Decentralized energy: how much of it?

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Antoine Cahuzac, chief executive officer of Electricite de France (EDF) said yesterday at a panel discussion in Abu Dhabi’s Sustainability Week (ADSW) that EDF clearly sees a trend towards the development of decentralized energy systems. This trend stems from the fact that renewable energies, like solar PV, are becoming very cheap and local communities increasingly want to generate their electricity locally, said Cahuzac. We don’t see this trend being reversed, however, EDF’s CEO added, we [EDF] believe what is going to prevail is a mixed system that combines both centralized and decentralized structures.

Developed power markets

A seminar titled “Energy Governance: New ideas, New Institutions, New People”, organized last month in London by the University of Exeter, suggested that in various developed power markets we already see a move towards decentralized energy systems, but this doesn’t mean that a centralized co-ordination process is not in place.

Event participants stressed out that as we move towards a physically and financially decentralized, customer-based model of energy market, there is need for greater clarity regarding the architecture of the new model and who is governing it. In other words, greater functional and institutional clarity is needed.

Matt Hastings, director of Centrica’s, an energy utility, distributed energy and power division told the event that given traditional roles of the energy stakeholders are blurring into one, we must address what roles are missing from the current energy market models that are needed to transition into a decentralized energy system.

Charlotte Ramsay, director of the Future Role of the System Operator program at the National Grid, a power transmission company tha operates in the USA and the UK, told the event in London that National Grid recognizes the fundamental shift in the energy sector towards a decentralized and decarbonized energy system. However, she added, National Grid embraces the whole system kind of thinking, which means the transmission operator holds a central role towards the decentralization effort.

Centralized versus decentralized structures 

Michelle Davies, global head of clean energy at Eversheds, a corporate law firm, likes to question the role of the transmission system operators even further though. Replying to Masdar, the United Arab Emirates’ (UAE) state-owned company that is the organizer of the World Future Energy Summit (WFES) that runs this week in Abu Dhabi, Davies said that the impressive development of renewable energies in developed power markets “has put a significant amount of pressure on the grid infrastructure,” leading these markets to look at “at storage solutions to balance out the intermittency of certain renewable energy solutions.”

Furthermore, Davies argues, “historic distribution models may no longer be the most appropriate,” and “it is here that the focus on the technical enhancement of storage is key.”  “As models for renewable energy coupled with storage emerge, the need for a national grid infrastructure come into question… Many countries in the developed world are looking at off-grid [meaning off the transmission grid] distributed energy solutions rather than national grid-fed structures”, although such plans vary from country to country and often depend on the location of a country’s natural resources, Davies noted.

Davies’ arguments include “the ability of storage to operate on an aggregated basis and on super-fast response times,” and rapid response aggregated small-scale solar solutions, (for example in residential and commercial buildings) that create virtual power plants.

Emerging markets

Clearly, the off the transmission grid model “is most suitable to markets with a less developed power infrastructure, or indeed a power shortage,” said Davies. The problem with such markets, Davies argued, is that “the financial model has to stack up.”

There are of course some cases where the power price is high enough and/or the energy security issue is very high on the policy agenda, so that off-takers are willing to pay a premium to secure their power supply (for instance in Jordan). But in general, some form of financial support will be necessary, Davies concluded.

The problem, Davies said, is when off-takers are non-government. In this case, the financers, “whose only revenue will be that which is derived from the power purchase agreement (PPA) with the off-taker, will need to be satisfied that the revenue stream will continue for the lifetime of the debt. If the off-taker is not sufficiently credible, the PPA is worthless.”

A solution to this problem might be “a hedged approach on an aggregated basis coupled with the utilization of technology”, hinted Davies. This is why we see some sponsors securing a large number of customers and modelling their returns on the basis of a defined percentage performing under the contract, Davies added. “This can then be coupled with mobile payment solutions, including pay-before-use which further decreases the risk for the sponsor. But the bank will still need a significantly high buffer of customers over and above what is required to deliver the debt repayment.”

So, it appears that solutions to current challenges can be found and stakeholders try various business models. But if the localized, off-the transmission grid solutions are to be delivered by the private sector, the governments also need to design robust frameworks that allow the market to deliver, argued Davies. Often, we see countries in Africa and the Middle East allowing only government-owned entities to participate in the energy market.

WFES 2017 runs from 16 to 19 January at the national exhibition centre in Abu Dhabi and hosts a plethora of events concerning both developed and developing markets.