Energy storage and market stabilization: the heat pump example

The low to zero marginal cost systems in primary production do not react to price shifts, unless the price becomes near zero. With shut-down and start-up costs, producers may even produce for negative prices. In a more developed situation, however, spread-out use, storage and secondary supply will stabilize prices. If at peak production and low demand the price becomes very low, heat pumps will start up to store heat, transformation processes as to hydrogen will speed up, all battery systems will start loading and delayed machines will start again like

washing machines and dryers. This will happen well before the price is zero and hence the price will not drop to zero. Of course overinvestment with overcapacity will have a downward

pressure on prices with low marginal cost systems. This has structurally been the case in aviation where governments tend to pay for losses of their flagship airlines.

Heat pumps based heat storage systems

Heat pumps with seasonal heat and cold storage are one option to decarbonize heating and cooling of buildings, if based on emission free electricity. Heat pump heat storage systems can help stabilize the grid over periods ranging from hours and days to seasons. It does not matter when exactly they are fed. They avoid the efficiency loss of electricity storage systems like battery and pumped hydro, which are in the order of 15 to 30%.

In the Swing Producers Market, with solar PV electricity delivered to the grid at feed-in tariff prices or only tax and surcharges raised end-user prices, heat pumps face that price competition. As long as natural gas and also oil and butane/propane are available for heating of buildings, these fossils also compete with heat pumps, the more so the lower taxes and emission pricing are. Non-predictable emission pricing makes investment in heat pump systems less attractive.

Heat pump based heating and cooling systems can come substantially into the market by technology specific policy instrumentation. Options are to subsidize them or to force them into

17 See their statement in Chapter 2: “… LCOE is closer to the real cost of investment in electricity production in regulated monopoly electricity markets with regulated prices rather than to the real costs of generators in competitive markets with variable prices.” This situation does not exist anymore, also not in the US where this method of pricing was near universal.

the market. This then can be measures like forbidding natural gas and other fossils based heating, (as has been done in Denmark for countryside gas use), or more stringently, by prescribing heat pumps, for new buildings, for renovated buildings, or also when renovating the heating system.

The situation is still similar in the National Unbundled Market, with contractually differentiated user prices combined with user-price based prices for delivery to the grid.

BOX 3 Heat pump investment under different electricity market regimes and CO2 emission prices Beware: This is not a prediction but an investigation of one corner of feasible technologies relevant for climate policy instrumentation.

An investment decision on heating and cooling systems for apartments is between heat pumps and underground storage and gas heating plus optional air conditioning. The heat pump would be driven by solar PV electricity. What will a wise investor do? That depends on the electricity market and on emission pricing, given the technologies as are available. (Roughly current situation in the Netherlands.) Market situation one is a fixed price for delivery back to the grid of €0.25. With a feed-in tariff the delivery back price would be higher. The second market situation is when producers of electricity receive producer prices, real time market based. That price will vary substantially but will be low for a substantial share of PV production, then used for driving the heat pump. The low electricity price is not influenced by emission pricing; the highest price levels might be. For the natural gas based system the price per cube is influenced substantially by the high emission price of €300 per tonne CO2, creating a price rise from €0.60 to €1.15 per kWh. Induced market mechanisms would reduce that price somewhat.

The investor would compare the costs and proceeds, as in Table 9. The outcome is that with the high delivery back price the investor will always choose for gas heating, even with the high emission price of 300 Euro per tonne CO2. Yearly cost are €1580 for the gas system against €1755 for the heat pump system.

With the low price for delivery to the grid (and similar for a low variable price from the grid) the choice is clearly for the heat-pump with heat and cold storage, even without any emission pricing. It would be €831 for heat pump system against €920 for the gas system without emission pricing, and €1580 with the high emission pricing.

The reasoning is based on decentral solar PV, funded by a partially high grid price, see the table. Grid connected renewables systems would favor heat pumps in the same way, with renewables based electricity production possibly at lower real costs than on apartment blocks. This holds however only under adequate market arrangements: real time variable market prices, equal for all.

Current electricity market arrangements as with net metering and more severe with feed-in tariffs, intended to incentivize solar PV, imply that building heating gets stuck to fossils for decades to come.

Additionally some air conditioning can be expected for cooling, which is covered in the heat and cold storage system already. A variable market price equal for all producers and users would not only fund the solar PV installation but also the zero emission heat pump with heat and cold storage system. Of course a carbon tax would make that option even more attractive. Having the zero emission heat pump system under currently usual electricity market arrangements could be induced by very extreme emission pricing, well over 300 Euro, required on short notice. A second option is to subsidize not only the solar PV but also the heat pump with storage system. A third option is to regulate heating systems, as advocated by the (IEA 2015) in its analysis of energy using and producing products. This IEA approach would fit in an extreme technology specific governance mode.

Table 9 Heat pump with heat storage under different electricity market designs and emission prices

Moving to the Single European Electricity Market, or the Unbundled Market with EU DCHV Grid, will change the situation substantially in favor of heat pumps. Producer prices, both primary and secondary, are becoming equal for all producers, net of transport cost and taxes and (expiring) feed-in-tariffs and their surcharges. Heat pumps operate when prices are low, not just because of own solar production but because of all peak production at low demand times. Heat pump use receives competition from all other storage systems, be they own storage of own production, other decentralized storage or central storage. Together they reduce price volatility and reduce very low price periods, linked through the energy markets as created.

4.5. EU instruments, EU induced instruments and Member State instruments

The focus here is on EU climate policy. The total of instruments covers EU level of instrumentation and Member State level instrumentation, the national level induced by EU requirements and also based on national and subnational initiatives without direct EU influence. Indirectly, the EU also has an influence through the setting of national targets. The most visible and substantial movement towards emission reduction have been implemented by independent nationally developed instruments. Feed-in tariffs have been developed in Germany, with a leading role by Scheer, and are applied widely in the EU, and beyond. Investment in wind power is based on national subsidies, including feed-in tariffs, feed in premiums and similar, and investment subsidies. Tax advantages and other subsidies for electric and hybrid electric cars at national level have played a major role in their introduction, with EU Fleet Standards becoming effective only

Electricity costs per kWh: Gas costs per m3:

Per year:

Capital

&

mainte-nance

Electricity kWh (efficien-cy 300%)

Deliver-back price

Variable market price (also if CO2 300€/t)

Gas m3 (efficien-cy 105%)

Current price; no emision pricing

€300 / tonne CO2

Energy prices 0.25 0.05 0.60 1.15

Natural gas heating 200 1200 720 1380

Fixed cost delivery 50 50

Total yearly cost (€) 920 1580

kWh/m3: 11

Heat pump & storage 600 4620 1155 231

Total yearly cost (€) 1755 831

Solar Panels kW: €: kWh per year/Wpeak 900

40 panels of 250Wpea k 10 kWh: Costs pa: 1100 Installing 40 panels 16000 € kWh per year total 9000 To grid: 4380 0.25 1095 Converter replace 2000 €

Own use: 4620 0.00 0 Maintenance / year 380 €

recently, with improvements in performance measurement upcoming¹⁸. The EU instrument flag ship, the ETS, has been hampered by an ineffectively low price, partly due to the successful national programs in renewable energy.

Current instruments and their interrelations have been investigated for the EU in (Drummond 2013), with country level studies adjoining in separate studies. That analysis shows in detail how instruments interrelate but at a more detailed level than is applicable for the grand design in instrumentation developed here. Specifically, the interaction of the Renewable Energy Directive (RED) and the EU ETS are cost-inefficient regarding centralized electricity production as emission permits can shift to other member states and other sectors (Drummond 2013), p91. However, the redesign of emission pricing towards price stabilization would reduce the opposition, as in the market Stability Reserve where the amount of permits is reduced if there are too many in the market. The line of development towards price stabilization is followed here. Also, EU climate policy has mainly left the multiple target set-up with separate renewable energy targets (COM 2015), as it does not matter so much how emissions are reduced; GHG emission reduction is the overall goal. Long term instrumentation strategies should reckon with interrelations and avoid counteracting and cost increasing instrumentation in the design stage as much as possible.

Stabilized emission pricing and avoiding all emission pricing are basic strategic solutions to incompatibility, with both options having been developed here in some detail in Section 4.3.

The four main approaches to emission pricing as distinguished differ in how the EU and national levels interact. Without emission pricing, most instruments will function nationally, partly induced by EU policy frameworks. All emission pricing schemes are encompassing over all fossil CO2

emissions, and possibly also covering some non- CO2 emissions. Emission trading systems have as a consequence that national targets become somewhat unspecified. Countries, that is the owners of the permits in a country, may sell emission permits to other legal entities in other countries for permitting installations there, shifting emissions to these other countries. Administratively these shifts may be noted but long term policies will not reckon with such past shifts, making national targets at least less easy to determine with simple criteria. With increased international trade in electricity and base industrial products shifts in hidden flows may also become substantial. These transboundary shifts mean that governments effectively lose control over what were “their”

domestic emissions. Of course their national climate policy instruments apply to their remaining national emissions only.

The pure cap-and-trade system, encompassing all CO2 emissions long term and being the effective instrument, makes national policies and other decentral actions quite irrelevant. They cannot influence emissions at EU level, as these are determined by the fixed cap. If the cap is adapted if prices are deemed too low or too high, the pure cap system becomes a hybrid cap. The hybrid cap system and the emission tax have a converse effect; they stimulate national actions, by making them economically more attractive. These differences are so substantial that they are laid down in some detail in the sector specification of policy mixes, starting from these pricing options.

In specifying EU instrumentation it is not possible to go into detail of what national policies might be, different between countries. The specifications of instrument mixes are made based on

18 The NEDC (New European Driving Cycle) has a rising difference between norm measurement and actual emissions and may be replaced by WLTP (Worldwide harmonized Light vehicles Test Procedures), initiated by the EU in UN context. Optimizing for test results would then start anew. Real life measurement comes up in discussions now as an alternative.

covering most emission sources, with some instruments clearly operant at EU level, and others in a general sense assumed operant at member state level. Adjoining instruments may be set up at EU level, may be induced from an EU level, or may be thought of as bottom-up developments.

Such option on centralization and decentralization are analyzed in a parallel project report, D6.3 (Markandya, Rey et al. 2015).

5. Instrument mixes for four emission pricing options and four