Digital Energy Transition

Germany has committed to the energy transition. A noble project, the implementation of which is faltering. Especially tricky: Societal support is waning. The significant increase in the EEG surcharge to 6.88 ct/kWh is only one of the symptoms of an ailing system. The general thrust is quite clear: somehow switching to renewables. The discussion paper of the Federal Ministry of Economics and Technology (BMWi) "Electricity 2030" specifies this direction: "Wind and sun will produce [in 2030] most of the electricity". Thus, Germany is building the future mainly from wind turbines and photovoltaic systems. If such systems come first in the grid, kilowatt hours (kWh) can be produced as CO2-neutral and virtually for free. Fuel costs, such as for coal-fired power plants, do not apply for these systems. But whatever costs nothing, also cannot be reasonably traded. Thus, trading in the electricity markets is still based on kilowatt hours.

The problem with marginal costs

Which power plants can meet the energy demand and get awarded a contract for sale of their energy is determined by the kWh price. In this respect, the resulting market price for all bidders equals the marginal cost of the last power plant that is still needed to meet the demand. This pricing on the electricity market - called merit order - is evidence of the economic rule that in a competitive market, the price is equal to the marginal costs. However, in an energy system marked by fluctuating renewable energies (FEE) this rule results in market failure. In fact, in this case the competition price is primarily and permanently zero. In the simplest case the problem can be solved by curtailing the competition. Indeed, this is exactly what the conventional solutions come down to. Concepts of so-called capacity markets presuppose organising the market via a central purchaser. Just like in a monopoly, an efficient market outcome is effectively impossible in this case. Thus, this solution is not convincing. There is an urgent need to develop alternative solutions.

The reality of the grid is local

After billions of years of prototyping, nature teaches us that system optimisation is always performed at the smallest possible level, so that balance is maintained in the overall system. Since our energy system has to be in balance, micro-optimisation should also be the aim here. In general price is the control parameter for such optimisation. In market design to date it has been undertaken centrally in the electricity market. It is applied uniformly to the entire price zone from Austria and Germany - a macro-optimisation. Regional peculiarities have thus been disregarded. However, the real situation in certain areas of the grid may differ from the Germany-wide conditions, perhaps significantly. Transport costs, which can vary greatly depending on location, are also not reflected in this case. The unit price does not express useful information as to the specific status of individual grid areas. Instead, the spot market price for Germany and Austria may even create direct disincentives for some grid areas, and in the worst case reward producers and consumers for behaviour that is not beneficial for the grid.

The potential of digital technologies

The energy industry is facing similar far-reaching changes to those faced via digitisation of the economic sector. Several new digital technologies have arisen in recent years, such as block chain, artificial Intelligence or the Internet-of-Things. These new concepts, which thus far have had little to do with the physical world of energy as genuine digital technologies, will be increasingly penetrating into this economic sector in the future, because every day they are becoming more accessible, more efficient, and cheaper. Digital technologies could enable an entirely new energy system, for example by gathering and evaluating information needed for appropriate grid trade in real time, at minimal cost with the necessary accuracy. Digital devices make it conceivable for medium and small consumers to directly participate in the energy market. The use of these technological applications could lead to fundamentally new markets, which were not previously imaginable in their design and function. Based on the marginal cost issues and the challenges of a decentralised grid reality, the project examines the potential of these new digital technologies.

Two-stage foresight process

In a two-stage foresight process, which draws on a range of different methods from the field of future research, a group of 15 energy and digital experts will create solutions to overcome the zero marginal cost problem. Taking into account the regional grid reality, initially conceptual and technical prototypes will be developed based on the application of digital technologies. In the second step the working group - which will include additional experts - will develop different scenarios for applying these technologies. The scenarios will describe the specific sociopolitical and economic environment in the year 2030. This will make apparent the political, economic, and civil society efforts that are necessary to implement the technological solutions by 2030. The analysis of these efforts is the starting point for the formulation of specific policy recommendations for action in the here and now. We want to promote discussion regarding the necessary policy agendas.

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