Fabien RoquesAssociate Professor at Université Paris-Dauphine and consultant at FTI
"The electricity sector is undergoing a truly Copernican revolution, driven by the combined forces of technology and society."
The Future Electricity Market Will Be Hybrid
The rise of distributed powerIn physics, power is the amount of energy supplied by a system per unit time. In simpler terms, power can be viewed as energy output... generation and the development of “smart communities” within buildings, districts and regions are radically transforming the traditionally centralized structure of power systems. In this article, Fabien Roques, Associate Professor at Université Paris-Dauphine, analyzes the future relationships between power grids and new local ecosystems.
The electricityForm of energy resulting from the movement of charged particles (electrons) through a conductor... sector is undergoing a truly Copernican revolution, driven by the combined forces of technology and society.
Technological disruption is being achieved through new decentralized generation techniques – first and foremost in the area of solar power – which are enabling us to put a definitive end to a century dominated by what is known as “increasing returns to scale”, that is to say “the bigger, the cheaper”. This phenomenon is epitomized by nuclear power, where reactors were first built with capacities of 900 megawatts, which rose to 1,300 megawatts, and will soon increase to 1,600 megawatts. Today, we can do more with less, as the saying goes.
The social aspect comes from a fundamental shift in our society, as people are now willingly moving toward self-sufficiency as part of local communities and as individuals consuming what they produce. This is a very deep aspiration, which is not just limited to energy systems.
The economist in me must, of course, wonder about the cost of this transition to a decentralized world and the economic efficiency needed to benefit from the potential synergies between production and consumption areas.
Moving from one extreme to another, i.e., from a highly centralized structure to a completely decentralized one, will incur substantial costs. It is difficult to say where we will be on the spectrum in the long term, but the most likely outcome is a hybrid structure, with local ecosystems coexisting alongside a centralized system that will need to be updated. In other words, there will be an overlap, or a “tiling” effect, from the local to the national or even European level.
The Central Power Grid Acting as “Insurance”
Maintaining the central power grid is essential for a variety of reasons.
First, we must ensure economic efficiency and solidarity. Not all regions will have the same production costs or consumption patterns. For solar power alone, the amount of sunshine will create disparities in output. Additionally, the cost of connecting and maintaining the network for an isolated house in the countryside is not the same as for an urban residence in a dense environment. It will therefore be necessary to reinvent the historical equalization provided until now by the power transmission and distribution networks, which ensure exchanges between regions and solidarity between urban and rural areas.
Then there is the intermittency, or variability, of renewable energies. But at what level should we address this issue? At the individual house level, consumption rarely peaks at the same time as production periods. It is possible to store power, but battery costs today make this difficult. With modern technologies, a completely self-sufficient house would therefore incur substantial extra costs. It is, however, a different issue at the district level, where offices and residential buildings are built side by side, and the inhabitants have different working hours. Under these conditions, consumption profiles can be “smoothed out” and there is a wider range of local production resources. This diversity makes it possible to imagine a certain degree of self-sufficiency, bearing inmind, however, that total self-sufficiency is not economically efficient.
For these reasons, local networks and the overarching national grid will see their roles change to providing “insurance” that guarantees continuous and high-quality service.
This development must be supported by changes in the feed-in tariff and power pricing model. Until now, consumers have essentially paid in proportion to the kilowatt-hours of energy consumed. In the future, they will probably pay a larger fixed portion, regardless of what they actually consume. This fixed amount will cover the insurance that the grid provides and not the electrons flowing through it. However, this model is not the first of its kind, as all motorists pay an annual insurance premium, even if they never have an accident.
Insurance of this kind can also guarantee a “level of service”. Private consumers may choose to allow their electricity supply to be suspended for specified periods, resulting, for example, in their heating being switched off for an hour. Similarly, a manufacturer may decide to stop a plant’s machines during certain times. However, both may decide to pay more for a higher level of service and/or continuity of supply.
Lastly, networks will make it possible to take full advantage of the gradual development of battery storage in homes, districts or directly in support of the grid, which is one of the challenges of the decades to come. The move to roll out large-scale power storage has begun in areas where electricity prices are high, such as California and Germany. The cost of batteries is still an obstacle today, but this will decrease, although at a rate that is difficult to predict. Battery storage will have a highly transformative effect on the power system, and more broadly on society in general, because it is linked to another fundamental aspect of the future: mobility and electric vehicles.
Fabien Roques is an Associate Professor at Université Paris-Dauphine and, alongside this role, also serves as a consultant at FTI – Compass Lexecon. After obtaining an engineering degree from École Centrale de Lyon, he completed his Ph.D. in energy economics at the University of Cambridge. He then worked as a senior economist for the International Energy Agency (IEA)An independent, intergovernmental organization founded within the framework of the OECD... , where he oversaw the electricity sector for the World Energy Outlook publications.