By Matt Rennie, Ernst & Young
The last 20 years have seen a large number of advances in economic consciousness, but arguably none more significant than the advent of market-based sharing; specifically the sharing of excess capacity in our society in the areas of public transport, accommodation and deliveries.
This is significant because at the root of sharing lays an expectation around the value of something that is not being used. It has diminished value to the person that owns or possesses it, but this value has rarely been set.
A spare seat in your car on the way to work, or your home when you are away, for example, has diminished value to you because you cannot sit in two places, or sleep in two beds, at once.
While the seat may have had a value to others – for example, the people you drive past, standing at bus stops in the rain – for most people, the process of obtaining that information and valuing the preferences of those people has been prohibitive.
It is only in the past 20 years markets have evolved, through technology, to value, price and allocate this capacity. It is only in the past ten years the notion of finding, capturing, and pricing spare capacity in the electricity sector has been possible.
Finding the duck
Capacity sharing in electricity is often spoken about at the customer or household level. The concept of virtual power plants (VPPs), for example, involves the storage of excess power produced from solar rooftops and its injection into the distribution system.
In the future, there is no doubt customers will form part of an integrated network of imports and exports using technology installed at their premises, which flattens the peaks on the network and contributes to more efficient means of supply. But it is at the other end of the supply chain – the large-scale renewable generation sites being built in increasing numbers and size – where a growing capacity excess is emerging.
Much has been written about the “duck curve” in electricity. Put simply, it refers to the time of the day when peak electricity usage is quite low (usually around noon in most developed countries) and the amount of electricity produced by solar facilities at the household level is very high, resulting in an excess of power production.
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The net demand curve thus exhibits a drop in the centre of the day, which when graphed over the course of a 24-hour period, looks somewhat like the shape of a duck. During this period of time, the prices for wholesale generation into the system reflect this low demand, and can fall to zero or below.
Generation that can be turned off is turned off, and waits for the price to rise before it then rejoins the market. For renewable power stations, turning off is not an option, and large amounts of power are produced which cannot be sold and for those producing it, holds no value.
Establishing a mechanism to share this “spilt resource” is the exam question of the next ten years for large-scale renewable energy facilities, and work is already underway on bespoke methods to accomplish it. Storage facilities provide one option, with batteries already being located at renewable sites for the purpose of injecting power into the system to provide balancing or frequency services, much like VPPs, at the other end of the system.
However, this is just the beginning, as new and old technologies begin to embrace these possibilities with cheaper power. Hydrogen is one such possibility.
Turning water into power
For those in the power game, hydrogen has been a technology often discussed but never considered to form part of the mainstream supply chain. It is produced by a process known as electrolysis, which separates water into hydrogen and oxygen, with the latter being released and the former being captured.
Once stored, hydrogen is both useful and valuable, to the tune of US$130 billion in sales annually. It is used by refineries to lower or eliminate sulphur from diesel fuel. It is used to produce ammonia and methanol, and it has an emerging (and in some countries, an established) role in the mobility sector through trucks, buses and trains.
Hydrogen is also an input for fuel cells, which can be used to convert hydrogen to electricity and so provide a storage market similar to that presently being provided by batteries but with the ability to locate the storage away from the generator using gas pipelines. But electrolysis is an expensive process, which has always served against it.
However, attitudes towards hydrogen may be changing, as indicated in an August report by Australia’s Chief Scientist Alan Finkel that called for further development of a hydrogen industry in this country.
As Dr Finkel points out, reducing the cost of hydrogen production will be the key challenge to overcome. But, according to interesting research by Morgan Stanley, around 50 per cent of the levelised cost of hydrogen is the cost of electricity.
Removing this cost, by pricing the supply of electricity at close to zero during periods of low demand when the duck curve is in effect, Morgan Stanley estimates the cost of producing hydrogen to be more competitive than alternative technologies.
Put simply, there may be a market in the production of hydrogen at renewable energy sites using excess renewable energy at low prices, with pipelines potentially running to industrial customers located nearby, or fuel cells able to convert this into electricity and re-inject it back into the system when prices are higher.
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With Bloomberg New Energy forecasting around 50GW from solar facilities operating under duck curve conditions, new markets will need to emerge to both price and share excess capacity and to direct it to new markets.
The reliability limb will become more important than ever, as intermittent renewables become the dominant form of baseload and conventional generation struggles to find markets and prices to recover costs, which will place pressure on valuations in much the same way as conventional companies in Europe faced impairments of around €200 billion between 2013 and 2016.
There will be no lack of existing companies needing to diversify and new companies seeking to feed off the changes but the demands of customers for low-priced and reliable power will remain a constant.
The period post-2020 will bring new ideas and innovation, and none more interesting than the potential production of power from water via hydrogen at prices that are competitive. It remains to be seen whether the growth of renewables will bring a sustained duck curve that will make it possible
It is worth noting that already negative prices are not uncommon in Australia’s National Electricity Market (NEM) in jurisdictions with high percentages of renewables, caused by the duck curve.
Perhaps the secret to the future storage and reliability of the electricity system may indeed be water off a duck’s back.