Hand in hand towards the energy revolution

Why renewables can’t exist without conventional power plants

In a  poll on our LinkedIn, we asked followers the question, “What will drive the energy transition?” Since a majority voted that it will be driven by an increasing share of renewables, we thought we’d explain this topic in more detail. 

In hindsight, we now can clearly see why some technologies prevailed against others. But at the time, experts themselves weren't in agreement - let alone the public.

Take for example the horse carriage. All infrastructure was built around it - the width of the streets, parking stations with feeding supply. Also, people were used to the speed and the lack of comfort during the ride, so when Henry Ford came along with his modern assembly line for manufacturing automobiles, the public was skeptical. But as the decades passed, the environment and human behavior adapted to automobiles and they became established as an indispensable commodity for modern societies.

More recently, we saw online streaming services surpassing Blu-ray, which in turn had just replaced the DVD. We are now used to modern technology gaining ground fast and then finding itself in retreat a few years later. When you look at the energy sector you may come to the same radical conclusion: If the goal is to have fully sustainable energy generation at some point and renewable energy sources are the superior technology to help us achieve that goal, why not replace all those unsustainable thermal power plants with wind and solar parks immediately and entirely?

In this article, we want to show you why the energy sector can’t be turned 100% renewable right away and how conventional power plants have come to play a positive role in the energy revolution.

Renewables are on the rise

Renewable energy sources are predicted to dominate the energy market by 2030, so investors are jumping on board, encouraging innovation while lowering manufacturing and installation costs. Electricity demand is rising, with e-mobility about to become the norm in every home, and countries are also seriously considering shifting household and commercial heating to electricity. The operation of renewable energy sources will become more viable with the widespread use of battery storage. At the same time, it is predicted that electricity costs will drop drastically, which will only reinforce the upward spiral for renewables.

If the steady supply of resources for manufacturing is maintained and the Suez Canal remains passable, renewables will have no problem meeting this rising demand for electricity. The bottleneck does not lie in logistics or governance, it lies in the distinct nature of the energy system, as a rising share of renewables can also cause more grid instabilities and a higher risk of blackouts.

Keeping the grid stable with flexibility

The degree of flexibility of a power system is defined by how quickly it can adapt generation or usage in response to external forces. Renewables have a low flexibility capacity, as their energy generation heavily depends on fluctuating environmental conditions like the wind and sun, and therefore they cannot simply produce more energy on cue. An energy system that partly consists of renewable energy sources needs to handle this energy fluctuation by balancing it with other flexibilities. 

Renewables get cheaper to produce and operate each year and they are seen as the backbone of the energy market in a sustainable future, but what will happen to conventional energy sources? According to the International Energy Agency, the combined share of coal, gas, and nuclear power plants will shrink to an estimated 55% by 2040, and along with it the share of flexibility potential in the energy system will drop as well. But having more renewables also means more demand for that precious flexibility. Alarm bells should be ringing. A shortage in flexibility can cause grid instabilities, which in turn can lead to inefficiencies, local outages, or even widespread blackouts.

Conventional thermal power sources get a lot of bad press due to the unsustainable nature of the resources they consume. But with a share of more than 70% of total capacity generating almost 5000 GW, they still remain the backbone of today’s energy market. With their huge flexibility potential, they will stay a major player in future energy markets, and with retrofitting measures it is possible to further increase their flexibility.

By providing crucial flexibility to an energy system that consists of more and more renewable energy sources, they are able to minimize the risk of a major blackout. This way, conventional thermal power plants can play a new positive role in the energy transition, as they enable us to integrate more solar and wind energy into the energy system.

Why keep conventional power plants alive?

RethinkX regularly reports on studies about the disruption of the energy sector. In their recent report ‘The Great Stranding’, they assume that in the next decades conventional power plants won’t be able to sell the same volume of electricity as they do today. Competitive pressure from solar photovoltaic and onshore wind power, as well as battery energy storage, will cause electricity prices to drop sharply in the next few years. As they won’t be able to sell their electricity at the high prices that covered their costs in the past, conventional energy sources will have a hard time staying marketable.

While in renewable energy sources flexibility is hard to come by, in thermal power plants it can be developed at a low cost. In the future, these plants could run at a lower capacity and provide crucial flexibility by marketing the majority of their capacity on the intraday market. This way conventional power plants can offer valuable energy in times when renewable energy sources aren’t able to provide sufficient electricity and are therefore able to stay competitive without relying on government subsidies.

So renewables or conventionals? In the medium term, there will be no declared winner, as for a sustainable and stable energy supply they are required to go hand-in-hand. We need all types of energy sources to do what each does best. And this can be arranged on a barrier-free intraday market, where market participants can enhance their performance by responding to supply or demand in order to take advantage of favorable prices.

Raise profits with flexibility markets

To fight climate change and reach the 2050 goals, many countries, like the UK, decided to go for electrification of many sectors. Today electricity makes up just 20% of energy demand, and according to the Energy Transitions Commission (ETC), by 2050 it could increase up to 70%. But where would the required amount of electrical energy come from? More nuclear and thermal power plants? This would counteract the sustainability goals in the first place. The solution is to introduce as many renewable energy sources as possible to meet the rising demand.

With the manufacturing and installation costs rapidly falling, renewables and the corresponding storage solutions are most likely the only way to cover the massive expansion of electricity demand. Renewables as the main source of energy represent the cheapest and most efficient way to decarbonize the economy. However, ETC calculates that wind and solar must increase from today’s 10% to about 40% of total electricity generation by 2030, and over 75% by 2050. Annually wind and solar installations must therefore grow 5-7 times by 2030, and more than 10 times by 2050. With such a high rate of energy being dependent on environmental conditions like wind and sun, it is key to be able to tap into the flexibility potential of all kinds of energy sources, renewable or not.

Renewable energy sources themselves can also play a vital role by offering flexibility to the system through trading energy on an intraday market. In 2020, the share of electricity generated by sustainable energy sources amounted to 36.6% with a total production of 2800 GWh. With this share constantly rising, making use of this flexibility potential can play a vital role in providing the additional electricity, while also meeting climate change goals. Trading the flexibility of conventional power plants on the same intraday markets can stabilize the grid when renewables can’t meet the demand due to unfavorable weather conditions.

The significant growth of renewable energy with an increase in total energy production of almost 50% compared to 2016 clearly correlates with the growth of intraday trading, with EPEX Spot showing a 77% increase in intraday trading volume in the same time period.

Getting started with intraday trading

Intraday trading is already complicated as it is and has surpassed the skillset offered by human traders. Increased volume and volatility, an ever-growing number of products, and the move to trading in near real-time make it extremely challenging for manual traders to succeed - not to speak of all those different types of power plants, technical requirements and trading strategies. To keep up with the competition, you really need to implement algorithmic trading and automation of the full trading value chain. Running your own intraday trading operations requires a complex setup including software, sophisticated data analysis, and a specialized team.

Are you interested in marketing your renewable or conventional power assets but not sure how to get started? Or just wanting to avoid the hassles of running your own modern intraday trading desk? Our team of experts in AI-based energy trading can take care of it for you, getting you started in no time with full transparency and no risk.

Book a non-binding call today.