区域电力市场可以有效地加强系统稳定性、降低排放、低成本地帮助可再生能源并网，更公平地分摊成本，并且提高电价和成本的透明性。《运营规则》是推动中国南方电网建立区域电力市场重要的第一步。然而，《规则》在一些关键领域仍然存在一些不清晰之处与尚未充分解决的市场设计问题，其中最重要的几点包括：

• 结算体系并不完善；
• 由于部分市场参与主体未以现货市场价格结算而导致了市场运营商（电力交易中心）的不平衡资金问题；
• 缺乏区域调度控制；
• 缺失对区域资源充足性的考虑；
• 市场价格的监督和监管。

以上几个问题，以及本文中未明确提到的问题，并不是不可逾越的鸿沟。本文阐述了应对这些挑战可能的策略。除了具体的市场设计外，额外的考虑因素（例如，国家政策层面的支持和对市场参与者有关市场规则和整体战略的培训教育），也将成为促进和维持区域现货市场参与度的重要基础。

《运营规则》的发布具有显著的意义，并且迈出了非常重要的一步：它为南方电网区域提出了一个全面详细的区域市场设计方案。如果可以对有些细节部分进行更好地完善和改进，将会带来更理想的结果。文章从以下几点做出了分析和建议，仅供讨论。

• 节点结算。如果真正逐步结算，“三部制”（即中长期、日前、实时）价格结算模式可能会导致市场运营商出现显著的不平衡资金问题。一个比较具备财务可持续性的方法是采用两部制结算模式，将发电侧偏差在发电节点结算，将负荷侧偏差在负荷节点结算，并通过差价合约来解决中长期合同和现货市场价格之间的差异，按照约定的交付节点来结算。
• 非市场参与者的市场结算。区域现货市场设计面临的一个关键挑战是，如何在确保市场价格有意义且保持市场运营商财务可行的同时，使得那些不参与市场的省份、负荷和发电机组不受现货市场价格的影响。在短期内，实现这一目标最直接的方法是将非参与者的不平衡电量按现货市场价格结算：将非参与省份的不平衡电量以省交界处的节点边际电价结算；将计划发电机组的不平衡电量以发电侧的节点边际电价结算；将非市场负荷产生的不平衡电量以负荷侧的节点边际电价结算。现货市场设计的一个总体目标应该是使市场运营商实现收入平衡，这只有在非市场参与者支付市场价格的情况下才能实现。这意味着各个省份加入现货市场的先决条件必须是，不管批发市场电价发生什么变化，它们都将承诺支付电力批发市场成本。将非市场参与者的边际电量暴露于现货市场价格信号下可以激励现货市场需求方与供给方增加报量报价的意愿，从而增加市场流动性并引导出更有意义的价格。
• 非火电和储能的市场参与模型。《运营规则》提出的市场设计可以接纳所有资源，但目前尚不清楚是否所有资源从一开始就能够参与现货市场。即使非火电资源最初只能通过试点项目参与现货市场，我们建议从一开始就将不同的资源参与模型（例如，基于天气预测的资源、水库水电、电池储能）纳入到调度和结算软件中。
• 区域调度控制。如果南网总调和省级调度中心继续共享调度权，当可调度发电机组不遵循南网总调的调度指令时，则可能会影响电力系统可靠性和可再生能源发电并网。对于区域实时市场，南网总调在调度时间尺度内应拥有全面的区域调度控制权（包括以五分钟为单位的实时调度），即使它不负责辅助服务的采购和小于5分钟调度间隔的调频。以实时价格结算所有计量的供给和需求将有助于将供应商的动机和运营的需求相结合。
• 辅助服务市场。《运营规则》中提出的区域辅助服务市场设计是省级辅助服务采购加上省间交易。目前尚不清楚相较于非市场化电力备用分享协议，这种模式是否值得。在短期内，首先关注区域现货市场，随着各省对区域系统运营商的接受程度越来越高，允许形成区域辅助服务市场可能更具有意义。
• 资源充裕性。在现状下，各省份负责制定自身的资源充裕性规划，资源不充足的时候减少负荷。然而，区域现货市场将会充分连接其区域内的所有资源，认识到这一点是很重要的。至少在短期内，应该考虑制定系统在受压情况下运行时，针对供应侧故意减持出力的市场规则。从长远来看，区域资源充裕性规划可以减少为满足系统可靠性而所需的发电容量，并降低总投资成本。
• 输电成本。省间输电成本似乎仍然是基于交易电量收费，这在具有节点调度的区域市场可能会引起问题。与《运营规则》更一致的替代方法是根据输电或者用电需求的系统同时峰值，将省间输电成本分配给区域各省，并向各省内所有负荷收取输电费。
• 价格监管。《运营规则》与实施细则对中长期市场和现货市场都引入了多层级的价格上限和下限机制。这些价格限制与其他市场监测和市场力减缓机制一起确保市场拥有足够竞争。然而，在设计这些市场管控措施时，应谨慎确保市场化的优势，如稀缺电价，不受过度约束。
• 市场监管。《市场规则》尚未明确区域现货市场中缓解市场力的机制将如何设计，哪个部门负责监测和执行市场规则，以及是否有第三方组织负责市场监测。最好在现货市场运行之初解决市场监管上的细节。

本报告可提供英文版全文(The full English version is available)

The post 中国区域电力市场：南方电网区域市场设计方案回顾（执行摘要） appeared first on Regulatory Assistance Project.

建筑行业碳减排路径

中国宏观经济研究院能源研究所和一些国际机构定期开展能源转型的研究，包括对全面减碳路径的分析，以及对各个领域的发展建议。在《中国能源转型展望2022》（以下简称“展望”）中，建筑行业碳减排路径的分析与双碳目标基本一致，其中包含以下几个关键的建筑行业里程碑：

• 建筑行业的终端能源需求在2030年左右达到峰值，在2030年到2060年间略微下降。
• 2019年至2035年间，建筑中的煤炭消费量减少，分布式天然气消耗相对稳定，到2060年完全停止使用这两种化石燃料。
• 在2019年到2060年间，建筑行业终端能源消费量中的电力消费由35%上升到64%，主要由增加的热泵产生。
• 中国采暖地区集中供热网覆盖的建筑面积占比从2020年约40%提升至2060年约60%。
• 在2021年到2060年间，集中供热部门的电力消费从零上升到38%，而化石燃料的消费从82%减少到38%。

这种碳减排路径强调了建筑电气化和提高能效，在很大程度上与其他国家的研究一致。而且，其中建筑减排路径中预设了会有显著增加的集中供热部分，这在美国等其他国家的碳减排路径中较为少见。“展望”中的碳减排路径提到了2060年仍然会有大量的化石能源用于集中供暖，这意味着碳捕捉技术的大量使用，从而引发成本方面的担忧，也许今后的展望中可以对此做出修改。总体而言，“展望”（或类似路径）能有效评估并为建筑行业近期政策制定提供参考。

如何使建筑行业走上碳减排路径？

“十四五”规划（2021年至2025年）涉及建筑碳减排的各种声明。一方面，“十四五”规划中的“绿色建筑”部分包括敦促在建筑中用电力替代煤炭和燃气的声明，更提出在2025年之前将建筑最终能源消费中电力消费百分比提高至55%的目标。作为比较，2021年建筑电气化率约为45%。此目标超越了“展望”提出的碳减排方案。

但另一方面，有些政策文件中将电热泵和天然气都视为“清洁能源”，而地方政府五年规划中关于基础设施建设部分，包括了积极建设城市燃气分布网络和扩大燃气消耗的目标。这在一定程度上体现了替代燃煤供暖的作用，但由于天然气基础设施存在较长寿命，会引发搁浅资产风险问题。就采暖方式的经济性来说，“展望”和国际上的相关研究表明，最优方案是利用高效的电力供暖替代剩余的燃煤供暖，同时要避免投资新建天然气。需要注意的一点是，建筑行业的电气化目标并不代表它具有优秀的指导性作用，这要取决于它是通过高效（比如热泵）还是低效（比如电阻或者低效制冷等）的方式实现。

最近，一些地方层面出现了新的清洁采暖途径。去年11月，北京市成为第一个明确电热泵的领导地位、禁止新建和扩建燃气独立供暖系统（含例外）、并设定了城市范围内“新能源”（主要是电热泵）提供建筑供暖目标的主要地方政府。然而，北京市的新政策仅要求新能源供热面积占全市供热面积比重在2025年达到10%以上，可能达不到“展望”碳减排路径的要求。

下一步？

下一个五年规划的制定，对于引领中国走向低碳未来起着至关重要的作用。尽管许多关于支持建筑电气化、采用热泵供暖的政策已经到位，但制定更加严格的目标，明确新能源供热优于天然气供暖，并禁止在新建筑中使用化石燃料，将是迈向前进的重要步骤。与此同时，加强北京市的新政策并将其扩展到其他省市可以帮助加速这一转变。

英文版

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China’s building sector is the world’s largest in terms of energy consumption. It is characterised by a vast and diverse building stock. District heating and combined heat and power play major roles in the northern half of the country. Although years of national and provincial efforts have produced some important green building policies, carbon emissions from buildings continue to rise, partly due to increasing demand for heating and cooling as household incomes increase.

China’s national “dual carbon” goals call for an economy-wide emission peak in 2030 and carbon neutrality in 2060. This raises the question of the decarbonisation pathway for the building sector. Here we take a brief look at the broad outlines of a feasible and cost-effective pathway and then discuss potential obstacles that may hinder China’s alignment with this trajectory.  

A Pathway to Building Decarbonisation

The Energy Research Institute of Chinese Academy of Macroeconomic Research, collaborating with international partners, regularly updates scenarios for economy-wide decarbonisation. This China Energy Transformation Outlook (CETO) includes one of the few regularly updated and publicly available decarbonisation pathway analyses for China’s building sector. The CETO scenario that is consistent with China’s dual carbon targets features several key building sector milestones:  

• The building sector’s final energy demand peaks around 2030, followed by a slight decline from 2030 to 2060.
• Between 2019 and 2035, direct coal usage in buildings decreases and distributed natural gas consumption remains relatively stable, followed by the complete elimination of both fossil fuels by 2060.
• Electricity consumption rises from 35% to 64% of building final energy demand between 2019 and 2060, primarily driven by the increased use of heat pumps.
• District heating covers about 60% of the floor area in China by 2060, up from about 40% in 2020.
• Electricity consumption in district heating plants increases from zero to 38% between 2021 and 2060, while fossil fuel usage decreases from 82% to 38%.

This decarbonisation pathway is broadly consistent with studies developed for other countries, which also show a heavy emphasis on electrification and energy efficiency. Some things stand out; it envisages a dramatic increase in district heating, which is not typically matched in decarbonisation pathways, as in the United States for example. One of the elements of CETO’s decarbonisation pathway that may evolve in future editions is the significant amount of remaining fossil fuel in district heating in 2060, as this implies substantial use of carbon capture that, in turn, raises significant questions of cost. Overall, however, the CETO pathway — or something directionally similar — makes sense as a way to evaluate and calibrate China’s near-term policy efforts in the building sector.

A tall order for policy: what will it take to get China’s building on the decarbonisation pathway?

China’s 14^th five-year plan (2021 to 2025) is somewhat conflicted about major decarbonisation questions. On one hand, the “Green Buildings” component of the national plan includes a statement that urges the use of electricity over fossil gas in buildings. It also has a target to increase the percentage of electricity in building final energy consumption to 55% by 2025, which surpasses the CETO decarbonisation scenario, at least in terms of this variable. For comparison, the building electrification rate was about 45% in 2021.

On the other hand, various national policy documents include language that frames both electric heat pumps and fossil gas as “clean energy” options. Meanwhile, the local infrastructure component of the five-year plans includes targets for the aggressive buildout of urban gas distribution networks and expansion of gas consumption. This is largely part of coal heating replacement but raises questions about how the building sector will decarbonise and the risk of stranded assets, given the long-lived nature of gas infrastructure. The economics of heating, reflected in CETO and other decarbonisation analyses around the world, suggest that it would be best to replace remaining coal heating with efficient electric options and avoid new gas investments. It’s also worth noting that a building sector electrification target is not necessarily a good guiding target as it can be reached in efficient (heat pumps) or inefficient (electric resistance and inefficient cooling) ways.

Fortunately, there are signs of a new approach at the local government level. In November, Beijing Municipality became the first major local government to issue a heating policy that specifically elevates electric heat pumps over gas heating, prohibits new fossil gas heating systems (albeit with some limited exceptions), and sets targets for citywide “new energy” applications (meaning chiefly electric heat pumps) in building heating. As it only calls for 10% of the city’s total heating area to be provided by new energy by 2025, however, even Beijing Municipality’s new policy is likely not in line with the CETO decarbonisation pathway.

What’s next?

The framing of the next Five-Year Plan targets will be crucial in steering China toward a decarbonised future. While national policy statements supporting building electrification and heat pump adoption are already in place, applying more stringent language that elevates heat pumps and electric district heating over natural gas — and prohibits the use of fossil fuels in new buildings — would be big steps forward. In the meantime, bolstering Beijing Municipality’s new approach and expanding it to other provinces and cities can help speed the transformation.

Chinese version is available.

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This situation led me to look into my options, where I discovered addressable (i.e., “manageable”) water heaters. My colleagues at RAP have had a lot to say in recent years about water heating as a managed resource. As efficient home electrification continues to take off, it’s worth reminding ourselves of the potential in this technology — both to save customers like myself money and to help utilities more flexibly meet demand. Today, state decision makers can play an important role in enabling access to these benefits. As I’ll highlight below, some states in the West have already adopted legislation to do just that.  

What are Addressable Water Heaters?

Addressable water heaters are like standard water heaters but are equipped with technology allowing them to be controlled and run as needed. If they are also equipped with a low-cost internet connection, they can be controlled remotely by their owner or their utility. Standard water heaters heat water at regular intervals that may not meet the actual hot-water demand schedule for the household. The figure below illustrates how water heating typically works today in a home during the winter in the Pacific Northwest. The red spikes are the times of day when the water heater demands electricity. These spikes occur when the water tank temperature drops and are costly and unnecessary. Today, basic technology allows the water heating schedule to be shaped and customized to meet customer needs.

Illustrative electricity production and consumption for a Seattle residence (from Farnsworth et al, 2019, page 31). Grid energy shown in red; solar generation shown in green.

What are the Benefits of Addressable Water Heaters?

Addressable water heaters can save households money by reducing their everyday energy usage during times when they don’t need hot water. Water heating is typically the second largest energy expense in a household. In 2020, water heating made up nearly 20% of total residential energy consumption in the United States.

Addressability can also help reduce expensive utility system demand peaks. These are costly and we all pay for them. The next figure, from a 2017 analysis by the state of Rhode Island, shows just how expensive peaks can be. The top blue line — 1% of the hours that year — accounted for 9% of ratepayer spending. The red line, the top 10% of hours, represents over a quarter of utility ratepayer spending — over a quarter of the budget for just 10% of the capacity.

Rhode Island Power Sector Transformation (RIDPUC and RIOER, 2017, p. 14)

Addressing peaks by customizing our water heating provides households direct savings — through reduced demand charges and on-peak/critical-peak pricing — as well as indirect savings by allowing utilities to avoid unnecessary capital expenditures and costly market purchases, both of which are passed on to ratepayers. Importantly, addressable water heaters can do all of this without impacting day-to-day lives. Controlling when the water heater turns on can be a seamless transition that better aligns with household schedules and needs. 

How Can Addressable Water Heaters Benefit Utilities?

Planning for and investing in addressable water heaters can help utilities maintain reliability and address the increasing peak demands that they forecast across the country. The figure below is a snapshot from the Western Energy Coordinating Council’s forecast of load and demand growth through 2033. Every subregion is expecting tens of gigawatts of additional peak demand in the next 10 years.

2023 Western Assessment of Resource Adequacy (WECC, 2023, p. 12)

Other regional forecasts are much of the same. ISO New England, for example, specifically points to the contributions from electrification of the transportation and heating sectors, with heating electrification forecast to contribute nearly 3,000 MW to winter peaks by 2032-33. MISO is also forecasting steadily increasing demand over the coming 10 years. Electrification, even beneficial electrification, will add to these demand peaks. However, there is no economic justification to leave this demand unmanaged. Without action this demand will unnecessarily threaten reliability and affordability for consumers and utilities.

Solutions to managing peak demand can take many different forms. One approach is to treat this flexible load as a resource and move it to times of the day that are lower cost and beneficial for the power grid. Load shifting simply involves moving certain loads from periods of high demand on the grid to periods with lower demand. Water heating, in particular, is a prime candidate for load shifting. For a local success story, consider Great River Energy’s Load Management Programs, which have been running for decades. GRE’s programs shift water heating to overnight when the grid is less stressed. This ensures both grid reliability for the utility and hot water for the household. Between May and September 2022 alone, the utility reduced “hundreds of megawatts of electricity demand and avoided making costly market purchases — ultimately saving members upwards of $2.5 million.” That’s enough to pay the average annual energy bill for an American household (assuming average annual energy expenditures per household of $1,884) for 1,327 years.

What Can My State Decision-Makers Do to Make Water Heaters Part of the Solution?

State-level decision makers can support consumer access to better water heaters by enacting appliance standards that require addressability as a standard feature for all water heaters available for sale. As states adopt these standards, industry will adapt, and this cost-saving feature will become the norm across jurisdictions. Several states have already adopted addressable water heater standards. Legislation in Washington, Oregon, and Colorado provide templates for other states to adapt to their jurisdiction. All three states require electric water heaters to have a modular demand response communications port, which is the feature that enables addressability and allows the appliance to be controlled. Further, all three have similar language for the key definition of “electric storage water heater” and for the addressability requirement. This is helpful for decision-makers in other states who now do not need to start from scratch.

The Takeaway

Addressable water heaters save consumers money and can help utilities manage the needs of their systems, including reducing expensive peak loads. Using the examples from neighbors in the region, states in the West and across the country can adopt state-level standards and begin building a glide path towards making addressable water heaters the industry norm.

The post Addressing the Problem: Controlling Your Water Heater for Consumer Savings and Load Flexibility appeared first on Regulatory Assistance Project.

Hey! I just read a blog saying this green renewables stuff is all very well at first glance…

Well, hello again, young man! A blog, you say?!

…but as more wind and solar are built, the prices they get paid for their energy will fall — ‘cos wind and sunshine and so on are free fuels, right? And so the more of these technologies, the lower the prices of electricity will be, yeah…? 

Yep, their fuel is free…

…and with these lower prices, the money earned by owners of solar and wind installations will fall, and they will increasingly struggle to make money…

Ah – the old price cannibalisation argument!

…and so no investor is going to invest in them in the first place, and so if the government is intent on building new solar and wind then Joe Public will have to fork out more and more money to pay for their construction.

There’s quite a lot to unpack here.

So why are you wasting your time with this renewables stuff? It obviously blows… no sane investor is going to invest in wind and solar off their own initiative. Instead, governments are going to end up doing it when the market is already signaling to them that it’s a bad idea!

OK, let’s just plough in. The extent to which more solar and wind leads to lower prices and lower revenues depends on multiple factors. The first factor is the cost of these technologies: the more their costs fall — and wind and solar have plummeted in cost over the last 15 years — the lower the market price required to support any given level of rollout by the market without relying on government support. 

Well, that’s the one sliver of sunshine then.

Second, the extent to which market prices will fall as solar and wind are rolled out hinges on how they are put on the system. Specifically, whether carbon prices are set in a way that is aligned with decarbonisation trajectories.

Would you mind putting that in English for me?

If governments make sure that the carbon price — the price paid by coal and gas fired electricity power stations for the carbon dioxide they release into the climate — fully reflects the growing costs of carbon pollution, then this bumps up prices when these dirty stations are running and setting market prices. Wind and solar and the like then piggy-back on the expensive market prices set by these dirty stations. The higher the carbon price, the fewer hours they need of these piggy-backs. It turns out that even as the number of dirty power stations running drops, a decent price on carbon can deliver the earnings wind and solar need. The trick is to make sure that carbon prices are right — this means getting higher each year on our exciting journey to a fossil fuel-free future.

And do we get these carbon prices right?

The European regulatory architecture for setting carbon prices is pretty impressive — probably the best on planet Earth. Carbon prices are quite sizeable, and much higher than the bad old days when you wouldn’t notice them at all.

Well, what about the hours when there are none of these dirty plants running to set high prices? What then, huh?

Good question. As we get more solar and wind, even though there will be times when there is an excess of them, there will still be moments when they are scarce. Thus, so long as prices are juicy when they are scarce — and they will be if these dirty power stations have to pay hefty carbon prices —  then this will send the signal for clever ‘flexible’ technologies that can shift this abundant, cheap energy to when or where it is scarce to displace the dirty, expensive stuff. This helps bump up prices during periods of excess, and supports the bank balance of companies building wind and solar, and helps the energy system adapt in helpful ways to accommodate their growth.

And?

Well, this points to the third factor, that policymakers must remove all the obstacles to investments in these helpful flexible technologies. Think various types of energy storage. Or the enabling of consumers who are open to automating a shift in their energy use patterns in return for a financial reward. Or investment in wires to convey energy from areas of abundant renewables to areas where they are scarce. Here there is plenty of work to be done. RAP is all over this stuff, like here and here.

So, do we need support for wind and solar from government at all then?

The biggest bottlenecks in deployment are not really about getting a subsidy or not. It’s stuff like planning and getting connections to the grid and so on. That said, renewables support can be great in helping reduce riskiness of investment and decreasing the amount of money banks demand to lend to companies building wind and solar, ultimately lowering the cost of getting to a carbon-free energy system. But they need to be designed in a smart way that doesn’t dampen prices due to poor design.

Oh, I remember. We already talked about this — smart CfDs. I tried to forget. Obvs I couldn’t.

Well, I’m delighted! It’s sticking! And what did you learn based on our chat today?

Investment in wind and solar can be sustained, so long as the grown-ups make well-informed and sensible decisions. It’s in our hands. It’s all quite doable.

Exactamundo.

Also… I guess I learned that not all blogs are right.

Indeed. Except this one of course.

This isn’t a blog. It’s a conversation between two people.

Yes. That’s exactly what it is. Bye!

Bye! 

The post Will price cannibalisation kill the market for wind and solar? Another conversation with Dominic Scott’s inner teenage sceptic appeared first on Regulatory Assistance Project.

We do not get to choose when our boiler breaks down. It could be at the start of the weekend, when a houseful of relatives has just arrived, on the coldest day of the year — or perhaps when all three events converge at once. Whenever it happens, you probably search for emergency telephone numbers to find a heating engineer who is on call and then you hope they answer.

The heating engineer will understand better than anyone the nightmare of being without a boiler. If they can repair it, they will. If you are unlucky though, a repair might not be possible and a new boiler would be required. The quickest and easiest way for the engineer to remedy this urgent situation is often to put in the same system again.

Missed opportunities

When all that matters is to get the heating and hot water going again, homeowners may find the solution — a new boiler — creates a new problem: The new boiler will lock them into a system, for a decade or more, where they have to burn fossil fuels to heat their dwellings. This one-for-one replacement misses a golden opportunity to install a better, future-proof, clean system like a heat pump. Proactive steps to address these missed opportunities would also make an important contribution to meeting Europe’s climate goals, speeding up the replacement of fossil-burning boilers with clean alternatives.

Deliberate choices

According to a consumer survey from the Association of the European Heating Industry, most new heating appliances are bought to replace defective old ones. But ‘defective’ can mean two things as the following figure shows: either it is a faulty device that can nonetheless be repaired or, as in most cases, it has broken down completely, which means it needs immediate replacement.

Repairing a defective boiler will probably buy the homeowner enough time to properly investigate options for replacing it. If the boiler has broken down beyond repair, however, the homeowner is placed under immediate pressure to replace it without delay. This is far from ideal. It takes time to plan for a new heating system and to assess the potential of related upgrades, for example putting in place insulation measures or installing better radiators.

Heating engineers are ideally placed to advise on such matters, but in the winter when they are running from one emergency to the next, they may simply not have the time to provide detailed options. It is far easier just to put in another boiler like the last one. Problem solved? But what if households with ageing boilers already had plans in place for replacing them? A concerted effort by governments to prepare people for the installation of new planet-friendly heating systems could be a major step forward on the path to continental decarbonisation.

Proactive policymaking

There is plenty that policymakers can do to connect with people who own ageing boilers and proactively encourage their replacement with cleaner alternatives. Firstly, they should collect data on the age and state of the heating stock. Identifying which boilers are most likely to need replacing is an essential first step, with several potential sources for information. Mandatory heating system checks would provide all the data needed. In Flanders, Belgium, these take place every two years. Building renovation passports could also provide this information. Registration of a heating system’s age could be made obligatory at certain trigger points, such as point-of-sale. Neighbourhoods or public housing complexes that are likely candidates for boiler replacement could be identified by their construction date.

Educated choice

Secondly, people will be more likely to improve the performance of their building and install a cleaner heating system if they are well informed about the choices they will need to make. Building renovation passports can inform building owners about the steps they need to take to decarbonise their buildings. And local heat planning can also help. People who know that their local area will be disconnected from the gas grid may be more likely to investigate new heating solutions. Domestic energy surveys can also be expanded to include heat pump assessments, which would consider possible locations for a heat pump and hot water cylinder, and identify any changes that would be needed with the emitters and pipework.

Prevention over cure

Thirdly, target system replacement before a repair is needed. Prevention is better than cure. Policies should actively focus on how to replace boilers that are at risk of breaking down, rather than on repairing (or replacing) them when it is too late. Boiler-scrapping schemes and market-based mechanisms, such as energy efficiency obligation schemes or clean heat standards, can be tailored to target older boilers. Meanwhile, lower-income households should be given access to subsidies which cover a large share, if not all of the costs, of installing a clean heating system. In general, all households should have access to finance to make the investment possible. Although heat pumps are cheaper to operate in the long run, the purchase price is still higher than that of a gas boiler and requires dedicated subsidies and interest-free loans.

Emergency fixes

Next, make ’emergency’ fixes to allow future switches. Several temporary solutions are available to keep heat and hot water going when boilers break down. These include offering portable electric heaters and immersion heaters for short-term needs and installing secondhand fossil fuel boilers to cover longer periods between breakdown and a clean heat install.

Finally, support the installer and maintenance industry. Heat pumps have a core role to play in Europe’s future, so the industry needs strong backing from policymakers. It is critical to increase support for skills development and to encourage the creation of innovative business models.

The European Commission is considering a de facto ban on heating appliances running on fossil fuel from 2029 onwards. But before these appliances are phased out from the market, Member States should already be launching interventions targeted at households whose boilers are at most risk of breaking down. The Commission is preparing a heat pump action plan, and it must examine how to support these interventions.

A version of this article originally appeared on Foresight Climate & Energy.

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Dominic Scott has a chat with his inner teenage sceptic about some new innovative CfD designs:

Look I already read the other CfD blog – only ´cos you made me – so can we not end this chat here?

No! I want to delve into some more details of innovative design that Monika briefly alluded to.

Yep, teenage Monika warned me this might happen. Best get this over with then… so I guess you´re going to start by outlining what ‘CfDs’ are?

Great idea! They happen when a government conducts auctions for a given volume of a new renewables plant, like wind turbines. The government commits consumers to pay top-ups to investors when the market prices they pocket on their energy output falls below a given price. In return investors commit to pay money back to consumers when market prices rise above the same given price. These payments to generators, which can be negative or positive, are called difference payments. Competition in the auction is used to identify the given price — the ‘strike’ price — that will satisfy investors.

CfDs sound like a good idea — I mean in the world of boring that is.

Yep. CfDs aren’t a bad idea at all. They reduce risk for investors. This lowers the cost of getting a loan from the bank, and translates into lower costs, ultimately to the benefit of consumers. And they protect consumers from those stomach-churning high prices, as investors commit to pay money back to consumers at precisely those moments when market prices sky-rocket.

What’s the problem then?

Not all CfDs are the same. Most traditional ones suffer from design issues that lead to inefficiencies in operation, maintenance and investment, thus creating higher costs than necessary. This typically happens because difference payments are linked to actual production of energy by the plant and hourly reference price.

Honestly, do you expect me to care?

Yes! Linking difference payments to actual production stimulates multiple problems. Example? It encourages wind plants to situate in the windiest spots: when you get the same price for each unit of energy, the investor’s best strategy is to maximise annual output.

Yeah, but … this actually sounds like a good outcome…

Well, this may not be optimal for the energy system itself — market prices might indicate that a better fit for the energy system would be a wind plant that maximises energy output during a subset of hours when prices are particularly high, even if meeting those moments entails a trade-off in annual energy output. Similarly, poorly designed CfDs can stimulate, for example, south-facing solar when there is already an abundance of production at midday, but a shortage in early evening hours that could instead be met by west-facing solar.

Well done — you’ve spotted a problem. Are we done?

Fortunately, wonks working in the energy sphere have been labouring day and night to come up with design improvements.

Oh, now you’re going to talk to me about the solution… these ´innovative new designs´… so we’re only half-way through now?!

Their eureka moment is to delink the difference payments from the observed energy production of these CfD investments. What should these difference payments be linked to? Reference plant possibilities include the theoretical capability of each plant as determined by manufacturers or regional forecasts of locally aggregated wind or solar output capability.

These ensure that the signal for plant investment decisions — for example selecting location and technological capability — are ultimately informed by energy market prices. The CfD no longer gets in the way!

Are we done? 

‘Fraid not. We are still going to have to deal with all the devilish details in developing robust reference plants, sharing good practice and getting investors and consumers on board to deploy smart CfDs. So there’s plenty more to be done.

Yes, but are we done?

Yep, we’re done. Promise! Though actually I might yet chat with you on a different topic — price cannabilisation and renewables investments.

Noooooooooo!

*Cover image created with the help of Midjourney AI.

The post Making contracts for difference smart: Conversations with Dominic Scott’s inner teenage sceptic appeared first on Regulatory Assistance Project.

Even well-designed capacity payments, however, are not an ideal solution. International discussions of “best practice” increasingly favour a more flexible model (sometimes called “energy only” or “scarcity pricing” model) focused on a spot market with strong scarcity pricing and without capacity payments at all. In addition, creating a well-designed capacity payment mechanism is often a challenging task. Cases of poorly designed capacity payments have acted as barriers to the clean energy transition around the world.

In early 2022, China’s National Development and Reform Commission (NDRC) issued a policy statement (Document 118) that called, in very general terms, for “all regions to establish a market-oriented power generation capacity cost recovery mechanism” to complement spot markets. Encouragingly, it allowed for several options, including a “capacity compensation mechanism, capacity market or scarcity electricity price,” that appeared to leave provinces and regions room to identify and implement good designs. One passage in the policy, however, raised the possibility of a significant problem, suggesting that capacity mechanisms should “guarantee” full recovery of all fixed costs for all generators. As RAP stressed to policymakers at the time, excess resources and carbon-intensive resources should not be guaranteed recovery of all fixed costs. Among other recommendations, we emphasised that only generators that are economic, meet environmental standards, and are needed for reliability or flexibility services should be eligible to receive any capacity payment — and those capacity payments should be determined in a competitive process, open to clean energy resources.

November 2023 NDRC policy statement on coal capacity payments

The debate in China over capacity payments swelled in 2023 and culminated in a November policy announcement from China’s National Development and Reform Commission (NDRC), establishing a capacity payment mechanism specifically for coal-fired generators. The debate was influenced by ongoing reverberations of the country’s 2021-2022 power sector crises, as well as by the episodes of system tightness in 2023 associated with heatwaves and low hydroelectric conditions. These recent problems, although not necessarily caused by lack of capacity, gave coal interests increased influence in internal policy debates and underpinned proposals and approvals of large amounts of new coal capacity.

In two significant ways, the November policy is better than feared: first, it does not guarantee 100% capacity cost recovery for all coal generators, as Document 118 seemed to countenance. Instead, it offers 30-50% recovery of fixed costs. Second, the policy includes a general statement mandating that only coal plants that satisfy energy efficiency and environmental standards and are in line with “national plans” should qualify for the capacity payment. Unfortunately, in other ways the policy falls far short of various recommendations. The policy has several significant shortcomings and problematic design elements. Because of these shortcomings, the November policy risks exacerbating the buildout of excess coal power and increasing emissions.

• The capacity payment mechanism is restricted to coal-fired generation and does not allow participation of alternative resources. Ideally, the mechanism should open to a broad range of alternative resources that could provide capacity services less expensively and with lower emissions. This should include energy efficiency, demand response, energy storage and renewable energy.
• The policy allows for new coal power to be eligible for payments. This could stimulate continued overinvestment in coal power capacity.
• The policy does not clearly specify the process for identifying needed capacity. The policy somewhat vaguely requires that only coal plants that are in line with “national plans” can qualify for capacity payment. The policy delegates specific qualifying criteria and process be fleshed out by the National Energy Administration (NEA). The details of NEA’s approach could significantly shape the outcome of this policy. 
• The policy does not require competition, even amongst coal-fired units, but instead offers a fixed percentage of capacity costs to coal generators. A marketised capacity payment (again, ideally open to non-coal competitors) would be a better approach. A marketised capacity payment would fall (or be zero) in times of system overcapacity. The November policy does leave an opening on this issue, mentioning the possibility of an eventual transition to a marketised mechanism.

There will be opportunities to address these issues in implementation details or in revisions to the policy in coming years and we are continuing to engage on these topics.

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In an effort to make the case for CfDs, Monika Morawiecka (very) patiently outlines RAP’s recommendations to her teenage self.

Snapchatting my hoodies… what do you want?

Hi, little Monika. Time for a quick chat on the topic of contract for differences — you know, CfDs — if you don’t mind.

I’m not little Monika. I’m youthful, idealistic fun Monika. 

Okay…

You’re going to start by telling me what they are, aren’t you? Give me a nudge when you’re done.

Wow, I’d forgotten how obnoxious I was! Anyway… CfDs are when the government organises an auction for a given amount of new renewables — like wind farms — and signs a contract where the government pays top-ups to investors when market prices fall below an agreed price. In return, the renewables investors commit to pay money back when market prices rise above the agreed price. These payments are called “difference payments,” and are why they are called “two-sided.” Competition in the auction is used to identify the lowest price — the ‘strike’ price — that is high enough for investors to go ahead with the renewables investment.

That’s just thrilling, big Monika, we done?

Nope. You see, we think they are great, and we have a few ideas on how we would like governments to put them in practice. 

Please, please do tell me more…

First off, they are particularly well suited to addressing challenges we are likely to see over the next few years. By giving investors confidence they can recover the costs of their investments, they lower costs  of the massive deployment of renewables. By protecting consumers from scary price hikes, governments don’t have to do things like price caps and other nonsense that do more harm than good. I think it would be great if the European Commission would issue guidelines for good CfD design and consider simplified procedures to get them approved. The aim should be that Member States use two-sided CfDs as the go-to support mechanism for renewables.

Wow! I have just been googling tardigrades. They’re really incredible…

Focus, young Monika. 

I am focusing — you see they are really small, like just one millimetre long…

Deep breath. Second, we urge policymakers to resist making CfDs the only route to market. Specifically, this means continuing to allow for investment without any support, and for long-term contracts with (PPAs, aka Power Purchase Agreements). These types of investment do not rely on governments’ auction schedules and can be deployed quicker.

Yay! We’re finished… we are, aren’t we?

Not yet! We have seen recent CfD auctions leading to far fewer contracts for new build than hoped. In part this is because governments set ceiling prices way too low. That’s the maximum price investors are allowed to bid in an auction. If they are set too low, investors just walk away. It’s important that governments take into account real investment costs and interest rates. If those go up – and they have been in recent years, so should ceiling prices. 

Finally, we urge policymakers to pay attention to the latest wave of innovative CfD designs that sidestep the pitfalls associated with earlier CfD designs, to help ensure good decisions — of what, where, when and how much — in investment and generation.

Right, so what have you — I mean, we — learned?

That tardigrades can live for centuries — they’re incredible!

Come on, do me proud…

Ok, I have learned that right now there is an opportunity for European institutions and national governments to support the use of well-designed CfDs. These can get renewables out at low cost, and also provide some comfort to consumers in limiting their exposure to wholesale electricity prices when they skyrocket. Grr… I’m looking at YOU, fossil gas! To get these out, European institutions may wish to issue guidelines for good CfD design and consider simplified approval procedures. 

Very good, little Monika!

I’m not done. Other routes to market shouldn’t be closed off though — specifically support-free deployment. What you call merchant investment and corporate PPAs should also be encouraged. 

Super!

Finally, governments should be realistic in setting ceiling prices for auctions — these need to take into account changing market conditions like investment costs and interest rates. But hey — even if we do all this right this does not mean that we’ll get much more renewables quickly, right? We also need to remove obstacles to new build like permitting, grid expansion, and system flexibility etc. Oh, but that’s a different interview?

Right, that’s enough — you big show-off.

*Special thanks for Dominic Scott who inspired these inner dialogues ideas.

**Cover image created with the help of Midjourney AI.

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RGGI’s Mapping Tool  

The RGGI states seek feedback on the mapping tool they have developed, including “the format of the tool, the data that is presented, or any other aspects of the dashboard.” In making this request, the RGGI states are are to be commended for developing this very accessible and useful dashboard tool and for keeping with their track record of program review improvements.

One significant improvement that the RGGI states could make would be for the dashboard to incorporate criteria pollutants. This would truly make it an “emissions dashboard.” Taking this step would require expanding the dashboard’s features, but doing so would require no additional data collection or monitoring by any of the RGGI states. State air regulators already collect this information from each facility in the RGGI program. It is derived from Continuous Emission Monitoring Systems (CEMS) data for fossil electric generators of 25 MW or greater. CEMS data is available for over a half dozen pollutants, including oxides of nitrogen and particulate matter, exposure to which leads to serious illness and premature mortality. Improving the public’s monitoring capabilities will not turn RGGI into a multi-pollutant program any more than RGGI’s support for energy efficiency programs has turned RGGI into an energy efficiency program. But this improvement will provide important and needed information to public health advocates that are seeking to reduce power plant emissions, and will build on the track record of RGGI program investments made for the benefit of electricity ratepayers in the region.

Program Thresholds

The RGGI states should adjust the program threshold to incorporate generators that are smaller than the current 25 MW threshold. One RGGI state, New York, has done this already. Their program applies to stand-alone generators 15 MW or larger and to those that are 10 MW or larger if collocated at other RGGI generator sites. Other states could make this adjustment via the model rule or by adopting New York’s regulatory language in their own regulations.

While this action might have marginal impact on total regional emissions, avoiding the criteria pollutants produced by these few generators would be significant for the public health in the communities adjacent to fossil electric generation facilities. This is because these generators are older, less efficient and especially dirty. It is common knowledge that they create greater local air impacts on high-electricity-demand days when air quality, especially in EJ communities, is already at its worst.

Unneeded Offsets

Another step that the RGGI states could take to improve regional air quality is to exclude offsets from the program. Offsets are, by definition, emissions above the RGGI emissions cap. Offsets were adopted initially to provide flexibility, although limited to 4% of one’s compliance requirements. RGGI has developed much more sophisticated flexibility tools in its Emissions Containment Reserve and Cost Containment Reserve mechanisms rendering obsolete the use of offsets. Furthermore, California’s cap and trade program pays far more per ton for an offset than RGGI will; thus RGGI offsets do not provide any economic driver for increased carbon reductions. During the last program review, one RGGI state, Massachusetts, eliminated offsets, although they honor such allowances from across the region. Similarly, New Hampshire, Rhode Island and Virginia do not accept applications for any offset projects, although they accept offset project allowances from elsewhere to demonstrate compliance. Other states could do the same.

Improving Access and Participation

The RGGI states can build on their current efforts to work with community groups to better define environmental justice and to engage these communities more meaningfully as partners and stakeholders in RGGI decision-making. New Jersey provides a useful model, defining EJ communities based on income, identification as member of a minority or tribal community, or limited English proficiency. RAP’s Public Access and Participation Plans: A Starter Kit for State Agencies may be useful in this context. It outlines simple steps that state agencies like those engaged in program review can take to improve their outreach, and promote public participation.

Revisiting the Consumer Benefit Allocation for EJ Communities

As noted in Part 1, the RGGI states adopted a consumer benefit allocation of 25% in the original design of the program. The investment dollars produced by this program have made a significant difference in many of the RGGI states, as recently noted by Ben Grumbles, former secretary of the Maryland Department of Environment and executive director of Environmental Council of the States.

Program revenues could be directly allocated within each state based on the population living in EJ communities. Allocation could also be modeled upon recent federal activity. For example, President Biden’s Executive Order 13985 launched the Justice40 initiative, an effort to ensure that federal agencies, such as the Environmental Protection Agency, work with states and local communities to deliver at least 40 percent of the overall benefits from all federal investments in climate and clean energy to disadvantaged communities.

There are many ways that allocating and targeting funding could help mitigate negative effects of RGGI jurisdictional fossil fired electric generation on EJ communities. For example, as suggested by the Analysis Group in their recent study of environmental impacts of RGGI, program allowance proceeds could “support the participation of community members in relevant program reviews and other formal state proceedings” related to siting, development and permitting of power plants.

RGGI Has a Great Story to Tell

As we have learned over the years, many electricity ratepayers in the RGGI region drive past power plants on their way home at the end of the day, while others live immediately downwind or directly in the shadow of the power plants that serve us all. The good news is that the RGGI MOU, signed nearly 20 years ago, was drafted in a way to enable today’s decision-makers to meet the needs of every one of their electricity ratepayers, especially priority populations that continue to experience more negative effects of power plants in the region. This 2023 program review is another opportunity for RGGI leaders to carry on a worthy tradition of hearing the voices of all citizens in the region and further improving upon an already excellent program.

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