Article - Greenbyte

November 9, 2021 — Industry Trends

The Perfect Grid vs the Perfect Producer

Will either be the endgame of the renewable energy transition?

Edmund Hood Highcock
Senior Data Scientist

The renewable energy transition is here, with its colourful and chaotic mixture of intermittent production and cutting-edge solutions. How will the challenge of matching supply to demand be solved in the long run?

To think about this problem let us consider two extreme scenarios: the ‘perfect grid’ and the ‘perfect producer’.

The Perfect Grid

In the ‘perfect grid’, transmission lines connect whole continents, and perhaps even the whole world. These transmission lines are perfectly sized to be able to carry whatever load is necessary. The generating capacity across the system is designed to match supply perfectly on average. Short-term variability in supply (eg. clouds passing, lulls in the wind) is largely mitigated by long-distance transmission: it is unlikely that temporary weather phenomena will strike simultaneously across the whole continent. Predictable peaks in demand are smoothed by transmission across time zones, and any remaining peak is solved by a minimal, carefully planned, over-provision of generating capacity. Unexpected peaks in demand are mitigated by transmission across countries and cultures.

Because the grid is perfect, suppliers of generating capacity are paid with simple contracts that give them a predefined fixed price per MWh: there is no need to pay more at peak times because there will be other producers far away that can supply that power. Thus, the suppliers do not need to take any hedging risk, but the downside is that they are providing a simpler, less valuable service.

Minimal storage is required because the continent-wide system will average out local fluctuations. This lean approach means that the cost of producing power will be cheaper. However, there will need to be an unprecedented increase in transmission infrastructure, meaning that the cost for consumers could be high. Moreover, heroic levels of intra- and inter-government cooperation will be required.

The Perfect Producer

At the other extreme, power producers use advanced virtual power plant software, in combination with hybridised wind, solar, hydro and storage assets, to produce the perfect power supply: fully dispatchable with an instant response. A free-market mechanism operates, with the energy price always settling on the point where demand meets supply. The more local the grid, the wider the price swings in electricity will be, because there will be fewer suppliers bidding as the electricity price rises. Thus, in less liquid markets, large consumers will probably set up fixed-price contracts directly with suppliers.

The price of electricity for consumers will depend on the barriers to entry, and the fundamental costs of making the requisite technologies: storage, most importantly. As long as electricity in a given market is expensive compared to these costs, it will make sense for new suppliers to enter the market, driving costs down. These new suppliers may also be consumers, constructing a micro-grid to supply their own needs and selling excess to the grid.

For a given cost of generation and storage assets, the ‘perfect producer’ scenario would possibly result in more expensive electricity for consumers. This is because over-capacity and storage provision would need to be enough to fully mitigate local variations in demand.

In other words, a supplier would need to have enough storage, and/or enough capacity over-supply, to smooth out seasonal fluctuations. It is possible, however, that the greater demand for these assets, from a greater number of suppliers, would drive innovation and reduce the cost compared to the ‘perfect grid’ scenario.

The ‘perfect producer’ scenario requires less inter-governmental cooperation and transmission infrastructure, but does require governments to provide a well-regulated energy market, with safeguards to ensure that producers can meet their commitments. It would also require governments to protect consumers in smaller grids with fewer suppliers of electricity.

The ‘perfect producer’ scenario may also increase resilience, compared to ‘perfect grid’, in the case of extremely low probability but high impact ‘black swan’ events (eg. more long-distance transmission line failures than the grid was designed to handle). This is because local sections of the grid can isolate themselves against disruptive events, and the local availability of stored energy will reduce the need for brownouts.

On the other hand, disruption to a local supplier in the ‘perfect producer’ scenario will be more harmful to local consumers than in the case of the ‘perfect grid’, since the grid may not have enough capacity to bring in power from elsewhere. Thus the most resilient choice, of course, would be to have both the perfect grid and perfect producers.

The Future (Perfect?) World

Of course, the real world will end up in neither of those extremes, but thinking about them allows us to chart the course ahead: to guess what will be the mix ratio of these two possibilities.

We can already see the levers which lead to us having more of each solution: more government initiative and cooperation favours the ‘perfect grid’; while ambitious power producers seeking better technology and higher returns favour the ‘perfect producer’. Higher costs of storage make transmission more desirable and favour the ‘perfect grid’. Advances in storage technology favour the ‘perfect producer’.

Which scenario is more worth pursuing? We leave this to the reader to decide. The ‘perfect grid’ could end up with a more equitable result for energy consumers, seeing as all locations would benefit from all power produced equally. It also avoids the need for a gigantic deployment of energy storage.

However, the ‘perfect producer’ has a distinct advantage given the climate emergency we are seeing unfold. Those companies, charities, local governments, and even individuals, who aspire to become the ‘perfect producer’ of green energy can start today. While national governments build the consensus and the plans needed for the transformation to the ‘perfect grid’, every kilowatt-hour of renewable energy reduces carbon emissions, and every kilowatt of truly dispatchable renewable power brings the energy transition closer to completion.

At Power Factors and Greenbyte we are dedicated to helping aspiring ‘perfect producers’ in every way we can, though of course we strongly welcome grid development that supports sustainable power. The capabilities provided by our solutions aim to help renewable energy producers achieve ever greater efficiency and better control of their data, as well as gain market intelligence and (coming soon), advanced storage management.

Thus, we can predict that as the portfolios of our clients continue to expand, and as we continue to help our customers engage in the highest value activities, the ‘perfect producer’ scenario will become more and more of a reality.

Of course, there is nothing to stop us having both the perfect grid and perfect producers. But let’s hope that the eventual mix gives us the best of both worlds – with resilience, low prices and, most importantly of all, zero carbon.

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