Energy is fundamental to modern society and its security of supply, economics and environmental consequences have critical impacts on the development of nations. With technological innovation and rapidly changing industry structures, energy markets are becoming more complex and challenging to forecast. This poses both risks and opportunities for the energy industry and consumers alike. The European electricity system is undergoing major change. This includes a transition towards a low-carbon economy with the growing role of renewable energy, increasing energy efficiency and the electrification of transport and heating. It will provide consumers with a more meaningful role, allowing them to actively manage their demand, produce their own electricity and feed the excess onto the grid. This requires the market, regulations and infrastructure to adapt to the changing environment. Furthermore, policy design needs to balance between encouraging investment in low-carbon technologies, safeguarding security of supply and maintaining cost competitiveness to consumers. Some of the key industry changes, and the strategic issues they raise for Ireland, are discussed in this article.

Energy future underpinned by climate-change policies

“…Transport and heating almost fully rely on oil and gas. They must wean themselves from oil and gas if Ireland is to meet its long term commitment.” Ireland has a long term commitment to an 80% reduction in greenhouse gas (GHG) emissions within the energy sector (and at least carbon neutrality in agriculture and land use), when compared to 1990 levels by 2050 and a 100% reduction by 2100. This commitment goes beyond the installation-specific GHG emissions obligations applied to commercial enterprises through the EU-wide Emission Trading System (ETS) and the binding national emissions targets that apply to the non-ETS sectors. The ETS is a market-based ‘cap and trade’ system to reduce GHG emissions within the EU, which covers emissions from power and heat generation and a wide range of energy-intensive industries. The ETS sector in Ireland emits less than a third of Ireland’s total GHG emissions, while the electricity generation part of the ETS emits around a fifth of the total emissions. The scale of ETS sector in Ireland is relatively low compared to our European peers. The major non-ETS sectors are heating, transport and agriculture, which present a much greater challenge for carbon reduction. According to the Environmental Protection Agency (EPA), Ireland will not meet its binding targets for 2020 with the current range of policy measures in place. The EPA has also highlighted the significant challenges in meeting the non-ETS emissions reduction targets in the long term. To meet these targets profound changes are required in how we run our cars and how we heat our homes. Currently transport and heating almost fully rely on oil and gas. They must wean themselves from oil and gas if Ireland is to meet its long-term commitment. [caption id="attachment_37771" align="alignleft" width="359"]Figure 1: Ireland’s GHG emissions by sector (source of data: GHG emissions 2015, EPA) Figure 1: Ireland’s GHG emissions by sector (source of data: GHG emissions 2015, EPA)[/caption]

Electricity is only part of the full picture

“…Carbon emissions policies to date have largely focused on the electricity sector which led to the rapid growth in electricity generation from renewable sources…” Electricity is one form of energy and it can originate from fossil fuels or renewable sources. To gain a more meaningful picture, one needs to examine the energy system as a whole. In Ireland, the primary sources of energy are imported fossil fuels. In 2015, Ireland imported about 90% of its Total Primary Energy Requirement (TPER), mainly in the form of oil and natural gas (Energy Balance 2015, SEAI). This figure dropped to about 70% in 2016, with the production of Corrib gas field (Provisional Energy Balance 2016, SEAI). TPER includes the energy requirements for the conversion of primary sources of energy into forms that are useful for the final consumer, for example electricity generation and oil refining. While electricity is a critical energy source, in 2015 it constituted merely 19% of the Total Final Consumption (TFC) in Ireland. TFC is essentially TPER less the quantities of energy required to transform primary sources (e.g. crude oil) into forms suitable for end-use consumers (e.g. refined oils, electricity, patent fuels). Carbon emissions policies to date have largely focused on the electricity sector, which led to the rapid growth in electricity generation from renewable sources. Continued policy focus on the electricity sector alone will not be sufficient to meet Ireland’s GHG reduction targets. Transport and heating, in particular, will require a fundamental shift in policies to deliver the necessary GHG reductions. So what are the options for the transport and heating sectors? Electric vehicles provide a promising prospect of achieving carbon reduction within the transport sector by effectively expanding the use of electricity, which is itself undergoing a rapid decarbonisation process through renewable generation. Similarly, electrification of heat using heat pumps is a highly efficient means of heating homes and offices. Of course, electrification is not the only possible option for decarbonising the transport and heating sectors: biofuel, for example, could also play a role. Nonetheless, the case for early electrification is based on there being ‘no regrets’, meaning electrification of transport and heating now will immediately reduce emissions with the current mix of generation. [caption id="attachment_37772" align="alignleft" width="251"]Figure 2: Ireland’s Total Final Energy Consumption breakdown (source of data: Energy Balance 2015, SEAI) Figure 2: Ireland’s Total Final Energy Consumption breakdown (source of data: Energy Balance 2015, SEAI)[/caption] Generation costs are a major component of the final retail price of electricity. Therefore, a well-functioning wholesale electricity market is critical for its cost competitiveness. The wholesale electricity markets in Ireland and Northern Ireland have been operating under a ‘pool’ type market, the Single Electricity Market (SEM), since 2007. The SEM is somewhat one-sided, as market prices are determined by generators only and suppliers are effectively ‘price takers’. In order to meet current EU legislation to harmonise cross-border trading arrangements, the SEM is being replaced in favour of a new bilateral market, named the Integrated Single Electricity Market (I-SEM), which is scheduled to go live in May 2018. As a bilateral market, suppliers in I-SEM can bid for the electricity they plan to consume and these bids are matched with the offered prices from generators, providing a two-sided and arguably a more efficient marketplace.

Brexit and Ireland's electricity market

“…It should be recognised that the island of Ireland, Great Britain and Europe are all net importers of energy and have many mutual interdependencies.” The SEM has developed through concerted co-operation between the energy regulators and government ministries in Dublin, Belfast and London. It is firmly established in national law in both the UK and Ireland.  While this law is entirely consistent with EU laws, it does not derive from EU law. I-SEM, by contrast, is designed largely to meet EU legislation. Post Brexit, Northern Ireland will no longer be obliged to comply with the EU requirements. Furthermore, the European Third Energy Package proposal envisages seven regional markets, one of which consists of France, UK and Ireland. As Ireland is currently interconnected with the UK only, post Brexit it would mean that our connection to Europe would be via a ‘third country’. This could have significant implications for Ireland, not least with all the potential regulatory complications that could arise post Brexit, but also the negative impact this uncertainty has on further interconnection projects between Ireland and the UK. Nonetheless, the exact impact of Brexit is still unclear given the level of political uncertainty around the UK-EU negotiations but it should be recognised that the island of Ireland, Great Britain and Europe are all net importers of energy and have many mutual interdependencies. Hence, a pragmatic outcome is one that would promote integration of energy markets in Europe. Wholesale cost is not the only component of the end-use cost of electricity. The electricity supply chain can be divided into distinct elements: energy sources, power generation, high-voltage transmission, low-voltage distribution, metering and supply/retail. Each of these elements contribute to the underlying cost to end-use consumers. Typically in modern electricity systems, the supply chain is separated, with generation and retail segments being open to competition. The network infrastructure (transmission and distribution) is considered a natural monopoly and hence difficult to open for competition. In Ireland, the ownership and operation of the transmission infrastructure are separated and regulated under a regulatory framework derived from EU law. [caption id="attachment_37773" align="alignleft" width="374"]Figure 3: Electricity supply chain regulatory and competitive structure Figure 3: Electricity supply chain regulatory and competitive structure[/caption]

Changing landscape

“…In combination with digital technologies customers are able to control how they use, buy and generate the electricity they need.” Electricity utilities were traditionally large-scale, centralised and capital intensive enterprises. Their customers were generally considered to be passive in terms of how the electricity was produced and supplied. However, this industry model is changing. Increasingly, distributed generation can viably displace large-scale centralised power plants as the costs of such distributed generation technologies are reducing. Furthermore, since these distributed generation costs compete with end-user prices (which includes network costs) rather than just with wholesale electricity prices, they can be attractive to consumers. Smart metering can also facilitate self-generating customers to integrate with the grid effectively, enabling import and export of electricity as their production and demand varies.  In some markets, these customers can get paid a set tariff for their excess electricity ‘spilled’ onto the grid. This group of consumers are termed ‘prosumers’ as they are simultaneous producers and consumers of electricity. Intermittency of renewable energies such as wind and solar can be a major constraint on their deployment. The lack of effective means to store electricity in scale has been a key defining feature of electricity as a commodity. Although storage of electricity is possible using traditional technologies such as pumped storage, it has limitations due to geography and environmental impact, among others. Battery-based storage, using technology such as lithium-ion batteries, is now disrupting the energy landscape as they are being deployed for both grid and small scale applications due to their rapidly reducing cost and performance improvements. A prosumer with roof-top solar panels and lithium-ion batteries can extract better use of solar resources by storing during periods of excess generation and consuming when the sun is not shining. Electric vehicles can also be part of home-energy systems, where excess free electricity stored during the day is used to charge the car at night. With distributed generation and storage, in combination with digital technologies, customers are able to control how they use, buy and generate the electricity they need. The prosumer model is even more relevant to commercial and industrial consumers due to the significant underlying cost of energy to their businesses. In summary, the disruptions taking hold in the electricity sector are just the start of an energy landscape transformation. The major changes in the electricity industry to date have been primarily on the regulations to enable markets and new technologies. Going forward, as the energy sector is on the frontline of concerns about climate change, the major changes will be on regulations to deal with climate change and new innovations. It will be important for companies, either as energy producers or consumers, or both, to understand these disruptive forces so they can formulate their energy strategies in a rapidly evolving landscape. Readers who are interested to learn more about energy market issues can attend an introductory one-day training course 'Introduction to Energy Market Fundamentals and Emerging Trends' on Thursday, 15 February 2018 in Engineers Ireland HQ at 22 Clyde Road, Ballsbridge, Dublin 4. For more information on the course, please click here. Author: Eric Khoo is a senior consultant - strategic advisory at ESB International