Navigating New Forms of Volatility
This winter, the UK and Ireland face an increased risk of blackouts and spiralling energy costs as demand continues to surge following the lifting of coronavirus (COVID-19) restrictions and a bounce-back in global economies. A recent fire shutting one of the UK’s major power cables until March 2022 adds security of supply pressure to the mix and couldn’t have come at a worse time for energy suppliers . National Grid ESO has been forced to fire up coal plants as gas prices soar across Europe due to shortages and increased demand from Asia while wind farms underperform with conditions leading to reduced yields.
In Dublin, the constraints on the electricity network have prompted the government to explore providing emergency power generation to meet demand this winter . While in the UK, the National Grid ESO published its winter 2021/22 forecast months early, warning the margin of forecast electricity supplies might exceed demand by 5.3% .
These concerns follow the cold snap that swept western Europe in January, leading to a near blackout across the continent. This call was too close for comfort and prompted a warning from the German Association of the Industrial Energy and Power Industry (VIK) to not "lose sight of the issue of grid stability and security of supply”.
Yet, as winter 2021/22 looms, Europe’s fears suggest a multinational electricity outage in the region could still become a reality and, when coupled with the potential risk of fuel shortages, it shines the light on power security as a serious exposure for society and economies as a whole.
As with Winter Storm Uri and Cyclone Klaus, the growth of renewable energy is typically only part of the story - there are many other contributing factors, several strikingly similar to the events in Europe and Texas, despite the different climates.
So, what are these factors, and what part is the ongoing energy transition playing in these events?
While 2019 was a record year for renewable growth globally, COVID-19’s economic uncertainty damaged the continuation of forecasted growth in the sector in 2020. Nevertheless, increases in electricity generation from all renewable sources should push the share of renewables in the electricity generation mix to an all-time high of 30 percent in 2021 .
The key questions are: can installed capacity from renewable energy sources keep up with the growth in electricity demand? And can storage capacity help bridge the gap between fossil fuel usage reduction and more intermittent, renewable power sources? As was apparent in Europe’s narrow escape in January 2021, this will require the introduction of much greater storage capacity to manage demand and reduce the occurrence of blackouts.
At the forefront of potential storage developments are chemical technologies, mostly in the form of utility-scale batteries. According to the Energy Information Administration, the cost of utility-scale battery storage has dropped significantly, falling by almost 70 percent between 2015 and 2018 alone. Much of this reduction has been driven by improvements in Li-ion technologies, with greater storage capacity alongside longer storage and duration periods now possible.
Development has been motivated by demand for Li-ion technologies in electric vehicles and consumer electricals, but this has been scaled up for use on a utility-scale. This fact, combined with the benefits the systems already have from high cycle efficiency and fast response times, has led to high levels of installed battery storage coming from Li-ion technologies.
Renewables Growth and
the Intermittence Gap
Security of Supply:
Greater Power Investment Needed in Europe
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Navigating New Forms of Volatility
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1. www.theguardian.com/business/2021/sep/15/fire-shuts-one-of-uk-most-important-power-cables-in-midst-of-supply-crunch
2. www.bbc.co.uk/news/business-58469238
3. www.irishtimes.com/news/ireland/irish-news/electricity-supply-concerns-spark-emergency-plans-for-dublin-1.4608199
4. www.theguardian.com/business/2021/jul/22/great-britain-faces-risk-of-winter-blackouts-system-operator-warns
5. www.iea.org/reports/global-energy-review-2021/renewables
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Yet, as winter 2021/22 looms, Europe’s fears suggest a multinational electricity outage in the region could still become a reality and, when coupled with the potential risk of fuel shortages, it shines the light on power security as a serious exposure for society and economies as a whole.
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Energy Storage Market - Regional Share (%)
These batteries are now considered sufficient in size and an economically viable alternative to building new gas peaker plants, according to Bloomberg NEF, with predictions that batteries may overtake peaking plants in as little as four years. Li-ion batteries, in particular, are reasonable replacements for peaker plants, as these plants are only required to operate for short durations, which suits the technology’s capacity, and the fast response times required can easily be matched.
Batteries used in this arrangement operate best when paired with solar generation, as this follows a predictable pattern for charging. Bloomberg suggests that this increased solar penetration even drives up the cost of operating traditional peaker plants as they are required to cycle on-off more regularly, increasing wear and tear on the systems, further adding to the competitivity of battery storage. They also benefit from being able to be situated closer to areas of demand, such as city centres, reducing transmission costs on the discharging side.
However, in terms of rolling out this technology, batteries are still in their relative infancy, with Europe reaching 5.62GW of advanced energy storage in 2020. While a significant limitation of Li-ion technologies, in their current form, is they only perform well for short duration storage, typically for less than three hours. There are also issues around the lifecycle of current Li-ion technologies. Where the technology is utilised in frequency regulation, the batteries go through continuous charge/discharge cycles, which puts significant stress on the systems, causing them to lose capacity, potentially requiring the premature replacement of battery modules. This raises significant issues with project budgeting.
Global Battery Energy Storage Market Volume (GW)
While many manufacturers offer warranties (such as 10-year guarantees), they often include stipulations around how the technology can be used, such as only cycling once a day, limiting how the project can be used over its lifetime. Alternatively, this can be managed by initially oversizing the system to account for reduction of capacity. A continual drop in battery costs may make this approach more and more affordable; however, this does significantly increase the upfront cost, and as the technology is still in its early stages, the real-world rate of degradation is still not entirely clear.
There are also concerns around the environmental impact of the systems, relating to the extraction of raw materials required for components and how they’re managed in their end-of-life (EOL) phase. Lithium extraction has been associated with significant water usage and pollution that has damaged the ecosystem around mines. Similarly, the limited ability to recycle batteries as they come to the end of their usable life can cause significant environmental damage from chemical leakage if the batteries are disposed of in landfill. Given the main goal of the energy transition is to limit the environmental damage caused by energy consumption, both of these issues will need to be addressed. This, combined with the other issues raised, suggests that alternative storage technologies also clearly need to be considered.
One potential alternative, longer-term chemical storage solution is redox flow batteries (RFB), particularly vanadium RFBs. Given the infrastructure and management required of their chemical tank systems, RFBs are only economically viable when configured for longer storage times (four hours or more). As such, these systems could be particularly useful in situations that require longer durations of storage and discharge, with the added benefit that the systems have incredibly long lifecycles with no degradation expected to occur within the chemical solutions. Significantly, from a risk management perspective, RFBs are not exposed to the same degree of fire risk in comparison to Li-ion technologies. But, at this stage, the larger physical footprint, lower energy density, and higher raw material cost compared to Li-ion technologies appear to have hindered the installation of RFBs thus far.
We would likely expect further novel battery chemistries to emerge throughout the decarbonisation process, aimed at increasing capacity and capitalising upon more abundant raw materials. Innovation is inevitable, and knowledge sharing will be critical in support of the design and development of projects. Recent fire events with BESS linked to aspects such as cell failure and thermal runaway have increased the focus on fire protection, looking at effective unit separation, detection and suppression systems across project sites. To help with the economic insurability of projects, engaging the insurance industry in the development process can be critical.
Ultimately, the success of rolling out energy storage will rely on investment and support for these developments to ensure the most efficient batteries can be utilised on the grid. Regulatory support will also play a key role in this process. Other storage solutions beyond batteries will also likely play a critical role, so should be considered too, particularly if they become cheaper and less environmentally damaging than battery developments.
Across much of EMEA, the grid will typically accept generated energy to match the demand for electricity at any one point. Utilities are tasked with meeting the required ‘net load’, which is effectively the difference between the scheduled/forecasted load demand versus what level of power may be available through generation at that point. Any shortfall in matching demand to purely renewable energy could be due to demand outstripping total renewable availability or production or demand for electricity coming at a point where the total availability of renewables cannot be exploited due to conditions. Continued investment in grid infrastructure along with the crossborder international trading of electricity in a more interconnected network will both support the growth in renewables. Storage and grid infrastructure will also support the growth of decentralised and smart energy systems. With an increasingly robust energy system, there is greater security of supply and potentially better stabilisation of electricity prices.
Grid dynamics and how power is traded
By their nature, peak loading generation technologies are required to have a fast response and high availability. Their low utilisation makes the cost of electricity relatively high as any capital, and operational outlay needs to be recovered via low levels of generation. The table on the right evaluates the advantages and disadvantages of the various technologies to help bridging energy gaps and increase the security around supply.
Operational regimes and filling the gaps
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Recent fire events with BESS linked to aspects such as cell failure and thermal runaway have increased the focus on fire protection, looking at effective unit separation, detection and suppression systems across project sites. To help with the economic insurability of projects, engaging the insurance industry in the development process can be critical.
Forbes reported that during the during the Texas power outage earlier this year, demand outstripped supply by over 12 GW. This is an extreme event, but for a system the size of Texas, a 2 GW power swing over 15 minutes is not uncommon.
Most grid systems have peak and off-peak periods, and grid operators are very experienced in managing these movements. To deliver 2 GW of power over an hour via the other means would require 35 to 55 aeroderivative GTs, 50,000 BMW i3 batteries or four large gas turbines. With more renewable power coming on stream and old coal, oil, and gas-fired plant being retired, the issue facing grid operators is real.
In Europe’s almost blackout disaster, the continent was met with a perfect storm of high demand, input fuel issues, and poor plant preparedness for a severe cold snap. Most climate predictions expect more severe weather events, and a similar situation could occur during prolonged periods of high temperatures. Traditional plants become significantly less efficient during high temperatures, water resource reduces and winds tend to decrease strength. During these periods, demand is likely to spike as people increasingly use air conditioning.
Extreme weather events may affect equipment reliability, with insurers expected to cover for damage to property but also lost earnings during peak power prices.
The solution in the long term is likely to be provided by a combination of renewables and gas turbines augmented by battery plants. The energy transition is beginning to move toward hydrogen generation during peak power periods. GT manufacturers are now developing gas turbines that can run on a mixture of hydrogen and natural gas and solely hydrogen in the future. Hydrogen can also be used efficiently in fuel cells, and it may well be considered as a large-scale alternative to battery plants.
The shift from conventional to renewables is not linear; it is not progressing in a straight line towards a conclusion. Instead, it is driven by an abundance of factors, including demand, economic pressure, ESG, technology, as well as hidden interconnectivities that combine to create an impact that is both complex and contradictory. With further economic upheaval and extreme weather events on the horizon, investment and support are needed across the industry to continue developing the most efficient battery storage.
Conclusion
Discovering and understanding the exposures that have/are evolving from the energy transition is the first key step. Aon’s breadth of client base provides it with a wealth of data and experience in the power generation industry sector.
Discovering
Developing the correct solutions and go-to-market strategy to cater for those risks is the next step. Our experience of managing hybrid programmes where both conventional and renewable power form the generation mix means we are well-placed in understanding insurers' risk appetite and available products to serve clients best, balancing generating portfolios of this nature.
Developing
Delivering the programme that provides the correct retentions and risk transfer is the final step in the process. In-house engineering expertise and the ability to generate remote and on-site engineering reporting give Aon detailed and real-time data for market negotiations. Direct access to key individuals and decision-makers can make a difference in unlocking insurer capacity. The Aon network is designed with these factors in mind to serve our clients best.
Delivering
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In Europe’s almost blackout disaster, the continent was met with a perfect storm of high demand, input fuel issues, and poor plant preparedness for a severe cold snap. Most climate predictions expect more severe weather events.
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Mark Potter
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luis.fragoso@aon.pt
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