FOSSIL FUELS, RENEWABLE ENERGY OR BOTH: WHAT SHOULD THE FUTURE ENERGY MIX BE? HERE IS THE IMPORTANCE OF ENERGY PLANNING (WHICH IS STRUGGLING IN ITALY)
written by Tommaso Tiozzo Bastianello and Duccio Baldi *
The concept of energy planning takes on different meanings depending on its various facets. Broadly speaking, it can be understood as the process of developing medium- to long-term policies that helps planning the future of an energy system. This is often done using integrated approaches that consider both energy supply and the role of energy efficiency in reducing demand. If planning is conducted by governmental agencies, this results in the creation of a framework of regulations for the energy sector, leading to changes in fuel prices or the construction of a certain type of power plant. Over the past two decades, many countries have deregulated their energy systems, making the role played by energy planning less effective and leaving the main decisions to be taken by market trends. This has led to increased competition in the energy sector but has also left the door open for companies seeking mere profit, heedless of the monstrous impact fossil fuels have on our planet. So how can we reverse this trend? By planning the future energy system years in advance, thanks to energy planning.
THE DIFFERENT APPROACHES
Energy planning is mainly conducted within governmental organisations, but there are some examples where the private sector, with large energy companies specialising in electricity supply or oil and gas production, makes use of these tools. The scale of use varies from local, regional and national projects to global studies and, if planning is conducted by governmental bodies, population growth plays a key role. However, when talking about energy planning, one must always specify whether the overview we are referring to is short term or long term. In the former case, the approach is directly related to operations planning. In order for an energy system to function properly, all the systems and management operations supporting them that lie behind the generation and transmission of energy, known as ancillary services, must be planned in advance. Maintaining grid stability, system security and the quality of the energy supplied is no small matter. This requires a long list of actions, including planning to avoid blackouts and outages, minimising system and monetary losses in the market, and gradually reducing CO2 in the environment, to be carried out in advance and with extensive planning. Long-term energy planning, on the other hand, aims to optimise investments and reach set targets by minimising costs and maximising the performance of the energy system as if it were one big machine in continuous motion. Here, energy sector scenarios, constructed with mathematical algorithms and energy system models, are analysed quantitatively to extrapolate regional or national energy (or emission reduction) targets and related policies and investment strategies. Such planning has been a central component of energy policy processes around the world for years. It is the tool that sets the guideline for decisions on when, where and how to invest in the energy sector. The process addressed in long term energy planning involves a number of elements, including institutional arrangements, capacity analysis and modelling methodologies, and the use and communication of scenarios. While many countries employ established approaches in these areas, the energy transition is creating the need to re-evaluate many aspects of planning methodology and the role it can play.
HISTORY AND STRUCTURE
As anticipated, energy planning has a long history behind it. The first attempts to develop large-scale energy system models, aimed at developing energy policies, are documented as early as the early 1970s. At that time, a high enough level of computational power was reached to process extensive simulations, providing more usable scenarios and thus establishing their importance. The first Energy System Models (ESM) had as their field of study the technologies that were the most advanced and necessary at the time to accompany the increase in industrial activity that the most developed countries were experiencing. These technologies were, of course, based solely on fossil fuels, both because of their greater availability and cost. It is in fact only since the 1990s, and especially with the signing of the Kyoto Protocol in 1997, that ESMs have focused on integrating renewable energy into the energy system and reducing greenhouse gases (GHG). Thus, they introduced environmental impact parameters that did not have pure cost-effectiveness as their sole objective. ESMs are based on algorithms that consider both technical and economic inputs, and aim to create as detailed a representation of real systems as possible, while allowing for simplifications that are sometimes necessary. A real system is, for example, the electricity grid of a country with its production plants (fossil and renewable) and its distribution network. In any energy model, one starts with a simplification of a past or present system that provides a characterisation of the existing structures and thus the skeleton of the model. Next, it is necessary to add a series of assumptions that allow future trajectories, sometimes too complicated to be represented, to be projected as realistically as possible. It is worth emphasising how the solution found by the model is governed by what the target to be achieved is. Simplifying the difficulty behind this, an example of this process could be to set the model to achieve a fraction of electricity in the country produced from renewable sources that is above 70% in a given year. Once this target has been set, the final solution will be to reach the quota. These models then choose the most efficient or least expensive solution, using a disaggregated data set. The common goal of an optimisation process is to find the structures (i.e. the size of the energy system) and their operations in a way that minimises the total system costs. Each problem has a different design of the structural parameters and framework in which the system operates. In particular, the four main challenges related to energy system models are time and space representation, system complexity, transparency and uncertainty of results, and behavioural and social aspects.
The different types of energy markets in Europe
European electricity markets, as shown in the figure, are divided into: long-term markets, wholesale markets, balancing markets and finally re-dispatch markets.
The long-term energy markets (yellow boxes in the figure) start approximately four years up to one month before delivery. A selected financial exchange organises the electricity trade, where energy quotas can be bought and/or sold. The traded energy prices are denominated per supply zone, which in most cases has different values for different zones within national borders. If an operator wishes to buy energy quotas between trans-national bidding zones, long-term inter-zonal transmission rights must be acquired separately. Furthermore, if deemed necessary and under certain conditions, Member States may decide to establish a capacity market. This measure allows the purchase of electricity from selected power plants at any time to meet unplanned energy demands.
The volumes traded on wholesale markets (red boxes in the figure) are only a fraction of the final volume of electricity produced. The day-ahead market consists of a pan-European auction that opens at 8 a.m. and closes at noon, where hourly blocks of energy for the next day’s 24-hour period are traded. Again, trading is organised by one or more exchanges per Member State. After the previous day’s market has been closed, the intraday market opens, which provides for transactions by continuous trading in some countries (as in a stock exchange) and by auctions in others. In addition, wholesale prices serve as a price reference in long-term contracts.
After the close of trading in the intraday market, the balancing mechanism (green boxes in the figure) is activated to ensure that supply and demand always match in real time. Each state has an entity responsible for the transmission of electricity on the high and extra-high voltage grid, called a TSO (Transmission System Operator). In Italy, this role is played by Terna, which takes care of the real-time balance in its control area. The various TSOs conclude contracts at least one year in advance up to one day before delivery to ensure that there is always sufficient energy.
Redispatch (blue box in the picture) is mainly used in regions with a high percentage of renewable energy production. As soon as schedules are received, TSOs perform a so-called load flow or grid load calculation to prepare an overview of the expected grid feed-in and consumption for the next day. They analyse the dispatch to determine whether certain parts of the electricity grid could be negatively affected and to what extent. In order to minimise the number of short-term grid stabilisation interventions on the following day, the transmission system operator may instruct plant operators to postpone planned energy production based on the next day’s load flow calculation to avoid grid bottlenecks. Some Member States have merged the balancing energy and dispatching markets to simplify operations.
What is happening in the markets
Bearing in mind what has been explained about the markets in Europe, let us try to analyse the developments in recent months. On the one hand, electricity consumption in Europe returned very close to pre-pandemic levels in the second quarter of this year (n.d.r. 2021), thanks in part to an increase in economic activity in response to the relaxation of the Covid19 freeze measures, although it remained slightly below 2019 levels (-0.5%). On the other hand, energy prices rose to all-time highs. Indeed, the perfect storm was created by an unfavourable intersection of factors: a sharp rise in commodity prices (mainly gas) in combination with an increase in energy demand linked to the economic recovery and temperature fluctuations in Europe, which led to a harsher-than-expected winter in the first half of the year, halving European gas reserves.
To a lesser extent, the strengthening of carbon prices also contributed to the price increase. Specifically, the European CO2 taxation system (ETS – Emission Trading System) imposes a payment on plants producing electricity from fossil fuels (e.g. gas and coal), which has led to a further price increase. So the ETS does not work? Far from it, with the money collected from these taxes, energy projects from renewable sources are massively financed. It was the combination of factors that broke the bank, leading wholesale electricity prices to rise by 180% (year-on-year in August) and five times the lowest prices recorded during the pandemic.
HOW THEY ARE USED
Various ESMs exist in the field of energy planning, with different structures and purposes. Among the most commonly used ones is Times, which integrates a holistic analysis of the entire energy system, from raw material procurement and refining to electricity generation, transport and energy efficiency. Balmorel, on the other hand, depicts the electricity system in detail from the planning of necessary investments to the dispatching of electricity. Another commonly used model is also PowerFactory, which takes care of the detailed representation of the electricity grid and the necessary security in terms of provisioning and balancing. Other models that have similar features to the above and are frequently used are Message, Leap, Pss/E, Homer, and the list goes on. All these ESMs can be combined to achieve the desired analysis, providing energy policymakers with a broad spectrum of analysis. As mentioned earlier, energy planning can guide the energy policy-making process by illustrating different strategies to reach and meet future energy demand, taking into account climate targets, and indicating the right time to invest in certain technologies. But who are the bodies that use it? At the international level, IEA (International Energy Agency) and Irena (International Renewable Energy Agency) have been supporting countries around the world with their energy expertise since 1974 and 1981 respectively. Both agencies produce annual reports on the status of global energy systems and trajectories to meet climate targets. They are both famous for their respective World Energy Outlook (WEO) and World Energy Transition Outlook (WETO), which analyse data from all countries of the world and provide a detailed overview of the present and future. These agencies also offer their consultancy services to governments and private companies on how to use and integrate a certain type of ESM into their operations. Governments use these systems to plan investments in energy infrastructure over the long term and structure an intelligent approach on how to distribute the relevant incentives across the territory. Without the use of ESMs, it becomes very difficult to establish an energy transition process that is not to the detriment of the citizen, both on the disruption side and on the economic side (increased costs on the bill). In the private sector, such as big industry, these models are used to support investment planning strategies in relation to the development plans of nations. One has to imagine that when a state, like Italy for example, decides to invest in a certain technology, this will result in a massive movement of capital for services and infrastructure. Both of which are of interest to the private sector.
AN EXAMPLE FROM VIETNAM
One of the most useful tools for energy planning, both by public and private entities, is the energy outlook. This is a document containing an analysis of the current and past state of an energy system and how it might develop in the future considering different scenarios, always with a view to meeting regional, national and international targets. The example proposed in this article is the ‘Vietnam Energy Outlook Report 2019’, produced by Erea (Vietnam’s national energy agency), and Depp (Denmark’s national energy agency), as part of the Danish Energy Partnership Programme agreement between their respective governments. The report initially describes the status and trends of the moment in Vietnam, discussing the government’s environmental and energy policies and objectives, and the obstacles to be overcome in the long term. These policies address various issues and the targets described in Table 1 translate into percentages of renewable energy compared to electricity production or primary energy supply, improvements in energy efficiency compared to the current status, and greenhouse gas emissions compared to current trends. As described above, an essential component of energy planning is the choice of scenarios to be analysed in order to recreate the desired conditions for energy system development. For example, in the case of the Vietnam Energy Outlook, five scenarios are considered (Figure 1). The reference case (C0 – Unrestricted) serves as a benchmark against the other scenarios and illustrates how the energy system would develop if current conditions did not change and no policy was applied. The other scenarios analyse how the system would change under certain conditions chosen a priori, such as meeting national climate targets or banning investment in new coal-fired power plants from 2025. The most significant part of the report includes the analysis of the results, the comparison of the results between the various scenarios and the final recommendations for decision-makers at government level, with a special focus on the methodology of how to tackle the obstacles in the system. Among the indicators analysed are two agglomerated energy values, the Total primary energy supply (Tpes) and the Total final energy consumption (Tfec), which make it possible to quantify the resources needed and in which sectors they would be used between now and 2050. Other important variables to be analysed are the development of electrical capacity and electricity generation. In particular, Figure 2 shows, for each of the five scenarios, which technologies and the fraction needed to reach the predetermined targets in 2050. Other outputs of the model include indicators such as system costs, which consider any investment and operational costs such as maintaining the system and supplying fuels to operate the power plants, CO2 emissions, and the percentage of renewables in the energy mix of installed capacity and electricity generated. The report then develops into detailed analyses of the resources that will characterise the energy mix of the future in Vietnam, the national dependence on fuel imports, the effects of different levels of energy efficiency in the residential, commercial, industrial and transport sectors, the development of different renewable energy sources in the territory, the balancing of the electricity grid, climate impact and emissions. All these issues are analysed and a series of policy recommendations are made to support the development of an energy system that is as sustainable as possible and in line with the objectives.
AND IN ITALY?
Over the last two decades, many countries have deregulated their energy systems, making the role played by energy planning less effective and leaving the main decisions to be taken by the markets. This has led to greater competition in the energy sector but has caused little benefit to the end consumer in economic terms, with the creation of energy monopolies with great decision-making powers in setting energy prices. This trend now seems to be reversing as concerns grow over the environmental impact of energy consumption and production, particularly in light of the threat of global climate change, which is largely caused by greenhouse gas emissions from the world’s energy systems. It is crystal clear how planning one’s energy strategy in time benefits not only the citizen but also the environment. For Italy, too, the time has come to create a governmental pool aimed at creating a single Italian energy agency that would make energy transition projects transparent and at the same time construct, for the first time, an Italian Energy Outlook. The benefits would be manifold: from greater international consideration, to a clear approach to the problem that could attract foreign investment, and a unified sense of community among its citizens. If Vietnam has had these tools for a few years now, there is hope for Italy too.
* Duccio Baldi and Tommaso Tiozzo Bastianello are two energy engineers specialised in renewable energy and energy systems modelling. After both completing their master’s degrees abroad (Duccio in the Netherlands and Tommaso in Denmark) and subsequently gaining international experience in organisations such as GIZ (German government), IRENA (international renewable energy agency) and the European Commission, they decided to return to Italy to actively contribute to the energy transition, founding a start-up that focuses mainly on energy communities: Enco – Energia Collettiva.