Why are we surprised by climbing electricity prices?

Lue sama juttu suomeksi täältä: https://www.vt-tek.fi/articles/onko-se-nyt-ihme-etta-sahkon-hinta-nousee/

Introduction

Within the last few months, people in many European countries have been irritated by the climbing price of electricity. They have been increasing gently for more than a year now, but the situation got worse on November and December. In addition, the price has been very unpredictable with dramatic daily changes. The worst price peaks have been more than 10-fold compared to what the consumers were accustomed to.

 

As a results, some energy companies have been forced to close down and asset managers have lost their business cases. Energy companies are wondering how they could make more profit with increasing prices, because the costs of electricity production have not increased correspondingly. And eventually, the consumers – at least the 8% of Finns who still in November had their electricity contract based on the Spot energy price in Nord pool exchange – have suddenly found their normal daily routines ridiculously expensive. For example, charging up electric car at the most unpleasant time window has become just as expensive as filling up a fuel tank of a combustion engine powered car. Or, when organising a sauna event with friends the electric stove generates costs in faster pace than the guests by drinking beverages.

I have seen many articles in different newspapers and magazines about the causes of electricity price development. The experts blame for example cold weather, low yield of wind power plants, problems in Swedish distribution network, delay of Olkiluoto 3 nuclear reactor, and climbing prices of natural gas in central Europe. These are probably all correct in a way, but the experts seem to be missing the big picture.

What we have seen in the past few months, may have been exaggerated by the corona crisis and fast economic recovery after the 2020 lock down conditions. But there is more to it. The world is going through major changes in energy conversion and transportation. We aim to replace the traditional fuels such as oil, coal, and peat with applications running on electrical power. We are going to use electricity in applications where it used to be completely absent. We are simply electrifying our way out of fossil fuels. The future societies need much more electrical power. But – excluding Finland and France who still trust nuclear energy – the Europe is only building highly weather-dependent wind and solar power plants. Furthermore, so far only minor investments have been made on energy storage applications.

Past trends in energy efficiency

To understand what is happening, we should look back a little. We see electricity all around us nowadays. Within the last couple of decades our houses and offices have filled with all kinds of electrical gadgets, all connected to the internet. We even monitor our sleeping with electrical apparatus. Companies used to have archives in the basement to store all the folders of book-keeping and drawings etc. Now, the basement has gym and locker rooms. The archive has moved to “cloud”: There is a data storage factory nearby, which produces so much extra heat that it warms up a whole village.

But interestingly, the total supply of electricity has not increased in the same pace, at least not in Finland, as seen in Figure 2. Instead, Finland used more electricity in 2007 – final full year before the financial crisis – than it has used in any year since.

 

Already in the 1990s Finnish and European industries started to focus more on the energy efficiency. Electric motors – which consume 70% of the electricity of all industries [4] – were selected based on higher efficiency requirements, and they were more frequently driven by frequency converters. Processes were equipped with more automation systems and they were controlled more efficiently.

At the same time, household appliances and systems started to become more efficient. Incandescent lamps were replaced by led lamps, which need only a quarter of power for the same lighting conditions. Refrigeration units were re-designed with better insulation and less power consumption. A refrigerator of 1980s consumed 4 times as much power as a modern refrigerator. A freezer of 1980s needed 3 times as much power as a modern one. Even though the 1980s houses did not have computers, Playstations, or usually even dryers, a modern household of 1980s consumed just slightly less electricity than a modern household of today. The increased power has been mainly used in ventilation machines and additional electrical floor heating systems [5]. Anyway, a modern family living an a house built in 1980s can still use the original fuse box.

Until now, our electrification programs have been powered by the increased energy efficiency. But we are at the end of this road now.

Replacing coal in energy conversion

In 20^th century, there was not much regulation on energy conversion regarding the energy sources. Power and heat were produced with the overall cheapest method. In many places this was coal. It used to be inexpensive, easily available, and capable of providing enough heat and power for an entire city. But today, to fight the climate change at least the Western World wants to get rid of it, they have started to put sanctions on it. Political aim is to put so high emissions trading fees on coal that it becomes too expensive for power plants to use. This is a nice initiative for the climate, but does it tend to increase the price of electricity?

On a general level, if you take the least expensive product and put additional fees (taxes) over it to make it artificially more expensive, the next cheapest product is not getting any cheaper. Instead, it gets more expensive, because the cost competition is gone.

Finland has been able to almost replace the fossil fuels in electricity production, but they are still present in total energy consumption, as can be seen in Figure 3. They are used in transportation and heat generation.

 

The pie chart on the left in Figure 3 is from 2020. If we look back to 2007, which is the first year in the referenced data set [3], we see big change happening. In 2007 15.1% of Finland’s electricity was produced by coal, 7.7% by peat, and 11.4% by natural gas. By contrast, the wind energy slice was negligibly small. However, alarmingly, the net import in 2007 was much smaller 13.9%. In other words, old polluting plants have been shut down, and new clean plants have been build, but still more power is imported from neighbouring countries.

Wind and solar change the balance

Potential replacements for coal include wind and solar, and their capacities have been vastly increasing lately. But wind and solar have one major disadvantage. Their yield is at lowest when the demand is at highest, on a cold, calm, and picturesque day in January. In Finland such conditions are as follows: There is no wind what so ever allowing the smoke from chimneys to go straight up, the sun shines from a very low angle for about 4 — 5 hours per day, and the temperature is charmingly -20 °C or below with all radiator control knobs pointing South East (or in which ever cardinal direction is ”max”). No technology breakthrough on wind and solar energy is going to change this.

In Finland the electricity price peak was seen on 7^th of December at 8 o’clock in the morning, when the Spot price was 124,30 cnt/kWh [2]. At this time instant, the Finnish meteorological institute wrote down following observations [7]: At Jyväskylä airport in central Finland -17.4 °C, clouds, no rain, and wind speed 1.0 m/s, at Helsinki airport in southern Finland -18 °C, clear sky, and wind speed 2.0 m/s, and at Oulu airport in the north and close to big electricity consumers -13.2 °C, clear sky, and wind speed 3.3 m/s. So, to sum up the weather was cold, although not exceptionally cold, and there was only light wind.

Anyway, excluding the winter months, wind and solar can provide high yields throughout the rest of the year. So, if one could store their energy in spring and summer months, there would be enough energy for the cold winter days as well. Anyway, these extreme days are presumably becoming less and less frequent as the climate change progresses. However, at the moment there is no solution to store the energy in Finland — and in many other countries as well. We cannot pump the Kemijoki river water from downstream back to the reservoir lakes 300 kilometers away. Hydrogen could be used as energy storage, but the technology and infrastructure are not quite ready yet. Nevertheless if one has to store the energy for several months before using it, and even in different form, is it going to get more expensive?

Furthermore, wind energy makes up 10% of Finland’s electricity production, and this share is increasing fast. Perhaps in the future we can use energy storages to balance the worst load peaks, but think again the cold and picturesque January day, when the nation requires the highest amount of power. Wind mills have very low yield. Many of them are shut down. If 10% of the power capacity is out of service when the maximum power is needed, is this going to increase the electricity price? Further, does it also cause high hourly price peaks at the time instants of the highest demand? Like the ones we saw on December seventh.

Because wind and solar have strong dependence on weather, they cannot run at predicted power level. We have to assemble much higher capacity of power than the actual demand is. This is also true for hydro, but with much less margin. Some hydro plants provide almost constant power, and some are more affected by seasons, but this is rather well known beforehand, since the river conditions are well investigated. But investigating the wind conditions is much less reliable. As a result, at optimal wind conditions, the wind farms produce as if too much power and the price of electricity goes rapidly down. The price might even go negative, which happened already once in early 2020. On the other hand, if there is high demand at very low winds, the power plant capacity is very low, causing the electricity price to go up and steep. We know the wind conditions only few days up front, so the consumption can only take limited precautions.

Wind and solar cannot be considered as so-called load following power plants, which can be used to balance the temporary peaks in the electricity distribution. Traditionally, hydro, coal, and natural gas have been used for this purpose together with optimising the load of the largest consumers (e.g. steel and paper mills). Also nuclear power is not considered as load following power, because the nuclear reactor cannot be adjusted as quickly as required by the consumption. The problems with load peaks are emphasized, if major part of electricity is produced by nuclear and wind, and only small part by load following power plants.

Sweden is shutting down nuclear plants

To replace coal, Finland has invested in wind and nuclear (at the time of writing the Olkiluoto 3 nuclear reactor has just started its commissioning runs). But we have also increased our electricity import. Mostly, Finland imports electricity from Sweden and Russia, and exports some to Estonia. In 2020, Finland imported 18.5 TWh of electricity [8] from Sweden, equivalent to 20% of total production. The import case is not straightforward, since Sweden imports electricity further from Norway, where it is produced by very powerful hydro plants with large capacity and low operating costs.

In 2019 46% of electricity in Sweden, 64.3 TWh, was produced by nuclear and about the same amount by hydro [9]. But on December 30^th 2019 the Ringhals nuclear plant reactor 2 with 900 MW rated power was shut down. On December 31^st 2020, the Ringhals reactor 1 with 880 MW output power was shut down. These two reactors used to make up 20% of the total nuclear capacity in Sweden.

Sweden has also invested heavily on wind, and new wind installations compensate the shut down reactor capacity. However, when the January day is cold and picturesque in Finland, it is probably somewhat cold and somewhat picturesque in Sweden as well. And again many plants are out of service when the nation thirsts for power. Might the price of electricity go up in Sweden as well?

Power demand has started to rise

Let us take another look on the electricity supply in Finland (Figure 2). We see 2 anomalies, 2009 and 2020, caused by financial crisis and corona crisis, respectively. If we neglect these years and follow the trend, we see that the supply has reached its bottom in 2015, and then started to rise.

In Finland, many paper mills have been shut down in the aftermath of the financial crisis, and they have reduced the total electricity supply. Between 2007 and 2015 the electricity consumption of forest industry dropped from 28 TWh to 19 TWh [6], which is roughly by one third. But at the same time, we have started the work for digitalisation.

Since 2015, electricity consumption has been increasing in all branches of Finnish society (industry, households, farming, and public sector), including the above-mentioned forest industry. More electrically powered automation is used in processes, more data is collected and analysed, businesses and services are digitalised. It should be noted that digitalisation is not replacing one energy source with another. It is just additional power demand, just like economic growth or improved quality of life.

The first steps to electrify traffic have been taken since 2015, although their influence is still very small in the big picture. We see also increased electricity consumption in households due to replacing oil boilers with either geothermal or heat pumps, and more frequent use of air-conditioning during the warm summer days.

What lies ahead?

If we look at the energy consumption pie chart (on the right in Figure 3), we see a big slice of oil. This is caused mainly by two things: traffic and heating. In Finland oil is rarely used in electricity production. The future plan is to replace major part of the oil slice by other energy sources: By geothermal and heat pumps in heating, and by electrical power in traffic.

Coal and peat are used in district heating plants, and they will be replaced as well. Peat could be replaced with biomass, but in practice it will be also largely replaced by electricity, because many homes in district heating network still wants to install additional air source heat pumps. Helsinki does not want to replace coal by another fuel. Instead, they want to shut down the plants completely and use other methods for heat generation.

Any replacement for oil, coal, and peat, except biomass and municipal waste, will increase the demand of electricity. Even Hydrogen will do so, since lots of electricity is needed in its production. This statement refers to Finland’s plans for “Green Hydrogen”.

Based on rough calculations, Finland will need 15 000 GWh of more electricity to replace coal, peat, and oil in district heating plants, 1 000 GWh to replace oil in household heat generation, 5 000 GWh to replace oil in passenger cars, and another 5 000 GWh to replace oil in utility vehicles (vans, trucks, lorries, and buses). These put together makes 26 000 GWh, or 26 TWh, of added electricity demand within the next, say 10 years, for just replacing the old fossil fuel based applications. This is even without any economic growth, added digitalisation, or other increases in electricity consumption.

The given 26 TWh is equivalent to 32% of electricity production in Finland in 2020. So it is roughly one third. It is more than the total nuclear power production in 2020, and more than hydro and wind in 2020 put together. However, the brand new Olkiluoto 3 reactor should produce 14 TWh with full capacity. The Fennovoima nuclear plant currently in early phase development should reach almost the same figure, but it takes some time until this plant is operational. Inevitably, we will need plenty of wind energy to fill the gap.

In the future, we are going to need more electrical power. But it will be produced with less reliable power plants. So, we can expect the electricity price to stay high in the future as well. Furthermore, we can expect high price changes in extreme weather conditions. Hence, we desperately need new and competitive methods to store the energy. We cannot take full advantage of wind power without them.

 

Lähteet

1. Nord pool electricity statistics, day-ahead prices, https://www.nordpoolgroup.com/Market-data1/Dayahead/Area-Prices/ALL1/Monthly/?view=table.
2. Vattenfall, electricity price statistics, https://www.vattenfall.fi/sahkosopimukset/porssisahko/tuntispot-hinnat-sahkoporssissa/.
3. Energiateollisuus ry, “Sähkön hankinta energialähteittäin 2007-2020”, (Electricity supply divided by energy sources in 2007-2020), https://energia.fi/tilastot/sahkotilastot/sahkontuotanto_ja_-kaytto.
4. ABB, “Boosting industrial profitability with energy efficient drives and motors”, Markkinointiesite, 2016.
5. Adato Energia Oy, “Kotitalouksien sähkönkäyttö 2011” (Electricity use by households in 2011), Report, 2013.
6. Statistics Finland, Statistics on energy, https://pxhopea2.stat.fi/sahkoiset_julkaisut/energia2020/html/suom0000.htm.
7. Finnish meteorological institute, Past weather observations, https://www.ilmatieteenlaitos.fi/havaintojen-lataus.
8. Energiateollisuus ry, “Electricity balance 1970-2020”, https://energia.fi/uutishuone/materiaalipankki/sahkotase_1970-2020.html#material-view.
9. Energimyndigheten, “2019 rekordår för svensk elproduktion” (2019 a recor year for Swedish electricity production), https://www.energimyndigheten.se/nyhetsarkiv/2020/2019-rekordar-for-svensk-elproduktion/.