Danish power prices, 2001-2105

Denmark is testing grid resilience at higher levels of variable renewables, after breaking its own world record for wind power, which reached 39% of national electricity consumption in 2015.

The country is leading where others will follow: the International Energy Agency expects renewables to account for nearly two thirds of all new electricity generating capacity worldwide through 2020, led by wind, solar and hydropower.

Denmark shows that the world can integrate far more wind power than on the grid at present. But it also highlights some challenges, including variability and zero marginal cost.

On one hand, we already understand the big picture: you can meet more variable supply with a more flexible grid, by building out electricity storage, gas peakers and interconnectors, using more demand response, electrifying heat and transport, and integrating cross-border power markets.

But questions remain about the balance, and the speed of implementation. Electrification of heat and transport, for example, could help buffer variable renewables, but is a long haul. Electric vehicle sales in Denmark are growing rapidly, but were still only 0.9% of the autos market in 2014, compared with 0.3% the year before.

Denmark’s strength is in interconnectors, where it is well-placed, given a land border with Europe’s biggest electricity consumer, Germany, and a short sea crossing to the Nordic market: Denmark can sell surplus power when the wind is blowing.

In 2014, Denmark’s electricity exports were equivalent to 29% of power consumption, according to data from ENTSOE, compared with an EU average of 14%. Denmark continues to build out interconnector capacity, such as a new 400 MW link with Germany, which will also link the two countries’ offshore wind farms.

But that solution may not suit everyone: some big renewable powers in Europe, including Britain, Spain and Italy, are more isolated by mountains or sea, making power links more expensive. They all have inadequate cross-border capacity, according to the European Commission, which estimates the cost of building out the required interconnectors at 40 billion euros through 2020.

And even in well-connected Denmark, wholesale power prices are falling, reflecting the zero marginal cost of wind power generation. Danish day-ahead power prices are now at historic lows over the past 15 years, falling below an average of 25 euros per megawatt hour in 2015, show Nordpool data (see below). Continental Europe will follow that trend in 2016.

Danish day-ahead wholesale power prices, annual average, 2001-2015 (Source: Nordpool Spot)

Danish power prices, 2001-2105

Lower wholesale power prices are increasing the cost of consumer support for renewables in Denmark, calculated as the difference between the required support level and the wholesale power price. There are similar concerns in Germany, as we blogged last week, where wholesale power prices are expected to fall disproportionately when renewables are available. And lower prices raise fears for the economics of backup power, or a so-called “missing money” problem.

On the other hand, falling wholesale power prices represent an enormous opportunity to cut the cost of energy consumption and boost security of supply by displacing imported gas.

To capture that opportunity, the EU will have to overcome growing isolationism, where Britain for example favours a national capacity market to guarantee supply by subsidising gas, coal and diesel. That seems a poor choice compared with importing cut-price Nordic power, even after factoring in the cost of long, sub-sea cables.

And the EU will have to support market reform which strengthens scarcity price signals, optimises cross-border trade and develops a regional approach to security of supply. The Swiss transmission system operator, Swissgrid, is planning interesting reforms in this area. As a hub of European power flows, Switzerland may show what is possible in power markets, as Denmark blazes a trail in renewables generation.

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  • Europe ,
  • grid ,
  • power generation ,
  • renewables ,
  • wind ,

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