Why Energy Markets are Failing and What We Can Do About It

Published in

Pace Ventures

7 min readAug 23, 2022

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With growing climate change and geopolitical pressures, energy markets and grids are increasingly overwhelmed. New structures are needed to replace the old fossil-based energy sector, the largest emitter of global greenhouse gas emissions.

Executive Summary

Liberalized energy policies have paved the way for greater renewable energy adoption.
Although global renewable energy generation is rising, adding renewables to the grid posits many challenges, including grid stability and costs.
Distributed energy generation needs more significant support to ensure a resilient energy system and prevent unfortunate scenarios like curtailment.
With politically binding bills such as The Inflation Reduction Act, the public and private markets are working together to solve the limitations of distributed renewables.
Startups are operating across smart grid, IoT, and hardware solutions, providing consumers and system operators with tools to phase out the global consumption of fossil-fuelled energy. This is great news!!!

Historical Snapshot of Energy Markets

The electricity sector in Europe and most parts of the world used to be vertically integrated and monopolized. One or a few, usually state-owned companies, were responsible for generating, distributing, and supplying energy. However, starting in the 1980s, several countries introduced energy deregulation initiatives. In the US, Carter’s National Energy Act ushered in an era of deregulation and in the UK, Thatcher introduced a wave of reforms to privatize and liberalize the electricity system (1).

In Germany, “the big four” energy generators (E.ON, RWE, EnBW, and Vattenfall) have been shaken by the country-wide energy transition. They used to cover 73% of Germany’s energy production in 2011 dropping to 67% in 2013; in 2012, they only owned about 5% (!) of renewable sources (2; 3; 4). The term “Big Four” is increasingly outdated as the two biggest ones, RWE and Eon, have each split into two separate companies: one with renewables and the grid, and the other with conventional fossil and nuclear assets (5).

The main benefit of liberalization is the increased availability and distribution of energy in supply situations due to the increased number of players. The creation of pooled energy sources such as in the UK (essentially allowing electricity trading between generators and electricity suppliers) has led to greater demand price-response, allowing for more efficient use of electricity and increasing consumers’ response to prices and choice of provider.

Moreover, studies have shown that a reduction in the monopolistic power of state-owned utilities positively affects renewable energy policies when various types of actors have access to the grid (7).

But what are the consequences of this for energy markets and grids?

The Challenge of Integrating Renewables into the Grid

First, looking at the global share of electricity production from renewables: in the last 20 years (2001 vs. 2021), many countries have substantially increased their energy generation from renewables. Germany, for example, has managed to increase their green electricity production from 6.65% in 2001 to 40.49% in 2021, meaning renewable energy sources produced more electricity than all fossil fuels (coal, gas, oil) together (8).

A few of the reasons why countries are struggling to increase their share of renewables are:

High initial cost (i.e., installing renewable energy generation plants);
Availability of power (i.e., solar power is only available when the sun is shining; wind power only when the wind blows fast enough); and
Power quality and reliability (i.e., consistent high power quality is needed to ensure the stability of the network).

To further complicate things, the energy grid has two types of renewable energy generation: distributed generation, which refers to small-scale renewables on the distribution grid where electricity load is served, and centralized generation, which refers to larger projects that connect to the grid through transmission lines (9).

Centralized utility-scale renewables tend to be much cheaper than distributed resources due to economies of scale and more straightforward for grid operators to control, as distributed renewables can be challenging to track and complicate load forecasting (10). However, unlike conventional fossil-fuel plants, energy from renewable utility-scale is typically not dispatchable. This means that it is not always able to generate power when called upon due to its dependencies on variable resources like sun and wind (yet when available, wind and solar get priority in the dispatch order).

With contemporary geopolitical tension and other externalities, many people are demanding a more decisive move towards distributed generation: when connected to microgrids, distributed renewables are far more reliable as they are less likely to fail during weather events or other externalities. Since energy from distributed generation is mainly used on-site or nearby, distributed sources can significantly reduce energy losses from electricity on transmission lines.

As more renewables are integrated into the grid, their intermittent nature will require grid operators to be flexible and quickly react to new conditions and production patterns. Failure to do so can lead to power shortages, blackouts, and instances of curtailment that want to be prevented.

Curtailment is any action that reduces the amount of electricity generated to maintain the balance between supply and demand — which is critical for avoiding blackouts. Recently, curtailment has made news in states like California that add a lot of wind and solar power. On very windy or sunny days, these sources may produce more electricity than the grid can take; grid managers reduce production to manage that oversupply (11).

How to Solve Energy Inefficiencies in the Renewable Era

The energy sector is being reinvented from various angles. We can break most of the solutions down into three segments: (i) making grids smarter, (ii) managing the grid more efficiently, and (iii) providing the needed built resources for a new and greener energy paradigm.

Firstly, making grids smarter:

Digital connection of various sources such as solar panels, batteries, EV chargers, or other equipment is needed. Through real-time data analysis, it is possible to speed up reaction time to the changes in the power grid both at the industrial and home scale. One instance is net metering: for people that generate their power at home (e.g., with a rooftop solar power system), a meter can record energy flows back into the grid as a credit (12).

Secondly, managing the grid more efficiently:

Combining different renewable sources can balance the variability of production of one resource type. For example, a grid that relies on many types of renewables — such as solar, wind, hydro, and geothermal — will likely face less volatility in production than one that relies exclusively on wind energy alone. Moreover, demand-side management can include shifting flexible demand to times of high renewables production.

Thirdly, providing the needed built resources:

Electricity can be stored during times of high generation (for solar, during sunny days; for wind, during times of high wind speeds) and is a quintessential part of the new power system architecture. It not only helps to balance out the variability in energy generation but could also enable the consumption of a higher proportion of self-generated renewable power by consumers and reduce the need to feed excess electricity back into the grid. Building more transmission lines to connect areas endowed with plentiful renewable resources (e.g., very sunny or windy areas) with areas of high electricity demand can increase the value of renewable resources and reduce uncertainties of their electricity generation. Additionally, energy storage can be paired with variable renewables to accommodate fluctuations in renewable generation during the day or over several days.

Parties Shaping the Space

Both the public and private markets are tackling these areas.

The US announced on Tuesday, 16th of August, that President Biden signed a bill into law that he has described as “the most significant legislation in history to tackle the climate crisis” (14). The Inflation Reduction Act contains $437bn of spending, $369bn of which will go towards emissions-cutting measures such as tax breaks for low-carbon energy and electric vehicles. One type of tax credit would be aimed at clean energy companies to deploy more solar, wind, and batteries on the grid. The second type would seek to drive more renewables consumption, offering Americans incentives for installing heat pumps, adopting solar, and buying electric cars.

In line with “making grids smarter,” the passage comes with $80 billion worth of new rebates for electric vehicles and other household energy efficiency upgrades. Starting in 2023, individuals and couples may be eligible for a $7,500 tax credit when they buy a new electric vehicle or $4,000 for a used electric vehicle. Homeowners who install solar panels, heat pumps, and electric induction cooktops or make improvements to their home’s insulation, wiring, and electrical panels are also eligible for credits (13).

Following on with private market approaches, the map below displays some of the players (not an exhaustive list) tackling the current system’s shortfalls.

Making grids smarter:

E.g. German Zolar offers easy solar PV installation for consumers; US-based Heila is an energy platform that makes it easy to connect and optimize solar arrays, batteries and other distributed energy resources to the grid.

Managing the grid more efficiently:

E.g. British Electron making it easier for energy stakeholders to make market-based predictions; Entrix allows trading of grid-scale battery storage solutions.

Providing the needed built resources:

E.g. US-based Moxion provides zero-emission generators; German Volt Storage builds solar energy storage systems.

Several companies are also indirectly pushing for a more democratized energy system. Initiatives include tools for end-users to monitor and manage their energy consumption and facilitating solutions in the electromobility + energy provider space.

With increased external pressures (climate change and political restrictions), the need for a more resilient and green liberalized energy system has never been more evident.

If you want to be included in this article or are a company working on a solution in the green energy space, let us know!

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