Does the spike in energy prices mean anything for the energy transition?
Energy prices would have moved higher this year due to strongly recovering demand and constrained global supply, but the recent speed and extent of the price increase in gas and electricity prices in Europe has caught everyone by surprise.
I had a look at the statistics made available by the UK’s National Grid and this shows in the UK context at least the energy transition is a factor (see chart). The price spike has happened as electricity demand (A) has sharply increased in 2021 while generation by renewables (B) and nuclear/biomass (C) has decreased. As a result, the UK has needed significantly more generation from fossil (D) and imports (E). It’s a classic case of two big numbers moving in opposite directions at the same time, creating a gap that is large.
Without doubt the drop in renewables generation has exacerbated what would have anyway been an environment of rising energy and electricity prices in 2021. This has been made worse by some specific unpredictable events such as network outages, but the decline in productivity from renewables has clearly been a factor.
It’s worth remembering that last year we saw the opposite – you can also see this in the chart that demand (A) fell sharply in 2020 while renewable generation (B) rose significantly. At the same time global energy prices weakened. It was reassuring to see how the energy system coped with the rapid increase in renewables on the system in 2020, and the system will need to demonstrate the same resilience in 2021.
The key difference to last year is that customers are feeling the pain in their energy bills, and there is a risk that the energy transition ends up getting blamed for this, particularly if renewable generation disappoints into the winter.
Regardless of when the wind starts blowing, we need to be better at making the case that the energy transition will deliver customers more stable prices in the long run. Distributed and connected energy assets will enable the storage and demand side flexibility that can help customers mitigate unexpected price shocks. This is certainly true for relatively short durations (hours) but less so for longer durations (days or weeks), and this is where new solutions for customers will be needed. In a post-commodity world, the needs of the energy system will evolve, but it’s certain that long duration flexibility will still be important (e.g. during cold winters, periods of no wind or low solar, etc.)
This price spike demonstrates that we have to keep customers at the heart of the energy transition, and it has to deliver what customers want: protection from unexpected and sharp rises in grid prices i.e. the chance to be independent from grid prices, rather than being independent from the grid itself.