National Energy Guarantee and known pitfalls

A Japanese study released in October 2017 warns of costly European policy mistakes when investment in renewable energy is increasing.

Though details of the National Energy Guarantee policy are still under discussion, the Japanese study is worth checking so that Australia doesn't fall into any of the pitfalls it warns of.

This is an extract with some of the warnings in the Japanese study.

The Ways Forward for Japan EPCOs in the New Energy Paradigm

October 2017

Renewable Energy Institute, The Ways Forward for Japan EPCOs in the New Energy Paradigm (Tokyo: REI, 2017), 76 pp.

at https://www.renewable-ei.org/en/activities/reports/20171006.html

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Executive Summary

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Japan electric power companies(EPCOs) have essentially been focusing on their domestic market so far. Yet, business opportunities also exist overseas. ... Critical to successful internationalization of Japan EPCOs business will be their ability to deploy cost efficient Renewable Energy (RE).

To make their way through this new energy paradigm, Japan EPCOs have the chance to learn critical lessons from their European peers.

European EPCOs have already faced similar challenges to those Japan EPCOs are now confronted with. And European EPCOs have failed to adapt quickly. Japan is lagging behind, and that is not necessarily a bad thing. Indeed, it means that Japan EPCOs may benefit from their European peers painful experiences.

Struggling, several European EPCOs posted record losses and saw their market capitalization collapse in recent years. They were victims of low wholesale electricity prices resulting from sluggish electricity demand and dramatic expansion of wind and solar power with lower marginal cost, leading to overcapacity and pushing fossil power plants out in the competitive market merit order. (page 1)

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Key Challenges Faced by Japan’s EPCOs

In the past two years RE accounted for the majority of new power capacity globally driven by dramatic cost reductions in wind and solar, and globally for the past three years the increase in RE electricity generation has been higher than the increase in fossil electricity generation. (Page 15)

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European EPCOs Failed to Adapt Quickly

These overall negative performances result from the European EPCOs failure to quickly adapt to the energy transition, at the generation level especially. While electricity consumption stagnated, significant expansion of close to zero marginal cost wind and solar power, in which European EPCOs did not sufficiently invest, took place in Europe. The latter helped lowering wholesale electricity prices due to the merit order effect. At the same time, conventional power capacity did not significantly decrease which combined with stagnating electricity consumption and the expansion of RE resulted in overcapacity further reducing wholesale electricity prices (Chart 31). European EPCOs conventional power plants were thus outcompeted due to their higher marginal costs and suffered from low wholesale electricity prices, thus significantly affecting European EPCOs profitability. (page 26-27)

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In Europe, several EU Member States including France, Germany, Italy, Spain, and the UK, notably, have introduced rewards for making capacity available, in the form of capacity mechanisms. However, capacity mechanisms are considered problematic because they risk distorting electricity markets. Inappropriate designs of mechanisms may for instance result in existing uneconomic power plants receiving financial support and disturbing the transition to a low-carbon economy – a failure. ³¹  The UK and Germany offer telling examples of far from perfect capacity mechanisms. (page 28)

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In Germany, from this year 2.7GW of largely inflexible and high-emitting lignite capacity will be placed into an emergency stand-by reserve, only to be used as back-up when required for a period of four years, after which these plants will be permanently retired. ³³  This comes at an estimated cost of €1.6 billion to the German government to compensate for lost revenues from the electricity market during these years of security stand-by. ³⁴

These flawed designs are unsurprising insofar as it has been found that many of EU Member States did not adequately assess the need or cost-effectiveness before introducing such mechanisms. ³⁵

In addition, it has also been recognized that capacity mechanisms implementation must be accompanied by appropriate market reforms. ³⁶

Thus, before adding gigawatts of new conventional power plants and/or pushing for the implementation of a capacity mechanism in Japan, Japan EPCOs should thus be well aware of these painful lessons learnt in Europe (page 29)

ENDNOTES

³¹   European Parliament, “Capacity mechanisms for electricity – May 2017” (accessed 28 August 2017)  

³³   The Economist Intelligence Unit, “Is Germany’s Energiewende cutting GHG emissions? – 20 March 2017” (accessed 31 August 2017)

³⁴   Overseas Development Institute, Rethinking Power Markets: Capacity mechanisms and decarbonisation (London, United Kingdom: ODI, 2016), 46 pp

³⁵   European Parliament, op. cit. note 31

³⁶   Ibid.