The Energy Transition and Policy Options for the Need of Flexibility

Abstract

National policies that seek to stimulate the energy transition require attention with the requirement for generation sources that can compensate for moments when wind and solar plants are not available. Electricity supply needs to adjust to demand in real-time, at least until energy storage becomes commercially viable, otherwise the energy security is compromised. Hence, the dilemma for energy policies is to continue to promote the expansion of renewables at the same time they secure the provision of flexible sources. One well-known technology for such is the combined-cycle gas turbine (CCGT). It has been used for a long time, however now there is concern over its economic viability due to the merit order effect of renewables. Germany is a front-runner in the energy transition and, recently, it enacted the Energy Market 2.0 to lay out a market design to accommodate the increasing intermittency. The underlying belief is that a competitive environment will allow market forces to provide the necessary flexibility in an economic efficient manner. Hence, the success of the Energiewende in this new policy framework depends on how the generation firms perceive the market conditions and investment incentives. This research investigates how these market actors and the federal government will perceive CCGT generation competitiveness, using generation costs as a criterion and external costs to account for social efficiency. A tailored Levelized Cost of Energy (LCOE) calculation is used to evaluate a CCGT power-plant in the context of a high presence of renewables. The method is broadly used and conveys the complexities of investment appraisal in a relatively simple manner, however there is no prior research that applies it to the described scenario. Energy storage is also investigated for comparison purposes. This research finds that CCGT generation firms in Germany will not have sufficient incentive to invest in new power-plants between 2020 and 2030. It is also found that the technology is not a cost-effective option for flexibility from a societal perspective either. Energy storage is more cost-advantageous than CCGT, especially when external costs are considered. Therefore, CCGT plants are expected not to be attractive for generation actors under the German energy policy framework. Vanadium batteries pose as a promising alternative for the system after 2030, but its uncertain cost development requires public investment to guarantee it effectively becomes competitive. Policies to incentivize CCGT generation seem economic inefficient and are not advisable, as the implementation of new plants during the next ten years would create long-term lock-ins.