Achieving a Green Transition: Combining Markets and Strategic Planning

I hold a steadfast belief in the efficacy of electricity markets and markets in general. There are not many tools available which are more powerful. Believing in markets I also firmly believe in incentive-based regulation. The strength of markets and incentive-based regulation lies in the principle of the “strength in numbers”. When the incentive is strong, many will follow it and we are able to scale our ability to execute incredibly well.

However, despite the merits of markets, they come with inherent limitations, especially if we want as free markets as possible. Markets balance supply and demand. Any significant imbalance can result in adverse consequences – excessive supply causes plummeting prices, rendering further growth unsustainable, while heightening demand leads to price spikes, necessitating demand curtailment once stored supplies are depleted. Essentially, markets excel in effecting incremental changes within an established system, promptly filing the gaps between supply and demand. The dynamic pricing mechanism reflects this adaptability.

When applied to the real-world challenges of the rapid green transition, these market dynamics unveil complexities and underscore the chicken-and-egg issues mentioned in my previous article.

The delicate equilibrium required for sustainable progress necessitates a nuanced approach that combines the strengths of markets with strategic planning.

The Imperative of Strategic Planning

In the pursuit of a radical overhaul of our energy system, the necessity of meticulous planning becomes apparent. The construction of a new large supply unit alone can span 5 years, coupled with an additional 2-3 years of planning and permitting. Transmission assets presents a similar timeframe in the best-case scenario, which means we are looking at the better part of a decade for just adding new assets. An exception to this seems to be photovoltaic solar energy, which are coming thick and fast in many countries, and often without direct public subsidies.

Despite the potential for organic growth, the incentives for a swift build-out of renewables are currently lacking. This is due to the self-cannibalises effect on revenue from electricity markets and the lagging pace of new demand, such as electrolysers and other power-to-x projects essential for a green transition across sectors. These innovative projects await the availability of “cheap” power, a prospect that remains uncertain given the intricate dynamics of the electricity markets. The competition among market parties, coupled with their interdependence, further complicates the situation, creating a challenging chicken-and-egg dilemma.

The role of planning in the context of a rapid green transition is to increase transparency while outlining governments involvement. While I strongly advocate for this approach to facilitate a faster transition, ?the current level of political micro management poses significant challenges. Nevertheless, as an energy professional, I believe it is essential to articulate a vision for how planning should unfold, even amid these complexities.

How to do the planning?

Setting long-term political goals for 2030, 2040 and 2050 is all well and good, but we need comprehensive plans as to how we should meet these political goals. Drawing inspiration from Denmark’s 4-year plans from 1980 to 2000, which effectively addressed oil dependency. These plans set in motion the wind sector, the district heating sector and cogeneration of heat and power increasing the energy efficiency in the energy sector massively. We must implement similar strategies again if we want to be successful with the European green transition.

Unlike political statements, our plans should outline relatively detailed targets, specify tools for goal attainment, and provide timelines for implementation. Emphasising the lessons learned from for example Denmark’s past, our plans should prioritise security of supply, especially in the electricity sector, where challenges persist.

I have, I think, previously mentioned that all EU countries are in deficit on primary energy supply. Every single one! In 2022 natural gas imports made up 89% of consumption, 93% for oil and 25% for coal according to EU statistics. ?Given their essential roles in electricity generation and transportation, addressing energy shortages or price increases is crucial for the success of the green transition, as our modern society thrives on abundant and affordable energy.

Back to the energy plans. We need to give investors in the green transition comfort in investments by ensuring they can get access to grids upon completing construction, and we must ensure that the energy systems remain balanced throughout, to ensure reasonably priced energy enabling sound business cases for both generators and consumers. Transparency is key in achieving these goals. Governments, especially those heavily involved in offshore wind and electrolysis development through tenders, can easily incorporate long-term planning into their strategies if they choose to do so.

In addition, securing onshore locations for energy assets is essential. We need to do active spatial planning of the onshore areas and in these areas remove obstacles hindering a fast development, such as energy taxes, extensive permitting etc.. These areas should have single connections to each of the public grids - electricity, natural gas and hydrogen - with taxation only at the connection point. Transforming these zones into energy “regulatory-free zones” facilitates swift development, production consumption and conversion of energy within the zones. This approach also allows for focused grid development at the connection points, addressing current issues where grids act as bottlenecks. Perhaps this could be a topic for regulation through the renewables directive in a kind of “renewable planning zones”.

In addition to handling the regulatory issues, we also need to handle possible Not-In-MY-Backyard issues, for example by ensuring neighbours a right to buy shares in the projects or get significant direct monetary benefits.

Once these steps are taken, market forces can take over and guide the next phases. These zones should also serve as the locations for publicly tendered assets, enhancing transparency by aligning them with the overall planning. This comprehensive approach sets the stage for efficient, sustainable, and transparent energy development.

In the mould of how we as countries have managed spatial use of the land area, we should also consider utilising matriculation in the offshore domain. Embracing a matriculation system in the offshore realm could facilitate smoother processes for all involved, especially if we aim for increased market-driven development and utilisation of offshore areas. This system would allow market participants to temporarily lease specific, well-defined areas for activities such as offshore wind projects, wave energy assets, oil and gas drilling among others.

For countries, implementing such a system would establish standardised frameworks offshore property rent payments, benefitting the populations when private companies utilise and profit from what is essentially a public area. Again, initial planning could pave the way for a more structured, market-based development, leveraging market forces to swiftly deliver what society wants and need – a green transition.

Returning to the electricity system and markets, the planning exercise that I believe must take place will also need to take security of supply into account, specifically the electricity security of supply at first, recognising that capacity markets are also a planning exercise. Looking ahead, addressing the primary energy requirement in EU is paramount, echoing the concerns that formed the basis of the Danish Energy plans in the early 1980s. The goal remains to ensure energy supply without dependency on specific regions or countries outside EU.

We have that same challenge today, extending beyond OPEC to a handful of nations supplying natural gas to Europe. Diversification is key, as we have learned the hard way in 2021 and 2022. However, there seems to be a repetition of mistakes, with increased imports from other countries rather than a substantial effort to enhance self-sufficiency within the EU. Instances like Germany closing well-functioning nuclear plants and Spain’s recent announcement of phasing out all nuclear power plants by 2037 replacing them with wind and solar energy exemplify poor decision making that compromises independence and security of supply by reducing diversity of supply.

The strong security of supply we have had in Europe the last 30 years have been based on diversity of supply. We are now dismantling this diversity, investing only in solar and wind energy, and expecting gas fired powerplants to make up the deficit. This is not very diversified. Hopefully, the efforts of the nuclear lobby in EU, comprising 12 or 14 countries, will succeed in ensuring the availability of dispatchable power in their respective systems.

Concluding

All the above do not replace the developments happening on market conditions that we already see today. The commendable efforts of developers relying on PPAs to construct solar energy (and a bit of wind energy) assets are noteworthy and should not hold back. Such initiatives prove highly beneficial, serving as a valuable addition to the electricity system in most cases as it delivers energy when demand traditionally has been high.

However, it is crucial to recognise that these advancements alone are insufficient. There is a pressing need for more comprehensive planning to ensure transparency for society to takes on its responsibility to solve the chicken and egg issues we are witnessing and which are preventing the green transition across sectors.