The structural change of the electricity market
Renewable electricity generation: from niche to mainstream
The electricity sector needs to be decarbonized globally as power generation is one of the largest source of CO2 emissions at world scale. Notwithstanding that, it is also leading the transition to a net zero energy system at the same time, through the deployment of variable renewable energy. The increasing electrification on end-uses, such as electric vehicles and heat pumps, implies a raise in power demand that must be compensated with renewable power generation.
If we look back to the 90s, global electricity generation was not even 12,000 terawatt-hours. After three decades, it has surpassed 29,000 terawatt-hours (Statista, 2023)1. During the last decades, there were only two occasions in which global electricity generation slightly decreased: in 2009, after the global financial crisis; and during the coronavirus pandemic in 2020 (ibid.).
Indeed, the total share of renewable generation in global electricity supply is expected to exceed one-third by 2024 (IEA, 2023: 7)2. If weather conditions are favourable, renewable generation could even surpass coal next year due to its potential growth, even when there is an increase on electricity demand. This is cutting fossil electricity generation, though extreme weather events may foster a setback or delay throughout the transition to net zero. This transition towards a low-carbon electricity system requires a transformation of the current market design and the regulatory structure, in parallel to investments on innovation, advanced technologies and flexibility.
Wholesale electricity prices and the increased need for flexibility
Strong clean energy sources output at times of low demand implies the fall of electricity prices below zero. According to the International Energy Agency, “the number of hours in which electricity dropped below zero doubled in European countries such as Germany and Netherlands in the first half of 2023 compared to the same period in 2022” (IEA, 2023: 8)2. What is more, in countries with a higher penetration of variable renewable energy, prices can fall below zero even more times, which indicates an imbalance between demand and supply.
The high penetration of renewable sources into the grid along with their close to zero marginal costs, which is moving from niche to mainstream, are pushing the expensive and non-renewable energy providers out of the market and cutting down electricity prices. In April 2023, the share of renewables considering the total net electricity production in the OECD countries was 38.2%, which represents a total value of 306 654.8 GWh; while the share of non-renewables with respect to the total net electricity production corresponded to 61.8% or a total value of 496 725.4 GWh (IEA, 2023)3.
That is why flexibility and storage are key as well as investments on the technological solutions that enable this aggregation and provide, inter alia, demand-side response, frequency response services and imbalance settlement. Likewise, virtual power plants (VPPs) play a critical role allowing market participants to combine distributed energy resources (DER) and aggregate them into a platform that can meet the grid requirements in real-time and provide balancing services. Thus, flexibility must be embraced to integrate more renewable energy, increase energy security and efficiency, and address the transition to net zero at the right pace.
3 International Energy Agency (IEA) (2023). Monthly Electricity Statistics. Last updated: 17 Jul 2023.
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