With a growing focus on decarbonisation and the role of renewables becoming increasingly dominant, greater flexibility in energy supply and demand will become critical as periods of oversupply of renewable energy grow longer and more frequent. These can lead to steep drops in the price of electricity, requiring new mechanisms to provide increased flexibility while also providing opportunities for new fields of application.
These new applications include battery storage and demand response, in particular, the smart charging of electric vehicles (EVs), which is emerging rapidly as a consequence of government efforts to decarbonise road transport. In March 2019, 58% of new vehicles sold in Norway were electric. Battery storage systems are also becoming increasingly commonplace and are already competing with power plants to balance demand and supply on a minute scale through so-called frequency containment reserve. The combination of battery storage, demand response solutions and EV charging and discharging has more than sufficient potential to address day-night fluctuation patterns in renewable generation, especially from solar energy, and demand.
But if renewables generate, on average, more energy than is used for a few days, then even the huge battery capacity of electric vehicles will quickly become saturated. As a result, the excess renewable energy will be wasted and the price of electricity will decrease significantly.
As the surplus of electricity outstrips available storage capacity, applications for which electricity used to be too expensive and valuable as an energy source suddenly become interesting. Direct electric heating is one example. But while the electricity is free, there are costs associated with use, which will determine the options that become viable first. In many cases, investment in infrastructure and equipment will be required to make use of the excess electricity in these new fields of application. Determining whether or not this investment is worthwhile depends on, among other factors, the total duration of the oversupply.
Having just a few hours a year when electricity prices are zero will not justify any investment. During these hours, renewable energy will be curtailed and any oversupply wasted. As the total duration of periods with very cheap electricity increases, however, applications that require larger investments, and generally have larger benefits, will become more attractive. For example, a business generating heat with natural gas might invest in a cheap electric boiler in addition to its gas boiler. This will give it the option to save on its gas bill when electricity prices are low.
A more cost intensive application that can benefit from cheap electricity is electrolysis: making hydrogen from electricity. Hydrogen has many more benefits and areas of application than just heating. But turning hydrogen generation from electrolysis into a cost-competitive energy carrier that is more affordable than natural gas requires a lot more hours of cheap electricity.
Like industrial heat, most applications require a steady supply of hydrogen and similar to electric heating, electrolysis is cost-efficient when electricity prices are very low. When electricity prices are too high for hydrogen production, there has to be an alternative. As a result, the use of electrolysers is likely to become more widely used alongside traditional steam reformers, which make hydrogen from natural gas. Their interchanging use will depend on the difference in gas and electricity prices, with electrolysers complementing steam reformers to create a steady supply of hydrogen for further processing, such as for fertilisers.
The large-scale use of hydrogen as an energy carrier will depend on many factors. Key among these is the price of natural gas, which in turn is influenced by the price of carbon dioxide emissions. The growing durations of oversupply of variable renewable energy is the next major factor as this will bring down the cost of electricity during these periods. This is influenced by the energy mix as well as the development of electricity demand and whether this oversupply can be exported to other countries through interconnectors. And last, but not least, it crucially depends on the cost of electrolysers. We are already seeing developments in this area which are reducing the cost of the equipment and the amount of power needed.
Taking all these factors into account, while there are still challenges to be overcome today, we can predict that electrolysis will become a central part of hydrogen supply within the next ten to 15 years.
Find the full report on Hydrogen in the electricity value chain here.
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