Grid disruption which results in blackouts is big news and often leads to public uproar and much finger pointing. The lightning strike that led to a blackout in parts of the UK in early August was widely reported and is the subject of an on-going inquiry. The failure of the grid in Java, also in August, affected large swathes of Jakarta and has led to calls for wide ranging reform of PLN, the state electricity utility. Issues in the South African grid have rumbled on for many months which commentators suspect is affecting public sentiment about the political situation. Blackouts in Australia in September 2016, which originally resulted from storm damage, have impacted Australia’s national energy policy, as did the Ohio blackout in 2003, which had an enormous impact on the North-East of the US. Meanwhile in Vietnam, the installation of over 4 GW of solar projects over the last 12 months has heightened concerns over EVN grid stability – felt most acutely by renewables developers who are not compensated when output is curtailed by EVN (in its capacity as grid operator and offtaker under the PPA).
The continuing rollout of renewable energy plants is causing a number of issues for grid operators across the globe. These issues are becoming more acute as the proportion of conventional generation, which has been relied upon to provide the baseload electricity supply, falls and the proportion of intermittent renewables rises. Grid operators and national governments in developed energy markets have been responding to these issues in a number of ways, from investing in upgrades to grid infrastructure to cope with the increased intermittent demand, facilitating on-site generation through “private wire” PPAs and changing how grid connections are managed and capacity is allocated, amongst other things. In the medium term, technological change is likely to have a transformational impact on how electricity is generated, distributed and stored, which presents an x-factor for grid operators to consider.
While in the APAC region some of these steps are being taken, it is by and large more piecemeal than the approach that’s been taken in the more developed markets in Europe and the US. It’s clear that the electricity grids in a number of APAC countries are facing significant issues and will need to adopt a range of solutions to increase and maintain stability at the same time as decarbonising the electricity supply. Adding to the challenge are political decisions in some countries to rapidly transition away from coal, which has led to security of supply issues, for example, of LNG. We outline below just some of the solutions that electricity market participants in other jurisdictions have used to address grid instability and increase system resilience.
Connect and Manage, an approach pioneered by the UK, is seeing increasing interest from grid operators around the world, most notably in Japan. Connect and Manage introduces a degree of flexibility into the transmission and distribution system, often as an alternative to reinforcing the network or the imposition of emergency power reserve protocols to maintain grid stability. In essence, Connect and Manage requires distributed energy generators to accept the imposition of some curtailment during periods of grid constraint, the majority of which will be compensated (albeit at fairly nominal amounts). If a generator does not want a Connect and Manage connection, the infrastructure costs associated with an “unrestricted” or a “firm” connection, which can be significant, are borne by the generator.
Cost aside, pursuing a firm connection can also have serious time implications, which often render a project un-viable, as a developer chases a closing window to apply for a feed in tariff or other form of subsidy support.
Aside from increasing capacity and grid reinforcements - in situations where industrial power demand is increasing faster than the rate of new generation - a flexible import supply arrangement can be introduced for certain categories of industrial consumers. This requires consumers to reduce demand within a certain timeframe following instructions from a grid operator, with the hierarchy for load reduction applied in accordance with set parameters (e.g. pro-rata across flexible demand consumers in a particular geography).
This has been combined with demand side response incentives which reward industrial consumers for complying with dispatch instructions from grid operators to reduce its demand. Elsewhere, we have seen firm connections being offered to customers who embed dispatchable generation within their premises to reduce the impact the firm connection has on the particular grid constraint.
A huge push is underway in certain jurisdictions to develop distributed battery storage projects – close to load centres - to provide system back-up when grid outages occur. In the recent UK blackout, the fleet of UK batteries – together with load shedding – took just over 2 minutes to restore the grid to safe frequency levels following the sudden loss of over 1.5GW of power from a CCGT and offshore wind farm.
In the same way that the cost of solar and wind has fallen dramatically and are now capable of deployment without subsidy support, it is anticipated that batteries will go the same way. The challenge for grid operators is to plan with sufficient flexibility to enable batteries to slot into the grid seamlessly when the project economics stack up in their jurisdiction. Enabling the co-location of batteries with renewable generation is the obvious first step, as has been deployed in South Australia following the 2016 blackout.
Private-wire behind the meter power projects approach the issue of grid constraint in a different manner – a generator distributes (some or all of) its electricity through a private-wire connection; that is, directly to the offtaker. The generator is not connected to the grid (or is connected solely for any excess spill amounts and periodic import).
The advantages for the generator and the offtaker are that grid connection costs are saved (or at least vastly reduced). The benefit for the grid operator is that no reinforcement of the network is required. A benefit for government is that private-wire PPAs do not necessarily require subsidies in order for the project economics to work, however, there may be an impact on the revenues of monopolistic, state owned electricity suppliers.
In order for private-wire PPAs to be available, an appropriate regulatory regime is required whereby the generator is entitled to sell its electricity without necessarily being a licensed electricity supplier, or only lightly regulated. Where this is not possible, more novel structures are sometimes used such as a leasing arrangement where the power asset is leased to the industrial offtaker in exchange for on-going rental payments. As ever, the devil is in the detail and careful consideration needs to be undertaken as to whether an asset will sit on an offtaker’s balance sheet.
Reinforcing the grid is expensive and time consuming and apportioning costs between developers and grid operators – on a transparent basis - can be difficult. For example, should late comers who benefit from grid reinforcements paid for by previous market participants be required to pay compensation to developers who have already paid for grid reinforcements?
Even in situations where reinforcement may seem like the only approach, it may not be the best use of public capital as private capital maybe able to provide grid operation services or distributed generation at a greater efficiency.
Grid operations are hugely complex, challenging areas, which we have barely scratched the surface of. When the jurisdictional differences within APAC are added in, it becomes even more complex. Having said that, the requirement to balance decarbonisation on the one hand, and on the other, the need to supply reliable, stable and cost-effective electricity to everyone in the face of vastly changing sources of power generation, offers opportunities for private sector developers, investors, suppliers and innovators. Without modernising the grid, the deployment of renewables will be checked and the ambitious decarbonisation targets set by governments in the wake of the Paris Agreement are unlikely to be reached. By looking to take the best in class approaches from other energy markets, the grid infrastructure in APAC can rise to the challenge before it.