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Firmed Energy Tenders: A Resilient Approach to Energy Subsidies

Low cost, reliable energy underpins:

  • internal political stability – since many citizens are sensitive to energy costs.
  • economic strength – since low energy prices attract and retain industries and knowhow.
  • external political and military strength – since energy cannot be used as a lever by aggressors/opponents PLUS strong economies have greater resources and optionality for military strength.

Policies of individually subsidising wind and solar undermines low cost reliable energy because they subsidise intermittency.

Wind and solar subsidies work directly opposite to the goals of grid operators, whose objective is to provide a reliable supply. This leaves grid operators with strategies that are increasingly reliant on natural gas – a geopolitical supply risk and carbon dioxide emitter.

This is visible within Irish capacity auctions – a mechanism to assist in future grid stability as further wind comes online. Here are the results of the April 2023 auction:

A dominant majority of the winning bids are accounted for by Gas Turbines. There is a growing portion of battery storage, and this is expected to grow further, but be limited to short durations.

This is not about excluding wind, wind or batteries from the solution. This is about allowing any non-fossil resource to compete (and indeed be subsidised) in a way that is aligned with the goals of the grid operators, and does not subsidise intermittency.

What is a Firmed Energy Tender?

Firmed Energy Tenders allows grids to deliver:

  1. A reduced average price per kWh versus a system that primarily subsidises wind, solar and storage separately. (Keeping grid blackout/reliability risks constant).
  2. Improved energy independence – versus a renewables + natural gas based grid.
  3. A substantially decarbonised grid.

Approach

The electrical grid operator runs a public tender for power to be delivered on a timeline of 2 to 10 years out, e.g. for power to be delivered in the year of 2028.

Tenders must meet the following criteria:

  • Power should be bid in increments of 10 MW.
  • Bidding 10 MW commits the bidder to providing 10 MW of power at any moment of time on any day for that year, i.e. nominal power delivery of ~8000 hours x 10 MW = 800 GWh. The tender is “firm”, hence “Firmed Energy Tenders”. This is in contrast to bidding for a contract to deliver 800 GWh “on average”, where the grid operator takes on the costs and responsibilities of balancing load.
  • Power may not be generated from coal, oil or gas.

What this means for bidders:

  • If the bidder cannot deliver power they have committed, they must purchase that power at the prevailing market rate**.
  • The bidder may sell any power in excess of 10 MW. The grid operator is not required to purchase any power above that 10 MW.
  • The grid operator must take delivery of 10 MW of power, i.e. the grid operator cannot refuse delivery so the bidder is guaranteed to be able to sell the power they bid to provide.

What behaviours emerge from Firmed Energy Tenders:

  1. Bidding firms now must internalise the costs to the grid of the variability of their power source – costs that currently are borne by the grid operator and ultimately the general public and industry. Tenders will no longer be technologies, so much as projects (e.g. a geothermal project that can deliver consistent power OR a wind farm + iron oxide storage OR a solar farm + lithium ion storage OR a fission reactor capable of delivering consistent power). 
  2. All (non-coal, oil and gas) forms of power are allowed to compete with each other. Even better, it is not just power sources that compete but power+storage combinations that compete.
  3. A long term price curve for energy storage would be materialised in the market. Today, there is no long term price curve for energy storage as it is not competitive while gas remains in the grid mix. By creating a long term tender, and excluding coal, oil and gas, this results in a price curve for storage being materialised. This serves policy goals (evaluating a better cost of storage) and entrepreneurial goals (establishing returns on investment in storage technologies).
  4. The grid operator’s objectives (matching electrical supply and demand) are better aligned to that of the power supplier. 

Variants to Consider

Some variants on the proposal to consider include:

  • Whether the use of gas and carbon sequestration should be allowed.
  • Firm energy tenders could operate in parallel to current schemes.
  • *Whether, instead of 24/7-hour power, the tendering would be for a specific power curve with a daily and monthly shape. RECOMMENDED! I omitted this for clarity of explanation above.
  • **The prevailing market rate may be done on an hour-ahead or day-ahead basis.

Focus incentives on cents/kWh at the meter, not the LCOE of a technology

Incentives are currently focused around achieving low levelised cost of energy (LCOE) of a given technology instead of aggregate energy prices at the meter. Wind and solar tenders target low LCOE, not low energy costs at the meter.

Citizens and industry don’t care if wind is selling to the grid at 8 cents per kWh. What they care about is the price they pay at the meter and that power is clean + reliable. The price at the meter includes the all-in cost of the electrical grid providing a reliable power supply! That’s very different than the LCOE of wind.

Consider the Irish grid, where wind makes up 40%+ of annual power production, but the price at the meter is largely set by the price of natural gas. “Reliability” is the scarce input here. It’s to our benefit to shift grid incentives for power suppliers away from LCOE on a per technology basis, and towards low aggregate power costs at the meter.

High Energy Costs are a Systemic Risk

This is true in two ways – internal political stability and comparative economic strength.

Comparative Economic Strength

Energy costs are a key input cost for industry. Arguably, with increased automation, the share of input costs accounted for by energy may further increase.

High energy costs shift industry incentives towards other jurisdictions. Losing industries can mean losing knowledge and capabilities that a) drive economic growth and strength, and b) support military strength.

The world is a competitive landscape. If one de-prioritises military strength (like Ireland), at the very least it seems wise to have economic strength… certainly not energy reliance on adversaries.

As a a prime example of how energy dependences results in military weakness, see my 2021 piece prior to the Russian invasion of Ukraine.

Internal Political Strength

Energy costs are a big portion of income for a big percentage of households.

One need only look at historical prevalence of unrest in the wake of rising fuel prices, to see the importance of lower energy prices for internal political stability.

Two ways I could be wrong

I see myself potentially being wrong in two directions; a) storage costs drop to ~$10/kWh* within 3 years, or, b) the cost of firmed energy tenders reveals an underlying preference for burning gas.

a) Storage costs drop to ~$10/kWh within 3 years

It’s a mistake to underestimate technological progress – on any technology, or indeed, those we do not have today.

Irrespective of how fast storage costs drop, firmed energy tenders would materialise a market for storage because renewable energy bidders would need to include a form of storage or stabilisation in their bids. Firmed energy tenders would likely only accelerate this positive trend.

Yet, if week-long storage costs dropped to $10/kWh within 3 years, perhaps one could argue that the effort of introducing firmed energy tenders was not worth the effort. Still, in a low cost storage abundant world, firmed energy tenders may be the best way to subsidise energy production, if still desirable.

b) The cost of firmed energy tenders reveals an underlying perverse preference for burning gas

Establishing firmed energy tenders would materialise a market price of storage. Without fossil fuels, it is possible that this price – and therefore the cost to the exchequer of the tender – would be high and lead to higher energy prices (than a renewables plus gas grid). This argument would be compounded for smaller electrical grids like Ireland where any Irish subsidy (owing to Ireland’s relatively small size) would not move the overall market for energy technologies and supply. (Although, I don’t underestimate the ability to influence the broader market based on what Ireland has already achieved with grid stability given such high renewables penetration – and how that informs other markets).

Somewhat perversely, the high price materialised in a firm energy tender might reveal an underlying political preference for a “gas grid mullet”. Renewables in the front and natural gas in the back – satisfying the political optics of having private players provide low carbon technology, while the job and costs of reliability – via gas – is dealt with by the grid in the background.

All of this said, my guess is that – while a first tender may be expensive – the tendering process would be refined based on learnings, players would adapt, certain exclusions for gas-phase out may be required, and the cost in Euro per kWh delivered to the grid would be lower than achieved by current subsidies.

*See here for a simple spreadsheet relating battery costs to amortised costs of storage. At $10/kWh, storage for weeks at a time is possible at a levelised cost of around 13c/kWh.

In Conclusion: Grid Alignment with Firmed Energy Tenders

When most power sources were firmed (e.g. oil, gas, coal, hydro), focusing on LCOE was ok because it largely aligned with low aggregate cost.

This is no longer the case and there is the opportunity and responsibility to introduce better alignment between power suppliers and the grids objectives of being cheap, clean and reliable.

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