating storage at the source will help avoid the substantial variance in Europe’s energy supply but will only postpone the need to manage a commodity with a zero marginal cost of production.

And in that world, new business models and organization mechanisms will become possible — it would be possible to manage and operate smaller micro-grids and to be an asset-light utility. Finally, deregulation of the energy market will deliver greater efficiencies to the system as inefficient plants (including coal plants) are shuttered.

In that sense, Europe will gain from the price reduction in storage driven by deployments in Asia and the USA. Conversely, Europe has substantially greater experience with the transition towards an energy network. Other countries will be able to draw on that experience to replicate or adapt business models and develop new opportunities within their local context.