SDE++ - Future of Energy


Realizing a renewable energy future

Overcoming regional grid constraints

Although the year 2020 will most likely go down in history as the year Covid-19 struck the world, the year 2020 is also the year of the International Energy Agreements. In 2019, almost half of the European Union’s 28 member states had already achieved or were close to achieving the agreed 2020 renewable energy targets. Unlike the Netherlands, which seems to live up to earlier predictions of not achieving the set goal of producing 14 percent of the energy supply through renewable resources, at least not in 2020.

Increase in solar power production

Of course, this does not alter the fact that the Netherlands has certainly shown an increase in renewable installed capacity in recent years. In fact, in 2019 the Netherlands generated 18 percent more electricity from renewable sources than in the previous year (2018: 11 percent)1. A main contributor to this development, is the astonishing 40 percent increase of power production from solar panels (2019: 5.2 bn kWh). Over the last years, solar power has often been considered to be the catalyst for the energy transition. To put this in perspective, in 2010 the installed solar capacity amounted to 90.2 megawatts, whereas in 2019 the (provisional) installed solar capacity amounted to 6,924 megawatts. The bulk of the increase is attributable to new, large rooftop and ground-mounted solar panel systems.

And there is much more to come. With more than 13,347 megawatts of unrealized SDE+ applications, the Netherlands is getting into position to meet its renewable energy target in 2023. However, like all transitions this one will not be without its challenges.

Climate agreement in time | Future of Energy | Deloitte Netherlands

Renewable energy sources cause unpredictability

Delivery capacity is seen as one of the most important factors in making the shift to sustainable energy successful. The increase in solar power has turned out to be significantly higher than expected, which caused the planned investments in the medium-voltage network to be insufficient. The more electricity is produced from renewable sources such as solar, the more unpredictable the energy supply will be. As a consequence, network operators are often surprised by a sudden inflow of newly induced electricity and are unable to quickly adjust their cables and transformers accordingly. 

Several utilities in the Netherlands have flagged their concern and have confirmed that congestion on their medium-voltage network is increasing as a result of the many projects that have been installed over the last few years. Some areas are even marked as not eligible for connecting new renewable projects as there is no grid capacity at all. As a result, there are fewer locations at which to connect new renewable energy projects. This may form a serious threat to the 13,347 megawatts in the SDE+ pipeline, as developers may have to wait longer for additional grid capacity needed to be granted access to the grid.

Grid capacity issues

According to Netbeheer Nederland, grid capacity issues are not present throughout the entire country, but mainly in the Northern and Eastern provinces Groningen, Drenthe and Overijssel. At the same time those areas are exactly the attractive provinces for large-scale ground-mounted solar farms with a large amount of available land at low prices. 

Based on the latest information from network operators, we have mapped the congestion areas and distinguished between no grid capacity and limited grid capacity. In these regions, congestion research has been conducted in order to match supply and demand of grid companies and institutions which resulted in an excess of demand for electricity. 

Provinces with regions that have an immediate shortage of capacity are Gelderland, Noord-Holland and Zeeland. Overijssel, Drenthe, Groningen and Friesland also have significant capacity issues. Putting the pieces together, this means that 3,472 megawatts (or 26.0% of total unrealized SDE+ applications) is currently facing the risk of not getting connected to the network as these projects are located in limited or no capacity regions. For a part of the remaining 9,874 megawatts, it is only a matter of time before these projects will face similar constraints.

Insufficient grid capacity | Future of Energy | Deloitte Netherlands

Solutions for the energy transition

Despite how much we love a one size fits all approach, the energy transition is far more complex. Only when all actors and potential solutions are taken into account is it possible to form a clear picture of our future energy system. We will elaborate on a couple of relevant solutions for the energy transition before we provide a comprehensive view on how the pieces fit together. 

Political and regulatory risk need to be revised

Political and regulatory risk remain one of the biggest problems for making long-term investments. Uncertainty about upcoming regulation increases the risk and lowers the appetite of investors to fund new projects. The current regulatory environment is largely based on fossil fuel generation capacity. We are used to a world where energy supply follows demand. In a world full of renewable energy it is exactly the other way around. Renewable energy is being produced when the wind blows and the sun shines, independent of the demand at that point in time. Under the current market structure and regulation this leads to unwanted situations. 

On April 20th of this year a record amount of 9 gigawatt of renewable energy was produced covering 70% of the Dutch electricity demand, thereby pushing spot prices into negative territory. Continuously low or even negative energy prices deteriorate the earnings model of renewable energy producers. Besides European, national and regional tax incentives with enough maturity to provide a solid basis for investment decisions, regulators should adopt the new supply-based reality. The demand side of the equation needs to be much more flexible and regulators should focus on (incentives for) an optimal distribution of the demand flexibility in a way that maximizes the flexibility of the aggregate demand.

Capacity of the grid is crucial

Another important factor is the capacity of the grid. Dutch medium voltage grid operators have a joint annual capex budget of ~€2 billion while high voltage grid operator TenneT plans to increase its annual capex to €4-5 billion (currently €3 billion) for the next ten years. Grid operators face difficulties effectively spending their budgets as a result of constraints in execution capacity (e.g. limited workforce of technicians), time consuming legal procedures and insecurity about the long-term need for the investments currently demanded. Grid and metering costs already soak up 20% of the energy bill of households and are expected to increase in the coming years. These costs need to be kept under control. 

Is temporarily using the emergency lane of the grid an option? 

On the 28th of June 2019 the Dutch government published its climate agreement. Regional Energy Strategies (‘RES’) are an integral part of the agreement. The Netherlands is divided in 30 regions that all have to come up with a plan to increase solar and wind generation capacity. The cumulative generation capacity for all 30 regions should reach at least 35 Terawatt hour in 2030. As mentioned before, connecting all this new renewable generation capacity leads to congestion on the grid. This problem can be partially mitigated by (temporarily) using the reserve capacity or ‘emergency lane’ of the grid. Additional agreements with users of the emergency lane need to be made. In case of outages or maintenance works on ‘the main road’, supply to consumers need to be prioritized. This might force producers using the emergency lane to be temporarily switched off. Industrial consumers are temporarily switched off form the emergency lane too so they need to have their own back up facilities in order to be allowed to use the emergency lane in the first place. 

Investing in smart grids

Investments in ‘smart grids’ play a crucial role in the prementioned demand flexibility as well. Grid operators don’t want their grids to be overloaded, energy companies are searching for new products and services and local sustainable energy initiatives are on the rise. Smart meters for example are able to communicate about the production and the consumption that is taking place behind the meter. As households are responsible for about one third of the electricity consumption and also increasingly acting as producers, they are important potential providers of flexibility. Pilots show that consumers are willing to shift their energy consumption patterns if this behavior is financially beneficial. With all these flexible and smart customers (consumers and producers) there is an important role for an aggregator that consolidates the production and demand of a large group of customers thereby balancing supply and demand. 

Will storage solutions become profitable business models? 

However, even with the greatest demand flexibility it is still impossible to exactly match demand to supply. The supply pattern of renewables is simply too capricious and unpredictable. In addition, supply dynamics are also impacted by the location of the assets - i.e. half the country can be sunlit while the other half is shrouded in clouds, and coastal regions usually face higher wind speeds than inland areas. Therefore new business models will evolve around storage solutions. The higher the percentage of demand being fulfilled by renewables the more likely it is that storage solutions become a profitable business model as they play an important role in ‘peak shaving’ - i.e. taking the abundant supply from the net in storage and selling it back when renewables are not able to fulfill the total demand. 

The main storage solutions are batteries and hydrogen. Taking into account that battery technology is currently more developed, we expect hydrogen to catch up and in the long run overtake battery technology as the main storage solution. The relative preference for one or the other will depend on specific circumstances. Hydrogen is a transportable, energy-dense heavy duty storage solution, while batteries can be used as a more temporary solution in a fixed location where supply and demand are in balance over time (e.g. at home or light duty transportation). The question “hydrogen or batteries” is often debated. However, given the different characteristics of both, the future will most likely consist of both hydrogen and battery storage solutions. A more relevant question is when and where to apply either one of them. 

Developing regional demand strategies will pay off

When taking all discussed parts of the solution (e.g. regulation, grid investments, smart grids and storage) in consideration we plea for a uniform approach towards the demand side of the equation embedded in a future proof regulatory environment. Just as the RES focus on the supply side, there should be a cohesive and regional approach to increase the demand side flexibility and create favorable conditions for energy storage. Stimulus can be given to electricity consumers (households and businesses) who add flexibility to the demand curve; either by shifting their consumption patterns or by providing storage solutions. 

A menu of demand side solutions should be laid over regions to find out which solutions are most efficient for each region given the specific characteristics of the region. Does the region contain a lot of flexible households with small consumption patterns, or is the region filled with industrial companies with large and inflexible consumption patterns? Is there an abundant supply of renewable energy in the area, or are there only temporary imbalances between supply and demand? If there is abundant supply in a region what will be the most efficient way to transport this capacity to regions in need (e.g. over the grid, via a hydrogen pipeline network or perhaps through liquified hydrogen tankers)? We expect that the investment in regional demand strategies will pay off in the form of substantial efficiency gains and lower unprofitable investments. 

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