INTERVIEW - Grid flexibility is the new key player in energy transition

As the global energy landscape transforms and evolves into a place dominated by widespread renewable energy deployment, grid infrastructure emerges as a major topic to address. In this interview, Mariana Costa and Andre Botelho, principals at EDP Ventures, discuss the key opportunities and hurdles they recognise as the world transitions from fossil fuels to clean energy.

Q: Which do you think are the major grid infrastructure constraints in the context of the global energy transition?

The energy transition represents a world of opportunities, but at the same time, the existing grid infrastructure needs to address and overcome significant challenges, having always in mind the need to ensure long-run sustainable access costs, reliability and stability of such a critical asset. The first issue to tackle is the integration of renewables capacity as the output of those plants cannot be ramped up and down when needed and a steady grid frequency cannot be maintained. The intermittency of renewables comes second, and that’s why lead grid operators are now turning to new tools to balance supply and demand. And third, the expansion of renewables will increasingly create curtailment events, wasting a valuable resource that is critical for a faster energy transition.

Grid expansion and modernisation are vital, as many existing grid infrastructures are outdated and unable to accommodate the new dynamics arising from the integration of renewables and distributed energy resources. Without sufficient investment in grid modernisation, bottlenecks and congestion can occur, hindering the transition to a more sustainable energy system. Meanwhile, without adequate energy storage solutions in place, the grid may struggle, especially during periods of high demand or low renewable energy generation.

For this to be overcome properly, all topics need to be addressed in a well-coordinated and orchestrated way, always involving both the public and private sectors. Solutions that can use available renewable and grid signals and define the optimal economical and technical solutions will be a must. One of EDP Ventures’ most recent investments is Splight, which, through digital twin and control/monitoring, allows for networks to be explored with higher than traditional levels of loads. If there is any contingency, Splight will identify and manage problematic loads almost instantaneously.

Q: Given the evolving electricity mix, where do you see the requirement for additional grid flexibility, is it more on the transmission or the distribution side?

The use of flexibility in the distribution side will require the deployment of decentralised assets such as storage and using smartly additional flexibility. On the transmission side, flexibility will be used through wholesale markets to solve intra-daily and daily mismatches, ancillary services and capacity, which is nowadays mostly provided by utility-scale storage. IEA reports that energy storage has doubled its installed capacity in 2023 and 65% of this was for utility-scale storage while the remaining was for behind-the-meter applications. So presently, we are seeing a higher need for utility-scale use-cases. But with a growing share of renewable generation (centralised and decentralised), both transmission and distribution will be highly impacted and require additional flexibility, however with different approaches.

On the transmission side, we will need to deal with the change to 100% renewable generation systems, since conventional dispatchable power plants will not be able to provide enough flexibility and balance supply and demand. Without this, only hydro (and partially nuclear) will have flexibility. Flexibility from new sources is needed to keep the system running for the short and long run - this can come from centralised or decentralised storage, backup generation, and demand with decentralised assets. Nevertheless, the required flexibility is more on a system level, like ancillary services or back-up capacity. On distribution level, the problem is much more granular and therefore more complex. We’re dealing with a boom in decentralised generation and consumption, which lacks structured planning. These distributed energy resources (DERs) lead to a new paradigm in the way the grid is being managed, as they introduce bidirectional power flows and localised generation, requiring flexibility to manage voltage levels, congestion, and power quality issues, leading to a significant number of lines that are under capacity pressure.

At the end of the day, from a flexibility point of view, the main goal is to reduce the mismatch between the speed of energy flow and the real capacity of power lines. Energy transition is running much faster than the grid renewal, so we need to find real alternatives not to block the ongoing energy transition.

Q: What would be, in your opinion, the most appropriate measures to enhance system flexibility and address climate change challenges effectively?

The changes need to happen at all levels and should involve the different energy stakeholders. Grid managers will need several new tools to address the issue at all levels and, as mentioned before, the measures should be articulated between all system operators. An example is new hardware solutions that can control and adapt more dynamically and preemptively to spikes, surges and bidirectional power flows. This will lead to investment in new solutions that can more efficiently manage congested areas. Adding to this, higher end-to-end grid visibility, especially in lower voltage, and operational software tools to act more quickly and dynamically are required. EDP is actively engaged in transformative projects that we believe can help us tackle several of the new arising challenges. This is demonstrated by the ongoing pilot with IONATE, which aims to test the UK-based firm's hybrid intelligent transformer's ability to increase data visibility and deliver real-time control of the energy flow in electricity grids. An investment in Spanish startup Plexigrid, meanwhile, addresses software solutions for the active management of low-voltage distribution grids, which is a key piece for the advanced metering infrastructure.

That said, regulators will need to create a level playing field for all technologies to provide additional flexibility to the grid at different levels, using the most efficient solutions to solve a specific problem. And system operators will need to have marketplaces to procure flexibility in the market. Today we already see solutions such as the Piclo platform providing this in several markets. And as demand grows, we believe this will surely be adopted on a wider scale.

Finally, instead of having big central flexible fossil-based power plants to provide flexibility, flexibility will be required everywhere, from upstream to downstream. From remaining power plants to electric cars, flexible demand from end users and batteries will be the key new players in the new energy transition. All of them will play this key role. The markets will need to evolve to adapt to these new sources, with new aggregators that manage and provide grid flexibility being a clear example. They solve grid needs and also provide their clients with additional revenue streams, moving them from merely end-users to active actors in the energy transition. Gridbeyond has been one of the leading aggregators in the UK to offer their commercial and industrial clients this service, using already existing industrial flexible assets to provide grid services.

Q: The deployment of distributed renewable energy generation is gaining speed. Is dispatchable power such as rooftop solar seen among the solutions for improving grid flexibility, in the near term, at least?

Rooftop solar will be very important to give end-users locally produced cheap energy. But will certainly be a local challenge for grid management. Usually this decentralised solar will be available at the same time as centralised solar, so it can increase the problem of oversupply in certain periods. Additionally, it can impact the local grid with bidirectional power flows and voltage peaks, which could impact industrial equipment and appliances and pose a significant challenge to grid operators. So, it will be important to couple storage with solar to make this solar fully dispatchable. The main way will be to use behind-the-meter applications, changing solar consumption patterns when energy costs are higher. The development of local energy communities will also gain traction so that energy can be consumed closer to where it is produced. A solution like Yotta Energy, another company from EDP Ventures portfolio, can easily connect solar panels with storage, delivering constant power and extending the delivery after the sun is down. It will give C&I clients additional self-consumption with faster deployment without permitting hurdles, but indirectly will reduce the local grid impacts.

Surely rooftop solar will be key to accelerating the renewables deployment and energy transition. We will need various sources of renewables capacity if we want to meet the ambitious COP28 targets. And if we want to make decentralised solar fully dispatchable, the fast deployment of decentralised storage becomes paramount.

Q: Is the energy storage sector in Europe in need of additional regulatory support? Which grid-related issues governments should address more urgently to streamline new technology integration and lower the risk for new investments?

The deployment of energy storage has been rising significantly over the past years. Nevertheless, as we strive to meet the targets set in COP28 and triple the installed renewable capacity by 2030, energy storage will need to increase sixfold by the end of the decade. Storage deployment will be increasingly neccessary as conventional generation is decommissioned. But visibility on these asset returns is critical for higher investment in utility-scale storage and longer duration storage. Today we see that investments in the renewable sector are becoming more difficult, as energy costs are plummeting, and interest rates continue to be high. In long-duration asset-based activity, the visibility of returns is important for investment decisions to be made.

Energy storage is a business that will rely on various use cases to make it profitable, which means access to markets and revenue stacking is a major point. Storage can provide flexibility to solve system-related issues – such as balancing, congestions, avoiding renewables curtailment costs, or making better use of the energy mix. So, in the first place, adding storage and other flexible tools to the toolkit of grid management is important. Governments should create the right incentives for grid operators to be incentivised and use all tools available.

Grid expansion is necessary, but it also takes several years of planning and construction to deploy. Certain operational tools may fit better in some cases or serve as transition solutions to optimised grid planning in others. To have higher grid visibility, operators will need to evolve in their monitoring and forecasting tools, to understand the new types of consumption patterns - additional electrification, EV deployment and local generation and storage – and in tools for market procurement of these resources.

Market stability is also important to give longer visibility of returns, such as capacity markets with long-duration contracts. This will surely help utilities prepare and deploy storage capacity that will serve as a tool for managing the security of power supply, optimised renewables integration and smooth price volatility.

Finally, there will be different types of flexibility needs, so this will also require different types of storage. Flexibility needs range from very short-term to longer duration such as seasonal or even interannual. The tools to promote investment must also aim to optimise the right mix of technologies, while not restricting innovation and the development of more cost-efficient solutions.

Q: It seems that raising debt for project financing purposes is no longer as appealing as it was in view of the rising interest rates. Is there an investment funding gap in the energy sector and in the renewables field, in particular?

It’s undeniable that rising interest rates do not favor CAPEX investments and negatively impact the overall attractiveness of projects requiring significant upfront investment, such as renewable energy schemes. Nevertheless, the investment landscape goes beyond the challenging interest rates and there may be mitigation factors like government policies (such as IRA in the US), technological advancements that make these technologies increasingly competitive, or demand imposed by the market itself. In parallel, the renewable sector has been one of the most resilient ones, with investment in renewable energy steadily increasing over the years, with billions of dollars poured into projects worldwide. In any case, it’s true that we are currently dealing with a very challenging macroeconomic context and that these mitigation factors need to be considered to avoid any delay to the ongoing energy transition and the road to net zero.

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