By Fitch Solutions
- As power supply and consumption patterns continue to shift amid a global drive toward decarbonisation, the need for effective grid management will become increasingly important to support the transition dynamic.
- Virtual power plants will gradually become one of the key driving forces for more renewables adoption and integration over the coming decades, supported by ongoing cost reductions, policy support, and increasing investments by utilities into the technology.
We believe that a global drive toward decarbonisation will continue to shift power supply and consumption patterns to be more sustainable. During 2020, the Covid-19 pandemic has increased focus around sustainability and concerns about climate change. Several markets have also announced longer-term carbon neutrality goals in recent months – including the European Union, China, and Japan amongst others. We believe that the power sector will remain one of the key target sectors for decarbonisation given its large emissions profile, with the non-hydro renewables sector in particular to see a boost. Several markets are explicitly focused on a ‘green recovery’ from the pandemic, and will look to renewables development as a key strategy to support their economies going forward. For example, the European Union’s Green Deal and various funding mechanisms are set to support the green, low-carbon transition in the power sector, with a strong focus for renewables growth in the bloc.
There is also a rising number of corporate energy procurement deals, primarily in renewable energy, which include power purchase agreements, green power purchases and green tariffs amongst others. Alongside this, a growing number of companies are looking to install their own distributed self-generation sources, such as rooftop solar or burning waste products for energy and cost-savings. The growing prevalence of corporate ESG considerations and policies will be a fundamental driver of this trend, with companies increasingly aware of consumer preferences for more sustainably sourced goods and services. We believe that this will be a significant driver behind more decentralised renewable energy developments over the coming years. Concurrently, growing environmental concerns will see the transportation and heating sectors increasingly switch away from fossil fuels to electricity.
As such, we believe that the need for effective grid management will become increasingly important to support the transition, as both demand and supply sources have grown more unpredictable in recent years. This is due to greater fluctuations in production due to the intermittent nature of renewables sources; and changing consumptions patterns from self-generation, peer-to-peer electricity trading and moving parts such as electric vehicles. In addition, the electricity grid is gradually shifting a from a hub-and-spoke structure to one that allows a two-way flow of electricity between utilities and consumers, due to the growing penetration of distributed generation and demand response technologies. As power generation grows increasingly decentralised, it will have to go hand-in-hand with technological advancements that can support increased power demand and improvements in supply management and efficiency.
We have already seen utilities in several markets struggling to address this challenge, particularly in those with a high penetration of self-generated renewable sources. For example, the rapid increase in household rooftop solar systems in Australia has weakened the stability of the grid notably of late, and regulators have warned about the potential of grid management problems if renewables capacity continues to grow substantially over the coming decades. Existing regulators are suggesting several ways to regulate and impose more controls, but they have been largely considered difficult or impractical at present.
Virtual power plants (VPPs) will gradually become one of the key driving forces for more renewables adoption and integration over the coming decades. A VPP is essentially a network that aggregates multiple smaller-scale generation sources, alongside energy storage systems and flexible power consumers. These VPPs relieve grid load with smart software applications that will enable the balancing and management of power sources to support both the integration of intermittent renewable sources and the adoption of more distributed energy resources (DERs), largely in rooftop solar. This will be supported by big data analytics, from monitoring and forecasting to optimise the dispatch of power load. On a grid level, this hinges on its ability to smooth out short-term power output fluctuations, allowing more wind and solar capacity to be added without jeopardising grid stability. In addition, this collective management improves energy efficiency and keeps power prices lower and more stable within that localised area.
There has been an increase in the number of investment and strategic partnerships relating to VPPs by utilities in recent years, and we believe that it will continue to gain traction in line with ongoing cost reductions in both DERs and energy storage technologies. In particular, the solar manufacturing sector has grown increasingly competitive in recent years, with economies of scale resulting in cheaper equipment prices and key industry players attempting to outbid each other. Continued advancements into solar technologies have also increased efficiency and brought about further cost reductions for developers and retail consumers. The drive towards VPPs is also supported by broader policy support for grid digitalisation initiatives and the availability of financial incentives for these innovations across many markets. That said, more-developed power markets are likely to be in a better position to explore this. At present, Western Europe, United States (California), Japan and Australia are leading markets for this development, but we expect greater adoption as the technology moves toward commercialisation over the coming years.
Statkraft, in partnership with Energy Meteo Systems in Germany, is one of the pioneers into this innovation, and holds one of the largest VPP networks in the world today. The VPP consists of nearly 1,500 renewable assets, with more than 10 GW of total combined capacity. Statkraft is currently rolling out VPPs in UK, France and Turkey as well. Japan’s ENERES has also partnered with US-based AutoGrid to develop the world’s largest storage VPP in terms of asset volume, including more than 10,000 assets by 2021. Tesla Motors Australia is also developing the largest VPP in Australia under the Australia Energy Market Operator trial, which will include an additional 3,000 systems on top of the existing 1,100 system installed in the previous phase. The project is expected to cost AUD 60.6 million and will leverage funding from the Australian Renewable Energy Agency, the South Australian Government’s Grid Scale Storage Fund, and financing from the Clean Energy Finance Corporation. Tesla intends to scale this up over the coming years to create the world’s largest VPP with 50,000 solar and storage systems.
This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 (‘FSG’). FSG is an affiliate of Fitch Ratings Inc. (‘Fitch Ratings’). FSG is solely responsible for the content of this report, without any input from Fitch Ratings. The original article can be accessed by clicking here