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The role of wind energy and solar PV is growing across energy systems worldwide. As intermittent renewable power production must be balanced, enormous investments in flexible capacity are needed. In many places, green energy agendas rule out new conventional power generation, while the potential of dispatchable renewables is limited. In this environment, the addition of storage and power-to-X (P2X) conversion capacity is becoming a cornerstone of the clean energy transition.
At the same time, markets and regulatory frameworks often do not provide convenient conditions for investments in such flexibility options. With a lack of appropriate market signals, investors and policy makers face the challenge of identifying which options could be efficient additions to their energy supply systems.
To address this urgent issue, the EC-funded “Horizon 2020” (H2020) project PLANET set out to develop a software solution that helps the relevant actors to make holistic grid planning and management decisions. Alongside the development of the PLANET decision support software, the 11 project partners from 7 countries (Italy, Finland, Greece, UK, Germany, France, and Belgium) produced a broad range of insights during the 2017-2021 project period. For a summary of the overall project results access the White Paper or watch the project video:
This work includes the demonstration of how market barriers currently prevent the successful adoption of efficient P2X solutions by investors in different EU markets. Additionally, the consortium presented a menu of solutions for overcoming these barriers.
The analysis of barriers and solutions in the VaasaETT-led Task “Policy and market reform recommendations”, was based on the evaluation of 4 P2X case studies performed in the project, including field tests of virtual energy storage systems, innovative heat pump solutions, and power-to-hydrogen installations. The following list presents 8 potential key barriers that have been identified in this context:
1) Some P2X concepts are not yet mature: High costs at earlier stages of technology or product life cycles tend to impede the profitability of commercial business models. This situation was found, for example, in the project’s case study on power-to-hydrogen fuel stations in the UK. By contrast, the problem was barely relevant for the two power-to-heat cases (Italy and Finland/Germany), with installations built around largely mature heat pump technology.
2) Essential technical infrastructure not in place: The availability of smart grid infrastructure is essential for some P2X solutions, which can lead to classic chicken-and-egg problems. This was found to be relevant, for instance, in PLANET’s virtual energy storage case study based on the interconnection of decentralized HVAC systems in France. With the basic IoT equipment in place, business models of many service applications look attractive, while this might not be the case when service providers must install the basic hardware. As far as power-to-gas business models are concerned, the availability of infrastructure for transport and storage can be a major factor.
3) System need for flexibility not yet high enough: Certain P2X technologies will play an important role in the future, while the current system need for their capabilities, and therefore market-driven demand, is low. With increasing shares of intermittent renewables in energy markets, the need for all of the examined P2X technologies and their capabilities will steadily increase in energy systems across the globe.
4) Market prices too low or input prices too high: Even when there is a clear system need for services from P2X installations, available profit margins often do not allow market investors to cover their entire investment and operating costs. There is a broad range of possible reasons behind the occurrence of such situations, often connected to one or several of the other barriers. Heat pumps are a typical example, as they suffer in many markets from unfavourable heat prices in relation to electricity prices. Similarly, comparatively low prices of conventional fuel are a major hurdle – although one of many – for a widespread application of hydrogen as a fuel.
5) Demand not adequately articulated: Beyond the problem of inadequate prices, markets for services provided by P2X installations might not even exist. This can happen, for example, when a DSO is the only potential buyer of local flexibility services provided by a specific P2X operator. With current regulations, DSOs in most markets have no incentives (or even permission) to purchase such services, regardless of potential efficiency increases.
6) Institutional and techno-institutional barriers: In some cases, there is sufficient system need and even demand for certain services P2X operators could offer, but access to the relevant markets is not provided. This might result in situations in which achievable revenues are not high enough to recover the costs of P2X projects, as some income streams are locked. An example of this can be found in prequalification requirements of ancillary markets, which often prevent the participation of energy conversion solutions.
7) Problematic regulated charges: Energy-related levies, taxes, and similar payments can impede the profitability of P2X investments. Some countries currently have inefficient systems of public charges. The PLANET case studies around innovative heat pump solutions have revealed problems in Germany and Italy regarding the treatment of power-to-heat solutions in comparison to natural gas. No such problems have arisen in the Finnish market, where heat pumps have been among the preferred heating options for many years.
8) High investment uncertainty: High uncertainty regarding achievable revenues and costs tends to result in high capital costs. P2X projects are usually associated with substantial initial investments, and devaluations of expected revenues due to high risk premiums may ruin the profitability of otherwise viable business models. This is particularly relevant for private companies of limited size that rely on market sales. By contrast, public actors, private actors that receive regulated returns, and large market players are often less affected by uncertainty about market prices and quantities.
This long list of barriers – which should not be regarded as exhaustive – emphasizes the urgency of policy reforms to improve the conditions for P2X investments. To help markets overcome these barriers, PLANET has developed and presented a broad menu of possible solutions. The following diagram lists some key principles that should be followed.
It is important to note that policy action must consider the existing energy sector framework: there are no one-size-fits-all solutions. Instead, it is necessary to make individual assessments of each case. The menu of possible solutions provided by PLANET can be regarded as a toolbox helping policymakers select the right options and thus significantly improve the conditions for P2X investments in their countries. Especially in countries with high ambitions for their intermittent renewables generation, governments would be well advised to prioritize reforms to keep pace with the rapid development of wind energy and PV plants.
The complete results of PLANET T7.3 are summarized in Deliverable D7.9 “Policy/market reform recommendations report”. The project partners involved in this task include Politecnico di Torino, VTT, IREN, ITM, FGH, SOREA and Merit.