COLUMN-Govts may over-compensate for grid risks: Gerard Wynn
By Gerard Wynn
LONDON, July 12 (Reuters) - Policymakers have intense aversion to the risk of lights going out.
The high degree of uncertainty involved in calculating future electricity supply, therefore, may lead European Union governments to overreact.
They are likely to err too much on the side of caution and intervene in energy markets to boost supply by more than is needed for the future, unnecessarily increasing costs that consumers will end up paying.
One of the biggest uncertainties, for example, is how to treat the reliability of weather-dependent wind and solar power, which will account for the biggest increase in new capacity over the next decade.
Some power grid operators, such as in Austria, Cyprus and Estonia, define all wind power as entirely unavailable when calculating how much overall capacity is needed to prevent a blackout.
In Lithuania and Sweden, operators have assumed a slightly higher 6 percent availability, in Poland 21 percent, Greece 25 percent, and in France and Portugal 30 percent.
"There is not yet sufficient data for wind generation during winter to enable us to understand the relationship, if any, between wind availability and high demand," Britain's Ofgem has said.
The most thorough investigation so far of the adequacy of the European power supply through this decade has come from the European Network of Transmission System Operators for Electricity (ENTSOE), which represents all operators of EU grids and others connected to their networks.
Its latest conclusion, published in April, was that EU power generation would collectively fall short of peak demand only if countries failed to carry out investments in power generation that are already planned.
The ENTSOE report categorised generating capacity according to the reliability of power plants in meeting unexpected demand.
It termed total supply as "net generating capacity", which divided into "unavailable capacity" and "reliable available capacity". (See Chart 1) Power plants that could be called upon at short notice were deemed reliably available.
When it came to wind power, for example, ENTSOE combined the widely varying estimates on reliability from the different member grids to come up with a regional figure.
It judged that a system adequate to avoid blackouts would require that "reliable available capacity" be greater than combined peak demand (measured as the third Wednesday of January and July at 7 pm) plus a 5 to 10 percent margin of spare capacity. Spare capacity is needed against the chance that a large power plant could go offline unexpectedly.
The report explored two main scenarios.
Scenario A was a conservative outlook, taking into account grip operators' expectations only for the new supply they are sure about.
Scenario B was its baseline outlook and included additional generating supply that the operators expected to be built, "whose commissioning can be considered as reasonably credible according to the information available".
Under Scenario B, capacity would be adequate throughout the decade, rising every year to 2020 except for a dip in 2015/16.
Under the more pessimistic Scenario A, the adequacy level would turn negative by 2020 (by 7 gigawatts compared with a total installed capacity of 1,092 GW), which meant that extra generation would be needed. (Chart 2)
Britain's Ofgem shows how regulators may take a more cautious view than grid operators. Two weeks ago, it used a reference scenario that was more pessimistic than the one used by National Grid.
"We make less optimistic assumptions than National Grid with regards to plant investment and retirement and the contribution of interconnectors," Ofgem said in its report, "Electricity Capacity Assessment Report 2013".
"If we look at National Grid's ... scenario, the trends are the same, but the margins are consistently around 2 percentage points higher."
Ofgem also differed from the National Grid's assumption of falling power demand.
"We estimate in the Reference Scenario that the probability of a large shortfall requiring the controlled disconnection of customers (is) ... one in 12 years in 2015/16. This increases significantly to around one in four years if the demand reductions fail to materialise," Ofgem said.
"The Reference Scenario alone should not be relied upon to assess the risks to security of supply in the coming years," it added.
Nevertheless, Britain announced a costly intervention in energy market on the same day as the release of the Ofgem report. It cited the report to justify plans to pay utilities to increase gas-fired power capacity in the system.
Britain's plan to use market tools to increase capacity may be very difficult to reverse. Once the government has encouraged utilities to build power plants, can it stop paying them?
One alternative that could assuage policymaker fears about keeping the lights on but avoid risking higher costs than cannot be reversed would be for the government to temporarily keep older plants out of retirement to be used as strategic reserves in case of emergencies.