When the lights go down in the City

by: Hans van Cleef

A few weeks ago, TenneT, the Dutch transmission system operator, sent out an alert about an impending temporary power shortage and issued a report pointing to the possibility of a lower security of supply after 2025. In this column, Hans van Cleef asks himself whether the Dutch Ministry of Economic Affairs should perhaps seriously consider introducing a capacity market.

On 22 January, TenneT issued an operating state Alert, identifying a power shortage that TenneT could not resolve itself. It seems that an unexpected fall in available capacity of gas-fired power stations combined with a particularly low yield from renewable electricity were the reasons for an impending power shortage. The low yield from renewable energy sources was due to foggy weather conditions (no yield from solar panels) and low winds (no yield from wind energy). The Germans use the word Dunkelflaute to describe this simultaneous occurrence of lack of sunshine and wind calm. These types of situations in which there is inadequate sunshine or wind to maintain a viable supply of renewable energy happen one or two weeks per year on average.

“One or two weeks of Dunkelflaute per year on average.”

The news of this recent temporary power shortage came a few days after TenneT issued a warning about more insecurity and greater price fluctuations in its report Monitoring Leveringszekerheid 2019 (Monitoring Security of Supply 2019). The security of the electricity supply will fall from 2025 onwards in particular due to a combination of factors. We are increasingly embracing renewable electricity (70% of the supply on average by 2030 according to the Climate Agreement), the demand for electricity will continue to rise, the capacity of coal-fired electricity will disappear (by 2030 at the latest), and the capacity of gas-fired power stations will drop.

The rock band Journey wrote a song called ‘When the lights go down in the City’. Although it never became a huge hit, the title may become reality soon. After all, while turning off the lights may be a matter of choice now, it might well become a necessity in the Netherlands after 2025, with all the associated economic consequences. For now, we still rely on power import from countries other than the Netherlands to prevent shortages. What is worrisome, however, is that the countries around us have similar strategies and depend on their neighbouring countries for imports as well. Although interconnection capacity, i.e. cable capacity between two countries to import and export electricity, will increase significantly over the coming years, our dependence on solar and wind-generated electricity will rise too. History shows that, if there is fog and no wind in the Netherlands, Belgium and Germany are likely to have similar weather. So, while the increase in mutual import dependence sounds great in theory, it offers no guarantees for meeting the demand for electricity.

“If no balance can be created, the lights will go off.”

Against this backdrop, we should perhaps open the debate on introducing a capacity market in the Netherlands. France has had a capacity market since 2017. After the issue had been put aside earlier, the debate on whether or not to introduce a capacity market was stirred up again in the United Kingdom recently. Germany, on the other hand, has so far chosen to leave it to the market. A capacity market offers the option for a guarantee, meaning that market players are paid to reserve production capacity that can be used as soon as power shortages threaten to occur. Alternatives are high prices or shortages. High prices during power shortages encourage market players (companies and households) to supply extra capacity or consume less. If no balance can be created, the lights will go off.

In its recent publication, TenneT argues that companies should look at how they can create buffers for times when electricity will temporarily be unavailable going forward and some of them will have to be disconnected: a demand-driven market. If they do not, they will have to make allowance for large price fluctuations and temporarily high prices for electricity during periods of Dunkelflaute. By addressing this issue, TenneT appears to be paving the way for a capacity management market mechanism for the corporate sector.

The question commercial parties have to ask themselves is whether a high price during a few moments of power shortage will outweigh the cost of surplus production capacity during the rest of the year. No company will want to reserve capacity on a long-term basis if there is no prospect of sufficient future cash flows to cover the costs. That would serve a public rather than a commercial interest. For this reason, it is more interesting to look at what the Dutch Ministry of Economic Affairs has to say on this matter. With the choice in favour of more renewable energy in both the Energy Agreement and the Climate Agreement, the climate for investments in new traditional coal, nuclear and/or gas-fired power plants has deteriorated or even disappeared.

“TenneT appears to be paving the way for a capacity management market mechanism for the corporate sector.”

Things are different for consumers. In 2003, former Minister Brinkhorst said in a letter to the Dutch Parliament <translated>: “The interests of the consumer should be at the heart of policy design. Unlike larger companies, consumers are usually ill-equipped to effectively safeguard their own interests.” In other words, the question for the Ministry of Economic Affairs is whether the damage caused by potential power outages or disconnecting consumers – as happens frequently in California nowadays – outweighs: a) paying for reserving production capacity or b) disconnecting companies rather than consumers.

The corporate sector will not be making that choice. The Ministry of Economic Affairs is and will continue to be responsible for the security of the energy supply. Should we consider TenneT’s recent power alert, together with the warning about a lower security of supply after 2025, simply as calm before the storm? Or should we see them as triggers for reopening the debate? It is up to Eric Wiebes, the current Minister, to shed some light into the darkness surrounding the Dutch demand for capacity, preferably before the lights go out.

 

This column was published earlier in Dutch on Energiepodium.nl