TODAY’S STUDY: INTEGRATING NEW ENERGY

Integrating Variable Renewable Energy in Electric Power Markets: Best Practices from International Experience

Jaquelin Cochran, Lori Bird, Jenny Heeter, and Douglas J. Arent, April 2012 (National Renewable Energy Laboratory)

Abstract

Many countries—reflecting very different geographies, markets, and power systems—are successfully managing high levels of variable renewable energy on the electric grid, including that from wind and solar energy. This document summarizes policy best practices that energy ministers and other stakeholders can pursue to ensure that electricity markets and power systems can effectively coevolve with increasing penetrations of variable renewable energy. There is no one-size-fits-all approach; each country studied has crafted its own combination of policies, market designs, and system operations to achieve the system reliability and flexibility needed to successfully integrate renewables. Notwithstanding this diversity, the approaches taken by the countries studied all coalesce around five strategic areas: lead public engagement, particularly for new transmission; coordinate and integrate planning; develop rules for market evolution that enable system flexibility; expand access to diverse resources and geographic footprint of operations; and improve system operations. This study also emphatically underscores the value of countries sharing their experiences. The more diverse and robust the experience base from which a country can draw, the more likely that it will be able to implement an appropriate, optimized, and system-wide approach.

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Introduction

Economic, environmental, and security concerns associated with conventional fuel supplies have strengthened support for clean energy technologies among governments and the private sector on a global scale; yet questions persist about how to effectively integrate large amounts of variable renewable electricity generation.1Renewable energy (RE) accounted for nearly half the estimated 194 gigawatts of new capacity in 2010—an investment equal to $211 billion (REN21 2011). Variable renewables, in particular, have achieved significant penetration in many countries, and issues associated with grid integration are increasingly gaining attention among a broad range of stakeholders.

The depth of experience in various countries—situated in diverse geographical and market contexts—provides insights for decision makers interested in increasing the penetration of variable RE into the power sector. This study documents the diverse approaches to effective integration among six countries, and it summarizes policy best practices that energy ministers and other stakeholders can pursue now to ensure that electricity markets and power systems can effectively coevolve with increasing penetrations of variable RE.

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Approach

Many countries—reflecting very different geographies, markets, and institutional structures—are already demonstrating success in managing high levels of variable RE on the grid, such as from wind and solar. The Clean Energy Ministerial, set of experiences, so that these lessons can be applied elsewhere. The energy ministers participating in the Clean Energy Ministerial requested a review of the approaches taken, lessons that can be learned from this process, and actions that energy ministers and other stakeholders can take to create supportive markets, institutions, and power systems.

The cases selected for this study—Australia (South Australia), Denmark, Germany, Ireland, Spain, and the United States (Colorado and Texas)—all have relatively high penetrations of RE but reflect different system and market characteristics.

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Key Findings—Actions for Ministers

Actions that ministers can take to integrate higher penetrations of variable RE:

1. Lead the advancement of the technical, institutional, human capital, and market institutions required to enable RE integration

2. Develop visionary goals and plans at national and regional levels, and empower appropriate leadership to bring the visions to fruition.

3. Lead the public engagement to communicate goals and actions needed to attain them.

4. Engage in international coordination to share best practices and strengthen technical, human and institutional capabilities to achieve higher levels of RE penetration.

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Five Areas of Intervention to Accommodate High RE Penetration

Analysis of the results from the case studies conducted for this study reveals a wide range of mechanisms that can be used to accommodate high penetrations of variable RE (e.g., from new market designs to centralized planning). Nevertheless, the myriad approaches collectively suggest that governments can best enable variable RE grid integration by implementing best practices in five areas of intervention:

A. Lead public engagement, particularly for new transmission

B. Coordinate and integrate planning

C. Develop rules for market evolution that enable system flexibility

D. Expand access to diverse resources and geographic footprint of operations

E. Improve system operations.

Figure 1 illustrates, within each of these areas, when actions typically need to be implemented as a country transitions from low to high RE penetration. For each of the five areas of intervention, the following sections summarize the rationale, best practices, and challenges and actions to implementing best practices. Text boxes highlight the diversity of approaches as revealed through the case studies. Additional details on the case studies and best practices associated with these five areas can be found in Cochran et al. (2012).

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System-wide Approach to Areas of Intervention

Areas of intervention are distinct but interrelated; taking a system-wide approach will ensure that not only are individual interventions more effective but also that the system as a whole will be more robust. Figure 2 shows one example of how each area of intervention might relate to others.

Costs of Integrating High Penetrations of Variable RE

Calculating the cost of integrating high penetrations of variable RE is very difficult; however, recent integration studies have demonstrated that the costs are manageable (Bird and Milligan forthcoming). Integration costs can be divided into three categories: those that relate to transmission extension and reinforcement (not including the cost of linking to the grid); those incurred in the balancing of increased volatility in the power system; and those that may be incurred to maintain the adequacy of the power system (i.e., its ability to cover peak demand). Milligan et al. (2011) note that all generation sources, including non-renewable sources, have associated integration costs.

Several studies, including the Eastern Wind Integration and Transmission Study (NREL 2011), the European Wind Integration Study (EWIS 2010), and the Greennet study (summarized in Holttinen et al. 2009) have examined integration costs. The Eastern Wind Integration and Transmission Study found that among various scenarios, the interconnection-wide costs excluding transmission costs for integrating large amount of wind were less than $5 per megawatt-hour (MWh). The European Wind Integration Study examined both costs and benefits of incorporating high penetrations of wind, finding that the costs of managing the variability of wind ranged from €2.1to €2.6 ($2.7 to $3.4) per MWh, less than 5% of the calculated wind energy benefits.

The Greennet study estimated wind power balancing costs in Denmark at 28% market share amounted to €1-€2 ($1.3-$2.6)/MWh (Holttinen et al. 2009). The estimated values are similar to real world experience in West Denmark, where costs have been €1.4-€2.6 ($1.8-$3.4)/MWh at 24% wind penetration. These real world costs actually overestimate the balancing costs because the system operator collects more revenues than are actually required to pay the balancing resources used by the system, but they are nevertheless indicative of the magnitude of these costs. The Greennet study determined that additional balancing costs in Germany, at around 10% penetration, would be around €2.5 ($3.3)/MWh (Holttinen et al. 2009).

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Conclusion

The cases reviewed for this analysis illustrate considerable diversity, not only of the electricity systems—and their supporting markets, institutions, and renewable resources—but in the actions each country has taken to effectively integrate high penetrations of variable RE.

The cases reveal that there is no one-size-fits-all approach; each country has crafted its own combination of policies, market designs, and system operations to achieve the system reliability and flexibility needed to successfully integrate RE. Notwithstanding this diversity, the approaches coalesce around five strategic areas of intervention:

• Engage with the public, particularly in developing new transmission

• Optimize features of the power system over a broad geographic area through system wide comprehensive planning and the use of markets

• Adopt market designs that help support system flexibility

• Expand the diversity of resources—both in type and through expanded effective balancing areas

• Improve system operations, including integration of advanced forecasting to reduce the impact of RE variability, and grid codes that ensure system reliability.

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The best practices associated with these five strategic areas benefit all power systems, not just those with high penetrations of variable RE. Yet these strategies are particularly instrumental in accommodating variable renewables where they minimize the impact of RE’s variability and allow more options to cost-effectively strengthen the ability of a power system to respond to change. Advancements in energy efficiency and smart grids, when conjoined with higher RE integration, further strengthen the efficacy of any power system.

The study also emphatically underscores the value of countries sharing their experiences. Any country’s ability to successfully integrate variable RE depends on a wide array of factors— technical requirements, resource options, planning processes, market rules, policies and regulations, institutional and human capacity, and what is happening in neighboring countries. The more diverse and robust the experience base from which a country can draw, the more likely that it will be able to implement an appropriate, optimized, and system-wide approach. This is as true for countries in the early stages of RE integration as it is for countries that have already had significant success. Going forward, successful RE integration will thus depend upon the ability to maintain a broad ecosystem perspective, to organize and make available the wealth of experiences, and to ensure that there is always a clear path from analysis to enactment.

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