Dr. Christoph Riechmann, Director, Frontier Economics, on energy sector coupling – what it is, why it’s a good idea and how it has the potential to change the energy sector.
Energy sector coupling refers to the increased integration (i.e. coupling) of different energy carriers – like electricity, gas and fuels in the end-use of energy – for electrical appliances, heating, mobility and industry.
The initial idea was that this would be equivalent to using renewable electricity and electrifying heating, mobility and industry where electricity currently plays a limited role.
But it soon became clear that electrifying all end-user applications is neither technically feasible nor cost-efficient.
Electricity helps us to deal with short storage cycles – e.g. overnight to recharge a car battery. But we also need to deal with longer cycles as well. In particular, we need to deal with seasonal energy demand for heating purposes.
We also need to deal with periods of limited availability of solar and wind power, which could last for several weeks.
Accumulating flexibly available energy volumes in batteries would be prohibitively expensive and absorb enormous space to place the batteries.
By contrast, gas and liquids have a very high energy density and they can be stored underground in bulk volumes. Once we decide to store bulk volumes of energy in the form of gas and liquids it is also very efficient to transport them as gas and liquids, rather than as electricity. To offer an example: A typical gas pipeline corridor can be used to transport more than 10 times more energy in the form of gas than could be transported across an extra high voltage electrical system. Moreover, the storage and transport infrastructure for gas already exists. It has been built in particular to meet winter energy demand.
However, to comply with climate policy targets we need to decarbonise not just the electricity sector, we also need to decarbonise gas and fuels. But how to do that? We can make a start with biogas and biofuels and blend them with conventional gases and fuels. But their potentials are limited. We need to go further.
And indeed, there are other options. Let me explain this for gas. There are broadly two strands: Firstly, carbon could be sequestered from natural gas to produce hydrogen. CO2 is a waste product in this process, and it could be stored away. The second option is to use renewable electricity to produce hydrogen from electrolysis. Both approaches help reduce CO2 emissions. This approach could mean increasingly replacing natural gas by hydrogen, either by blending hydrogen into the conventional gas grid or ultimately by replacing natural gas in parts of the system with hydrogen.
In essence: we will only be able to meet our climate policy targets to 2050 if we are open to new technologies for energy conversion and we need to be open to new forms of gases. This creates business opportunities for innovative technology and energy companies but also carries risks for incumbent producers, infrastructure operators and traders.
Challenges and opportunities
A big challenge is to understand the new technology environment, to form views over the future climate policy and regulatory design that serves to address these challenges and to make strategic choices: • What technologies will phase out, which technologies will they be replaced by?
For example, what exactly is the future of my gas infrastructure? How will I need to grow my electricity grid? What are the appropriate timings for such choices?
• Which types of gas and fuels will play a role, to what extent and by when? What will be the role of biogases, hydrogen and synthetic methane? To what extent will they be produced locally or imported from the EU or further afield?
• What are path dependencies in the technology choices of utilities? For example, if I utilise hydrogen technology what other options may I be foregoing?
Our current market design does not properly enable this type of energy transition. In a recent study for the European Commission several areas of concern that need addressing have been identified:
Our current policy arrangements reward the environmental benefit of low carbon and renewable fuels in the electricity sector, but we miss similar arrangements in the gas sector. Moreover, innovators may be kept from making the desirable level of investment into technology development if they see a risk or if they are not fully able to exploit the commercial benefits of such investment. We need an R&D and a climate policy framework that extends to the heating and mobility sector.
Many EU member states have developed a complex system of tariff structures, taxes and levies. To give an example: Some countries apply a levy on the use of electricity. However, if a sensible approach to decarbonisation is to use renewable electricity to produce hydrogen, then this option may be discouraged if this very electricity is burdened with a levy. This can affect technology choices and hamper innovation.
Our current regulatory arrangements in gas are focussed on natural gas and they make little or no provision for alternative forms of gas, e.g. hydrogen. In some EU member states, gas transmission operators may not even be allowed to operate in hydrogen alongside natural gas.
For such a system to function well we also need stronger integration of the infrastructure planning in the electricity and gas system. We made a small step when the electricity and gas network operators joined forces to develop joint planning assumptions.
But that stills falls short of integrating infrastructure planning.
We also need to ensure that we retain the integrity of the EU Internal Market for gas. This was achieved in a world where gas qualities may vary in different parts of the system, while in commercial trading we will consider all types of gas as interchangeable. This integrity could be threatened if we start thinking in terms of different markets by different types of gas.
The future market design needs to address these challenges.
The energy transition to a carbon-neutral 2050 will not work without the continued use of gas and fuels as a means of storing and transporting energy. However, their respective roles are likely to reduce in the EU relative to their uses today – even as they increasingly decarbonise – and the role of electricity as end-use energy, but also as an intermediate form of energy, will rise.
For this transition to work effectively and efficiently changes to climate policy and market design will be required. Until this policy design is clearer, the commercial viability of these technologies remains uncertain. The new design will need to encompass a broadening of climate policy instruments to extend into the heating and transport sector. This will likely require some bold policy decisions as there will inevitably be winners – for example certain innovators – and losers – e.g. some consumers that do not adapt to the new environment and that would subsequently need to pay more for their energy supply. SEI