16.05.2019  |   Advisory Report

Transition to clean energy: power grid expansion

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0 Executive Summary
We reviewed the steps taken to expand the power grid (transmission network) as part of the move to clean energy. Our findings are set out below:

0.1
The electricity power grid balances out demand and generation. So far, generators have preferably located their renewable power station at high capacity solar and wind site. Since generators do not have to pay for power infeed and power transmission to consumers, they do not take into account grid load and the need for grid expansion in their investment appraisals.

The federal government sees macroeconomic benefits in continuously adapting the transmission grid to distribution needs. The federal government states that it is using sites that yield high firm capacity and that expanding the grid is less expensive than developing less productive sites although even if these require less grid expansion.

The long-term scenarios commissioned by the Federal Ministry for Economic Affairs and Energy project a need for expanding and reinforcing the transmission network by 36,500 km until the year 2050. Based on current estimates, the funding needed for this amounts to €70 billion until 2030 and up to €85 billion until 2035.

In 2017, the Monopolies Commission conducted studies on the merits of siting renewable power stations close to consumers but at locations with a lower capacity. The studies illustrate that low capacity plants whose location fits well into the system could help cut transmission network expansion by half. This would yield annual welfare gains of €2.7 billion and save some 9.4 per cent of the costs for operating the overall system.

Since grid expansion did not keep up with the growth of renewable power stations, especially due to unfavourable siting in the power grid, a high number of re-dispatches were required to ensure grid stability. In 2017 and 2018, consumers paid some €2 billion respectively for this purpose.

According to the recommendations made by the Commission on Growth, Structural Change and Employment, the Ministry should carry out a comprehensive analysis of the impact the phase-out of coal power plants has on the electricity grid. Having the “right” grid in the future means avoiding unnecessary expansion.

We see the risk that due to the growing number of renewable power stations, the federal government may fail to expand the grid in a timely and efficient manner.

We recommend that the Ministry incorporate grid expansion needs as a general planning component into other decision-making especially those on power generation. Furthermore, the Ministry should include the impact of the phase-out of coal power into grid expansion planning.

0.2
The Ministry acknowledged that transmission network expansion had fallen far short of demand posed by the rise in renewables. As a result, in August 2018, the Ministry presented the “Electricity Grid Action Plan”. By means of this Action Plan, the increase in renewable energies was to be better synchronised with grid expansion efforts. New technologies and operating frameworks were designed both to reinforce current networks and accelerate grid expansion. The Ministry stated that the grid was to be expanded only as needed but projects already planned for would have to be fully implemented.

We hold that the federal government should synchronise grid expansion in the future in such a way that the federal government takes into account the impact on the grid before expanding renewable power stations and plans for the scope and timing of steps to be taken by all players. The federal government can achieve this by means of a detailed implementation plan or by means of a legal framework setting incentives for target-oriented and self-reliant action of the players involved. To do so, the federal government first needs to make up for the time lost and make the transmission network fit for more renewable power stations. In addition to accelerating grid expansion, the Ministry should give priority to locating renewable power stations primarily at sites offering transmission network access. Other options would be to place more focus on grid expansion projects for debottlenecking or to place a moratorium on individual renewable power stations.

0.3
If the federal government opts for a legal framework and targeted incentives to the actors involved, the government should base its coordination efforts on the following aspects:

In the market simulation, the current pricing model of the system operators does not set adequate incentives to expand the grid speedily: Transmission system operators’ costs for improving network security are fully guaranteed by revenues. Thus, there is currently no driver to keep these costs as low as possible and accelerate grid expansion accordingly.

The liberalisation of the electricity market also provided for unbundling transmission system operators. To gain adequate influence and produce synergies, discussions had been held on the pros and cons of establishing a “Deutsche Netz AG” with or without federal shareholding. By waiving this option, the federal government does not have the same impact on the network operators as the governments have in other European countries.

The federal government largely concurs with this opinion.

We recommend that the Ministry provide an incentive for transmission system operators to accelerate grid expansion effectively. For this purpose, the Ministry could lower the revenue cap so that it would no longer cover all measures to improve network security, or the Ministry could pay premiums for grids completed early. Where required, the Ministry should consider how to assert more influence. This could be achieved by transferring property rights or ownership.

The federal government could provide another incentive by making generators pay a share in grid expansion costs. This would internalise external costs of siting. From a macroeconomic perspective, this would result in locating renewable power stations at ideal sites. For example, generators in areas with high grid load could have to pay fees while generators in areas with low grid load could receive subsidies for avoiding grid expansion. Such payments are already in place in other European countries and have been recommended by subject-matter experts in Germany.

The federal government largely concurs with this view. According to the Ministry, it is “worth considering” involving generators in overfed networks in grid expansion by means of a one-off lump sum.

We recommend that the Ministry share grid expansion costs with electricity generators, e.g. by charging grid fees from generators.

0.4
We recommend that the Ministry

  • state the need to expand the grid already as part of planning for other decisions;
  • fully include the impact from the phase-out of coal power in grid expansion planning;
  • provide effective incentives to transmission system operators to accelerate grid expansion and consider how to increase federal government influence as needed;
  • share grid expansion costs with electricity generators.