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There are two key components of a zero-carbon electric grid. First you need generation: all the wind and solar farms. But because those sources can’t be fired up on command, you need a powerful transmission grid that can shuffle electrons near-instantly between locations of supply and demand, plus large-scale batteries and other storage.
The first part of that equation is proceeding apace. But for regulatory and technological reasons, superpowered transmission lines and batteries are still nowhere near the necessary scale. Until they are, and the grid is made much more flexible—which could take decades—renewables won’t be able to completely replace fossil fuels in the grid.
During that period of transition, the electricity market will be especially vulnerable to fossil fuel price volatility, as evidenced by Europe’s recent energy crunch, now spreading globally. In the UK, electricity prices throughout September were three times higher than any time in the last decade. Prices for natural gas and electricity are also surging in Brazil, the US, and China. Earlier this week, the price of Brent crude, the international oil benchmark, reached its highest point in three years.
Post-pandemic demand, extreme weather events, and depleted natural gas reserves are all factors—but so is the effort to fight climate change. Europe’s grid is increasingly reliant on renewables, but its wind farms haven’t seen a good breeze in months, forcing grid operators back onto gas just as prices for carbon pollution credits surge. In China, grid operators are under political pressure to cut carbon emissions by burning less coal.
“What we’re seeing is an unfortunate set of circumstances during a period of transition where we haven’t fully moved from one system to another,” says James Henderson, director of the Energy Transition Research Initiative at Oxford University. “It’s impossible to envision a world where there won’t be more volatility.”
In other words, energy price spikes will get worse before they get better.
The backstory
- Renewable energy is more affordable than ever. The price of utility-scale solar photovoltaics fell 85% between 2010 and 2020, converging with low-cost wind and undercutting coal-fired power.
- The biggest challenge is energy storage. Today, the US has about 23 gigawatts of energy storage for the grid (almost all of it pumped-hydro), but it will need hundreds of GW of storage to decarbonize the grid.
- Fossil fuel companies are under pressure. But if investment in oil and gas production falls more quickly than global demand, price spikes are guaranteed. The pandemic, during which oil and gas production froze up, offers a preview of that future.
In a nutshell
“The question is how to [help consumers] at the retail level without distorting the important price signal that you need for the energy transition. High CO2 prices are a feature, not a bug, so you cannot merely offset these price increases across the board. You have to be narrow and targeted and really help those consumers who are truly hurting.” —Nikos Tsafos, a senior energy researcher at the Center for Strategic and International Studies
What to watch for next
- Governments softening the blow. Several European countries are temporarily cutting energy taxes and imposing price caps, although that has led to energy companies collapsing, particularly in the UK. They could also reform electricity markets to provide extra compensation to peak suppliers, and offer new incentives for transmission and storage projects, as well as smart meters and other technologies to control demand.
- The US infrastructure bill. The fraught $1 trillion package includes about $27 billion for the grid, including loans to utility companies to invest in climate change protections, cybersecurity and software upgrades, and funding for transmission projects. But one of the bill’s most important climate provisions is a tweak to an obscure law that should make it easier for developers to build long-distance, high-voltage transmission lines.
- Climate policies out of COP26. The energy crisis could imperil political support for climate policies, just as the climate summit approaches in Glasgow next month. Governments will be under heightened pressure to explain how they plan to accelerate the pace of the energy transition without derailing the global economy.
- The importance of critical minerals. Clean energy systems will still be susceptible to the market volatility of lithium, copper, and other critical minerals—a market currently dominated by China.
- A world of compromise. Even a post-carbon economy won’t be immune from volatility. Electricity markets face an inherent trade-off between higher across-the-board costs (to ensure the system is fully supplied even at peak times) or lower costs with occasional spikes.
China’s power crunch
Intermittent electricity outages. Dimmed traffic lights. Half-cooked rice in rice cookers. As of Sept. 28, power rationing had been reported in at least 20 Chinese provinces, which account for 71% of the country’s industrial production. For residents, the cuts have felt like a return to the 1980s, when China had acute power shortages due to the stunning pace of its economic growth.
It’s worth remembering that shoppers outside of China, particularly American ones, also play a role in the country’s “domestic” power consumption. Chinese manufacturers powered up their factories to meet Americans’ record demand for goods, from the N95 masks and PPE of the early months of the pandemic, to the frantic shopping spree for furniture, kitchen appliances, and exercise equipment.
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Thanks for reading! And don’t hesitate to reach out with comments, questions, or topics you want to know more about.
Best wishes for a stable weekend,
Tim McDonnell, climate and energy reporter (powered by goldendoodle)
Kira Bindrim, executive editor (recovering AC addict)