As I introduced in my last post, I recently traveled to Germany as a member of a transatlantic delegation of young American energy professionals and academics working in the areas of smart grids and energy storage. The purpose of the visit was to share ideas with our German counterparts and build lasting relationships that will help our two nations approach the energy challenges of the future together.
My last post reflected on my experience in Germany and shared two lessons I think the United States should learn from the German experience. With this post, I’ll turn my lens back on Germany, and identify two areas where I think Germany should learn from the U.S. energy experience.
Lesson 1: The price of electricity varies in time and space—and the market should reflect this fact
From an economics standpoint, there is one characteristic of electricity that distinguishes it from other commodities: electricity generation and consumption vastly exceed electricity storage capacity, so electricity is typically generated, delivered, and consumed within the same instant.
This unique aspect of electricity causes the price of electric energy to vary in both time and space. When electricity demand peaks at, say, five o’clock in the evening, expensive peaking power plants must be turned on, so the price of electricity is higher. Likewise, if there are not enough power lines linking a region to the grid, more-expensive local power plants must be used, causing the locational price of electricity to be higher.
These fundamental economic principles of electricity are why U.S. electricity markets model the cost of electricity at thousands of different nodes located throughout a given region using “locational marginal pricing,” i.e. prices that vary in both time and space.
I think that effective locational, real-time pricing of electricity will become vitally important as we transition to renewable sources of electricity that only generate energy at certain times of day (e.g. when the sun is shining) or in certain locations (e.g. windy plains). In Germany, there are already many regions of the country where wind and solar power production exceed the export capacity of available transmission lines. Nevertheless, the European Power Exchange (EPEX) spot market currently uses only one time-varying price of electricity for the whole of Germany—giving no spatial resolution to electricity planners and renewable energy developers.
Without locational pricing, Germany’s market doesn’t incentivize renewable energy development in regions where electricity is actually needed. Instead, the European Union’s vision is to build a “copper plate” of transmission lines crisscrossing Europe with the capability to send a unit of power produced anywhere in Europe to anywhere else in Europe. While it’s true that having excess transmission capacity negates the need for locational electricity prices, new transmission lines are extremely costly (greater than $1 million a mile), and those costs are automatically passed onto consumers.
Locational pricing, on the other hand, would likely provide an economic benefit to Germany. An independent report on Texas’ transition to locational prices estimated that everyday electricity consumers would save $5.6 billion over the first 10 years of implementation. A similar 2005 study of Germany’s grid found that locational prices would be more efficient than the current uniform pricing model, and ease the integration of large-scale offshore wind.
In a country such as Germany where critics of the visionary Renewable Energy Law point to rising electricity costs for consumers, I think there is an urgent need to reform the market to incentivize electricity production at the right time and place. Any market efficiency tweak that might reduce the social cost of reaching Germany’s admirable goal of 80 percent renewable energy by 2050 is worth doing in my opinion.
Lesson 2: Build the Technical Backbone Required to Enable the Smart Grid
One fact I was surprised to learn in Germany is that the German government has more or less rejected rolling out smart meters to electricity customers using less than 500 kilowatt-hours of energy a month—50 percent greater than the German average. Thus, the vast majority of German electricity customers won’t see a smart meter anytime soon.
Germany’s situation stands in contrast with the United States, which had over 43 million smart meters installed in 2012, the latest year for which data is available. Numerous U.S. states have ordered their utility commissions to roll out smart meters to enable greater consumer engagement and reduce outage response times. Today, a suite of U.S. companies already offers consumers data-driven energy efficiency reports with suggestions for energy cost savings.
With no smart metering infrastructure, it is impossible to produce automated energy efficiency recommendations or incentivize electricity use at certain times of day, so German customers won’t have access to the sort of smart energy apps U.S. consumers will see.
Moreover, Germany only started requiring smart meters on residential solar installations over seven kilowatts in 2011, so often neither the customer nor the utility has access to real-time production data from solar panels. This means that customers can’t spot a shading issue, for example, affecting their solar power production. Furthermore, the utility can’t incentivize solar generation at certain times of day, so the utility can’t encourage the customer to, say, turn their panels West to better align solar generation with peak electric demand.
Considering a key part of Germany’s Energiewende (energy transition) is the vision of a distributed electricity system, I think Germany should consider the indirect costs of not installing the smart-meter backbone required to intelligently interconnect millions of energy producers and consumers. As Germany continues to increase renewable energy production, I’m afraid effective demand-side management could become a binding constraint on development.
The final takeaway from my experience as a young energy delegate to Germany is that the global energy system is poised for an inevitable change. Young people from the United States, Germany, and many more countries around the world understand the global challenges posed by a changing climate, exhaustible resources, and persistent air pollution. We may not all agree on the solutions—but we are unanimous in our understanding of what’s at stake. I am truly excited to see what energy solutions the global community of problem solvers puts forth over the coming years.
- Texas locational price contour map - ERCOT.
- Smart meter installation photo - Flickr user portlandgeneralelectric.