Industry electrification in a renewable power system

This paper is about the gradual electrification of industry and its relation to the growing penetration of variable renewable electricity generation. The interaction between these developments can significantly reduce the challenges associated with either of them.

Decarbonizing the energy system is very challenging. However, it is essential to limit global warming to acceptable levels. The main pathway to decarbonization – replacing fossil fuels with renewable energy – is not straightforward. For the energy system, it involves installing large amounts of variable renewable electricity generation. However, a large installed capacity of renewable electricity sources leads to increasingly longer periods where generation exceeds demand (‘surplus’ electricity), while on the other hand, periods where renewable electricity generation is insufficient to meet demand remain. Because of the simultaneity of variable renewable generation, an increase of its installed capacity leads eventually to an increasing need to curtail during oversupply and thus to a reduced yield of added variable renewable capacity. This will threaten the business case for new variable renewables. The increase in renewable electricity generation capacity and the potential mismatch with electricity demand leads to issues for the market as well as for the infrastructure:

1 Market issues

An electricity price of zero for electricity when there is a surplus1 and high electricity prices during shortage.

2 Infrastructure issues

Constraints in the electricity grid that limit the transportation and distribution capacity.

Storage and demand response – such as shifting electricity demand to match variable generation – are seen as solutions. Especially lithium-ion batteries are very well-equipped to accommodate load swings of up to one day. The effect of storage and demand shift on electricity prices is twofold: it creates demand at very low electricity prices, and it increases electricity supply at high prices, mainly caused by a (relative) shortage of variable renewable generation. This leads to a significant reduction in the need to curtail variable renewable electricity in terms of MWh, but unfortunately not as much in terms of the duration of curtailment. This means that, with an increasing amount of storage, the price-boosting effect of storage during charging will increasingly be offset by the price-reduction effect of discharging. Hence, a large capacity of storage and demand shift will have a limited impact on the overall business case for variable renewables. Demand response that does not rely on shifting demand is another option that is especially suited to free up capacity in emergency situations. This may for instance involve shutdown of operations or industrial demand response capable of falling back on other energy carriers, such as biomass, natural gas, and eventually hydrogen. Such demand response is characterized by ‘opportunity costs’, i.e. the cost of curtailing production (generally expensive) or the cost of switching to the alternative energy carrier (generally relatively cheap). In this report, we call the latter ‘opportunity demand’.

Gradual decarbonization of industry For industry, the primary path towards decarbonization is electrification, preferably using renewable sources. In this report, we looked at using opportunity demand for industrial heating, i.e. heat supply that is capable of switching between gas boilers and electric boilers depending on the price difference between natural gas and electricity. Taking Germany as an example, our case-study calculations show that a structurally positive commercial business case is emerging for a hybrid electric-gas system for large-scale industrial heating, provided that the industry is exposed to ETS carbon prices and that synergies with the grid allow for low grid tariffs similar to industry with large continuous electricity load. Hence, opportunity demand can be an economically attractive way to decarbonize industrial heating.

Setting a price for renewable electricity Opportunity demand increases demand during renewable surplus, but not during shortage. Because it is triggered by opportunity cost (the fuel price, e.g. for gas or biomass) and not directly related to the current or future electricity price, it can set a price for electricity. In an energy system with plenty of renewables and with sufficient opportunity demand and storage, the price-setting effect is amplified by storage, because storage will take the opportunity cost based on (predominately) natural gas as the low-price reference for charging, instead of an electricity price of zero set by surplus renewables. From a societal point of view, renewable generation should preferably be stimulated indirectly. By stimulating the demand for variable renewable electricity rather than generation directly, a better fit is ensured between supply and demand, ultimately reducing curtailment of renewable generation. The main bottleneck for the electrification of industry through opportunity demand appears to be the increased need for transmission capacity in the electricity network. This is reflected in a significant increase of the grid fee covering transmission costs for the electric boiler (or electrolyser).

Infrastructure constraints 

The German business case for opportunity heating highlights the need for an integrated view on the energy transition that should optimally utilize the synergies between the various aspects of the energy system. There are still significant synergies possible between variable renewable generation, flexible demand with a theoretically infinite sustain time, and the electricity network. We briefly discuss three of them: non-firm capacity, interruptible capacity, and capacity pooling. Compared to congestion management, the latter two options offer the additional advantage of opportunity demand, potentially giving industry a more secure and sustained coverage for the required investments. In this paper, we define non-firm capacity as capacity for generation or demand that can be shed in advance to avoid congestion. We define interruptible capacity as capacity that can be instantaneously shed to free up capacity for higher-priority load. Because of this, it can make use of the reserve capacity in the transmission system needed to preserve the N-1 redundancy criterion. An alternative way of looking at it is that the load provides an ‘N-1 service’ to the network. With capacity pooling, several loads and generation units in a confined geographical area collectively contract capacity and are free to share it between themselves, as long as their total used capacity remains within the boundaries agreed upon with the grid operator. This allows the participants to exploit the synergies between their loads. We show that significant synergies can be achieved through smart electrification of industry by applying opportunity demand to reduce the impact on the network and even help to reduce the impact of variable renewable electricity generation.

Conclusions

In summary:

Opportunity demand, especially for industrial heating, is becoming an economically attractive way for industry to gradually electrify using renewable electricity and can become an important mechanism to support the energy transition.

Opportunity demand supports the business case for renewables and for electricity storage. It provides a floor price for electricity based on the cost of the alternative (e.g. natural gas instead of electricity for industrial heating), thus avoiding zero prices.

Opportunity demand is well-suited to optimize the use of the electricity transportation and distribution grid. It can be applied as non-firm capacity, as interruptible capacity, or for capacity pooling. All three mechanisms promote optimal use of the grid.