the energy issue 2014 - continued - william d’haeseleer ku leuven energy institute

The Energy Issue 2014 - continued - William Dhaeseleer KU Leuven Energy Institute

an amount of water [m 3 ] flow rate [m 3 /s] volume of water = an amount = a package m 3 or kilo-liter = kl flow rate = amount per time m 3 /s or m 3 /min or m 3 /h or kl/h 1 gallon ~ 3,8 liters 1 minute to fill the cup 5 minutes to fill the cup Energy versus Power

an amount of water [kFh] flow rate [kF] volume of water = an amount = a package m 3 or kF * h or kFh flow rate = debiet = dbit amount per time kl/h or kF 1 gallon ~ 3,8 liters kF = kilo-Flow kFh = kilo-Flow-hour Energy versus Power

same energy = an amount [kWh] Power [kW] Energy versus Power

Small plant, running many hours (like small faucet) Large plant, with large output running shorter period (like large faucet) Energy versus Power

Small plant, running many hours (like small faucet) Large plant, with large output running shorter period (like large faucet) same energy consumptiondifferent power demand different duration Energy versus Power

Power & Energy Units Energy in Joule J Power in J/s or J/h Alternative name for power J/s = Watt W or if 1,000 Watt = 1 kWatt 1 kW Thus energy: 1 J = 1 Ws or if 1,000 W during 1 hour 1 kWh Note: kW=1,000 W MW=1,000,000 W

Session September,2014 Focus points: o Electricity Prices o Security of supply Gas / Russia Electric power provision / rolling blackouts

/MWh MWh/h NukeCoalCCGT Classic Gas Peak units Wind, Hydro Supply curve (= marginal cost) Price setting in a perfect competitive power market

/MWh MWh/h NukeCoalCCGT Classic Gas Wind, Hydro Demand curve Supply curve (= marginal cost) Peak units Price setting in a perfect competitive power market

/MWh MWh/h NukeCoalCCGT Classic Gas Wind, Hydro Demand curve Market price (= marginal cost of most expensive generating unit) Supply curve (= marginal cost) Peak units Price setting in a perfect competitive power market

/MWh MWh/h NukeCoalCCGT Classic Gas Wind, Hydro Demand curve Market price (= marginal cost of most expensive generating unit) Supply curve (= marginal cost) Full cost Peak units Price setting in a perfect competitive power market

/MWh MWh/h NukeCoalCCGT Classic Gas Wind, Hydro Demand curve Market price (= marginal cost of most expensive generating unit) Supply curve (= marginal cost) Full cost Potential for new investment Peak units Price setting in a perfect competitive power market

William Dhaeseleer Third Handelsblatt Annual Conference, Berlin EU 20-20-20 targets by 2020 Reduction of greenhouse gases Energy consumption, Efficiency increase Share of renewable energy -20% 100% +20% 8,5%

EUs implementation - currently Much progress build up renewables (+) seems to be too nice to be true... And it is... There are major system effects that have been neglected and that may jeopardize further success of renewables deployment! One has gone too rapidly recently, with danger of losing support of population!

William Dhaeseleer

French Report January 2014

20 EUs implementation Issues / challenges / problems in the EU market Technical challenges Market-integration problems Consequences for the CO 2 emissions End-electricity prices for end consumers

EUs implementation Consequences of renewables quota in end-energy terms (1) Total end energy = electric energy + fuel for heat + fuel for transportation EU requirement by 2020: 20% of end energy from RES For transportation only 10%... for electric sector ~ 34% Expectations / outcome (steered by differentiated subsidies): o Hydro ~ only small increase possible o Biomass ~ moderated increase (protests against co-combustion, imported biomass pellets, sustainability questions) o Wind onshore + offshore / ENOH onsh ~ 2200h/a offsh ~ 3500 h/a o Solar photovoltaics (PV) / ENOH Belgium ~ 800 h/y Total: 8760 h/a low capacity factors of these intermittent sources

EUs implementation Consequences of renewables quota in end-energy terms (2) Capacity factors intermittent sources (wind + PV): o Wind onshore + offshore / CF ~ 25% - 30% o Solar photovoltaics (PV) / CF ~ 10% To produce 34% electric energy with something that operates only 10% or 25-30% of the time, you must install a large amount of installed power ( called capacity) leads to massive overcapacity If there is a lot of wind and sun, and low demand (e.g., weekends), then too much electric power produced But sometimes in case of cold spell (cfr winter Feb 2012) with temp inversion... little wind and dark (hence no PV) at 17.00h-18.00h, when peak demand arises in NW-Europe! very little RES electricity produced

EUs implementation Consequences of renewables quota in end-energy terms (3) Intermittency: defined as variable and partly unpredictable How deal with massive intermittency in electricity system? o Back up reserves from flexible dispachable thermal plants (+ & -) o Electric storage (large scale electric storage not available) o Expansion of transmission grid o Encourage active demand response (ADR) o Curtailing of superfluous RES production / review priority access o Mitigate on local level via smart grids

25 EUs implementation Some simple technical aspects Power expressed in Watt... kW...MW...GW o Instantaneous power ~ flow (cfr water flow from faucet) o Installed power capacity: max power output of facility Nuc pwr plant ~ typically 1000 MW or 1 GW (but instantaneous output at shutdown = 0) Wind turbine ~ typically 2 tot 5 MW (but instantaneous output depends on wind) o Examples Belgium Peak electricity demand ~ 14 GW in winter Low electricity demand ~ 6-7 GW in summer Electrical energy expressed in kWh...MWh...TWh Annual production / consumption ~ 90 TWh/a Difference betwn demand from the grids and consumption ( incl own consump ) Power variations of flexible plants (ramp rates) MW per min... MW/h

26 Ref: Lehner & Schlipf, VGB Powertech, 8/2011 EUs implementation technical issues

Common EU electricity market started in 1996,...then 2003,...then 2009 At present third package being implemented Better European coordination through ENTSO-E, ACER Unbundling (generation, transmission, distribution, supply) Alligned grid codes... Market integration elements in place, was bearing fruits... But now anew price divergence between countries! EUs implementation market issues

But... Recent developments... !!! EUs implementation market issues Ref: CREG 2014 decoupling

31 Source: ACER, 2013 EUs implementation market issues But... Recent developments... !!! 68% 50%

32 Source: ACER, 2013 Price differential Hourly wind generation DE EUs implementation market issues But... Recent developments... !!!

Decoupling prices shows poorer functioning of market Lower wholesale prices seem to be good news (?) But they lead to major problems for owners/operators of thermal plants which are needed for balancing! And ironically, end-consumer prices increase rather than decrease (to pay for the levies/subsidies) EUs implementation market issues

But... Recent developments... !!! These effects were not foreseen in liberalized market design... Due to massive injection of zero marginal cost generation (RES) Most efficient & flexible plants (CCGTs) are pushed out of merit order... Tendency for mothballing Leads even to negative wholesale prices !! Need completely different philosophy whith massive RES, where holding capacity ready is remunerated... capacity mechanisms

EUs implementation market issues

Ref: F. Roques in The crisis of the European Electricity System FR 2014 EUs implementation market issues

The merit order effect of RES Ref: Factsheet 2014-1 KULv EI EUs implementation market issues

Spread = difference price & production cost = gross profit EUs implementation market issues Prices too low for covering operational cost of gas plants

EUs implementation market issues The missing money problem !! The most efficient plants (gas-fired combined cycles CCGT) are pushed out of the merit order their capacity factor becomes too low to recover investments the prices are too low to cover operating costs many CCGTs are currently shut down and will be mothballed or shut down permanently! Risk: insufficient capacity (generation adequacy) to do the back up

EUs implementation market issues Negative wholesale prices Ref: Factsheet 2014-1 KULv EI

EUs implementation market issues 41 Negative prices in Germany in period October 2008-October 2009

Negative Wholesale Electrivity Prices Ref: F. Roques in The crisis of the European Electricity System FR 2014

43 EUs implementation market issues Negative prices in Belgium June 2013

EUs implementation market issues Belgium: the missing money problem + nuclear phase out Recall: Risk: insufficient capacity (generation adequacy) to do the back up In case of shortage, peak prices would skyrocket! But peak prices not high enough to compensate losses Need for capacity remuneration mechanisms In Belgium: combined with nuclear phase out... Strategic Reserves (Plan Wathelet)

Influence Doel 3 Tihange 2 and... Doel 4 Lack of own cheap generation

GHG Target: -20% compared to 1990 -14% compared to 2005 EU ETS -21% compared to 2005 Non ETS sectors -10% compared to 2005 27 Member State targets, stretching from -20% to +20% A shared effort between sectors and MS

EUs implementation Consequences for the CO 2 emissions First Phase 2005-2007

Second Phase 2008-2012 EUs implementation Consequences for the CO 2 emissions

EUs implementation Consequences for the CO 2 emissions Second & Third Phases 2012-2014

EUs implementation CO 2 price

EUs implementation market issues

Consequences for the CO 2 emissions Very low prices for CO 2 emission permits (allowances) Due to o economic crisis (less CO 2 emissions) in 2008-2014 o banking of allowances from phase 2 o massive injection RES with priority access reduces demand for fossil generation reduces demand for CO 2 allowances lower CO 2 prices i.e., highly subsidized RES effectively subsidize cheap coal by keeping the CO 2 penalties low !! EUs implementation

Consequences of shale gas in US for CO 2 emissions in DE System effect due to low gas prices in USA shale gas Gas extremely cheap in the USA EUs implementation

IEA WEO November 2013 EUs implementation Consequences of shale gas in US for CO 2 emissions in DE

Source: CREG, 2014 EUs implementation Consequences of shale gas in US for CO 2 emissions in DE USA Europe

Consequences of shale gas in US for CO 2 emissions in DE System effect due to low gas prices in USA shale gas Gas extremely cheap in the USA Gas pushes coal out of merit order in USA US coal demand decreased Lower coal prices USA coal offered to world market... shipped to Germany Cheap US coal used in German coal fired plants CO 2 emissions electricity generation have gone up! But does not matter in EU since ETS, only price increase EUAs In mean time: world emissions CO 2 up up up EUs implementation

Consider following consumers (following CREG report) o Household (Dc) Electricity 3,500 kWh/y o Professional consumers Electricity 160,000 kWh/y, low voltage (Ic) Electricity 160,000 kWh/y, medium voltage (Ic1) Evolution of price from January 2007 till May 2013 59 Decomposition of energy retail prices Electricity

Evolution of final price domestic consumer 60 Decomposition of energy retail prices Electricity Source: CREG, 2013

Composition of final price o Energy price o Transmission o Distribution o Public levies o Contribution RES and CHP o Energy taxes and VAT 61 Decomposition of energy retail prices Electricity

Composition of final price domestic consumer 62 Decomposition of energy retail prices Electricity Source: CREG, 2013

Composition of final price domestic consumer 63 Decomposition of energy retail prices Electricity Source: CREG, 2013

Energy component o Component based on index parameters Indexation formula changes not frequently o Prize freeze between April 2012 December 2012 o As from 2013, changes (indexation) in variable pricing contracts require approval regulator CREG (ex-post) o Dc: Flanders -1.53 /MWh (-2.83%) o Dc: Walloon region & Brussels: +2.72 /MWh (+3.63%) Due to evolution index parameters 64 Decomposition of energy retail prices Electricity

Evolution of energy price domestic consumer 65 Decomposition of energy retail prices Electricity Source: CREG, 2013

Transmission tariff o Elias transmission grid tariff Corrected with loss-percentage of DSO o Minor component o Same for Dc and Ic; Ic1 different 66 Decomposition of energy retail prices Electricity

Distribution tariff o Introduction of multi-year tariff o Public service Flanders: Free electricity, public lighting, green certificates and actions for rational energy use o Consumers on MV face lower tariff Cascade principle do not bear costs of infrastructure downstream o Price evolution: Overall +71.7% Flanders +41.64 /MWh (+99.96%) Walloon region: +13.80 /MWh (+32.42%) Brussels: +19.28 /MWh (+47.81%) 67 Decomposition of energy retail prices Electricity

Evolution and composition distribution tariff 68 Decomposition of energy retail prices Electricity Source: CREG, 2013

Public levies o Federal contribution (2.98 /MWh) E.g., denuclearization of BP1 and BP2 Mol-Dessel o Connection off-shore wind (0.14 /MWh) o Green certificates (2.2 /MWh) Off-shore wind o Costs +99.57% 69 Decomposition of energy retail prices Electricity

Contribution RES and CHP o Obligations supplier o Costs +119.67% 70 Decomposition of energy retail prices Electricity Source: CREG, 2013

Energy tax and VAT o Energy tax: 1.9 /MWh o VAT on sum of all components (including tax) 21% till March 2014 6% as of April 2014 71 Decomposition of energy retail prices Electricity

Waiting time bomb? - Flanders

International positioning 74

Comparison neighboring countries domestic consumer 75 International positioning Electricity Source: CREG, 2014

Comparison neighboring countries domestic consumer 76 International positioning Electricity Source: CREG, 2014

78 Final reflections on costs all energy end products

Session September,2014 Focus points: o Electricity Prices o Security of supply Gas / Russia Electric power provision / rolling blackouts

January 01 2006 & 2009

Source: Wood Mackenzie / Fluxys Russia

SoS Structured definition 1. Strategic Security of Supply 2. Adequacy 3. Avoiding Black outs or Sudden Cuts

(1)Strategic Security of Supply SoS Structured definition (1) Strategic Security of Supply 1. Physical availability of primary energy sources enough non-empty wells (reserves), coal mines, uranium mines For oil, partly the issue of peak oil

(1)Strategic Security of Supply SoS Structured definition (1) Strategic Security of Supply 1. Physical availability of primary energy sources enough non-empty wells (reserves), coal mines, uranium mines For oil, partly the issue of peak oil 2. Sufficient investments in production capacity in producer countries e.g., investments in oil & gas production also peak oil

(1)Strategic Security of Supply SoS Structured definition (1) Strategic Security of Supply 1. Physical availability of primary energy sources enough non-empty wells (reserves), coal mines, uranium mines For oil, partly the issue of peak oil 2. Sufficient investments in production capacity in producer countries e.g., investments in oil & gas production also peak oil 3. Geopolitics unpredictable (Iran Ukraine/RF Middle East)

Geopolitics

Transit Russian gas through the Ukraine

What if Russian embargo? Ref: EWI Kln

What in case of embargo? Ref: Fluxys

But cold spell in February !!! Supply shortfalls during embargo of 6 months normal weather in Februarycold spell in February What if Russian embargo? Ref: EWI Kln

(2) Adequacy SoS Structured definition (2) Adequacy = Sufficient investments in consumer and or transit countries

(2) Adequacy SoS Structured definition (2) Adequacy A Electric power plants, HV grid, high-p NG pipelines, LV and low-p distribution grid, oil refineries, U-enrichment plants installations need to be able to cope with baseload, peak load & variable load (transient flexibility, variability, unpredictability)

Adequacy

(2) Adequacy SoS Structured definition (2) Adequacy A Electric power plants, HV grid, high-p NG pipelines, LV and low-p distribution grid, oil refineries, U-enrichment plants installations need to be able to cope with baseload, peak load & variable load (transient flexibility, variability, unpredictability) B Transit pipelines (NG), LNG ships, cross-border HV lines, oil-tanker fleet, assure more than one single route/means

(2) Adequacy SoS Structured definition (2) Adequacy Issues that may hamper adequacy: Nature of liberalized markets (economic risk) -- investors demand a higher IRR Unstable regulatory situation Conflict with environmental policy Uncertain regulatory character; price caps Complex permitting/licensing processes

(2) Adequacy SoS Structured definition (2) Adequacy Issues that may hamper adequacy: Circumstantial influencing elements Financial market expectations/tendencies Energy policy expectations (green papers, intentions) Political uncertainties (attitude of political authorities wrt private investment; ideological tensions in governments on investment choices to be made) Too low electricity prices (driven by RES); small load factors

(3) Avoiding sudden cuts (black outs) SoS Structured definition (3) Avoiding sudden cuts (black outs) = make sure that the overall system performs as expected (for end customer) even in case of unexpected events i.e., capacity to absorb transients, dynamics, mishaps reliability/security = issue of reliability/security redundancy (e.g., N-1 rule) related to maintenance, control strategies,

Cope with storms, Need redundancy N-1 (3) Avoiding sudden cuts (black outs) SoS Structured definition (3) Avoiding sudden cuts (black outs)

Solutions for SoS General principles Energy efficiency (reduce demand) o Avoiding kWh and Joules (energy) o Mitigate peak loads (power) Energy prices must be sufficiently high

Solutions for SoS General principles Diversity; spread risk portfolio analysis o Types of fuels/renewables

Solutions for SoS General principles Diversity; spread risk portfolio analysis o Types of fuels/renewables o Origin of the fuels

Actually, entering BE from the East; So origin RF < 7.1% Ref: FLUXYS Solutions for SoS Example: origin of Natural Gas Belgium Year 2013

Solutions for SoS General principles Diversity; spread risk portfolio analysis o Types of fuels/renewables o Origin of the fuels o Routes

Solutions for SoS

General principles Diversity; spread risk portfolio analysis o Types of fuels/renewables o Origin of the fuels o Routes o Types of technologies sufficient firm generation capacity

Adequacy Components o Generation o Demand o Interconnection Capacity Security of Electric Power Supply BE 114

Generation: Belgian Energy Mix High dependency on nuclear power Renewable energy: installed capacity energy produced 115 Sources: Elia, ENTSO-E, Apere

Nuclear Phase Out 2022-23: -2.014 MW 2015: -866 MW 116 Belgian nuclear phase out calendar: definitive (?) Current uncertainty with Doel 3 & Tihange 2

Generation: Evolution 2012-17 Sources: FPS Economy, Elia 117

Generation: Evolution 2012-17 118 Sources: FPS Economy, Elia

Generation: Evolution 2012-17 119 Sources: FPS Economy, Elia

Generation: Ancillary services 646 MW Reserves held by Elia 120 Sources: FPS Economy, Elia

Generation: Outages 121 Sources: FPS Economy, Elia

Generation: Doel 3 & Tihange 2 out 122 Sources: FPS Economy, Elia

Demand: Peak Security of supply Peak Peak history: High correlation for peaks between BE, NL & FR Most peaks occur after 6PM Entso-e[MW]Change 200714074 200813584-3,48% 2009136660,60% 2010142744,45% 201114081-1,35% 2012141910,78% 201313345-5,96% 124

Demand: Peak 2012 125 Sources: FPS Economy, Elia

Demand: Non firm Capacity Renewables 126 Sources: FPS Economy, Elia

Demand: Doel 3 & Tihange 2 127April 30 2014K.May U-WETOCO

Physical interconnection capacity: o BE-NL: 6.000 MVA o BE-FR: 5.000 MVA Net Transfer Capacity (NTC) = Commercial capacity (Winter) o BE->NL: 1.701 MW o NL->BE: 1.701 MW o BE->FR: 2.300 MW o FR->BE: 3.400 MW Belgian simultaneous import capacity: Summer: 3.000 MW Winter: 3.500 MW Interconnection Capacity

Interconnection Capacity: Winter 130 Sources: FPS Economy, Elia

Interconnection Capacity: Doel 3 & Tihange 2 131 Sources: FPS Economy, Elia But should subtract RES...

Interconnection Capacity: Are there sellers? 132 Sources: ENTSO-E Can we import 3.500 MW? o Technically speaking yes o Are there sellers?

Interconnection Capacity: Are there sellers? 133 Sources: ENTSO-E Imports form France: High sensitivity of the load to low temperatures No surplus generation capacity under severe weather conditions

Recall w/o Doel 3 & Tihange 2 2 134 Sources: FPS Economy, Elia But should subtract RES...

KCD 3 & CNT 2 out / no RES no import

Doel 3 & Tihange 2 available

KCD 3 & CNT 2 in / no RES no import

Adequacy Components o Generation o Demand o Interconnection Capacity Plan Wathelet Security of Electric Power Supply BE 138

A public tender aiming for 800 MW of new gas-fired units Nuclear phase out: o 10 year lifetime extension of the nuclear plant Tihange 1 o Removal of art.9 Creation of strategic reserves Creation of strategic reserves Demand side management & storage Interconnection (Nemo, Brabo and ALEGrO) Plan Wathelet 139

Elia analyzed the situation and the risks for security of supply for the upcoming winter Based on Elias analysis the Secretary for Energy decided on the need to create a strategic reserves of 800 MW Elia has organized a tender for this strategic reserve Have to participate: all production units for which closure is announced + all production units which are temporarily shut down Can participate: demand side (large consumers, aggregators) CREG checks the contracted prices and approve the functioning rules Plan Wathelet: Strategic reserves 140

Plan Wathelet: Strategic reserves 141 Sources: FPS Economy, Elia Non-firm RES Doel 3 & Tih 2 ?? -2014 MW

KCD 3 & CNT 2 out / no RES no import 800 MW does not help in 2014 Hopefully KCD 4 back

Range [MW] Winter 2014/150 - 800 Winter 2015/161.200 2.200 Winter 2016/171.300 2.300 Plan Wathelet: Strategic reserves Ministerial Decree 3 April 2014: The creation of a Strategic reserve of 800 MW from 1 November 2014 for 3 years. Now, 850 MW strategic reserve foreseen: - 485 MW Seraing - 265 MW Verbrande Brug (but still construction works till Jan 2015?) - 100 MW demand reduction large customers ELIA & CREG force suppliers to be in balance penalty 4000 /MWh Further needs according to Elia analysis: 143

Generation adequacy at stress o Major decrease of flexible generation capacity o Uncertain generation from renewables o Forced outage of Doel 3 & Tihange 2 o Deterministic approach fatal / probabilistic approach LOLE perhaps Result: o High dependency on (uncertain) imports to meet peak demand o Challenging integration of the growing share of renewables due to loss of flexible generation capacity Lessons Learned on Missing Money 144April 30 2014K.May U-WETOCO

Conclusions The challenges on energy provision are considerable o Geopolitics gas - Russia o Electricity Provision Should learn lessons from past experience: o Do not repeat no-no-no attitude (nuc, coal, HV lines) o Now crisis: let ELIA do its job politics not to intervene! Energy issue is very complicated because interactions more need to study the system effects A careful energy policy on EU and Belgium level is necessary to be taken out of ideological sphere...

the energy issue 2014 - continued - william d’haeseleer ku leuven energy institute

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