Strategic forward planning by European governments that is focused on ‘sector coupling’ as the bloc’s grid takes on more wind, solar and ocean energy could create a market price-setting effect that would boost the value of renewables-driven power production, according to a new report from DNV GL.
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The study concluded sector coupling – flexible linking of “energy carriers” electricity, natural gas and oil-derived motor fuels to industrial, residential and transportation sector “end-users” – would lead to “more complex power price-forming” as electrification of the EU power network increased and electricity became “less a conversion product and more like a primary fuel”.
But DNV GL cautioned that without tax harmonisation to counteract fiscal regimes developed during the fossil fuel era, the energy transition would continue to be undermined by the “high preferential position” given to non-renewables, particularly natural gas.
“Energy taxation regimes are historically based on the concept of electricity production from fossil fuels and independent value chains, leading to high electricity taxation rates to account for conversion efficiencies and efficient use,” said the report authors, who give the example of the heating sector where the average EU tax per kWh on electricity is four times higher than on gas.
“Due to sector coupling and the changing nature of electricity, it becomes evident that the taxation should be harmonised per energy unit for the different energy carriers.”
“Sector coupling will lead to new mechanisms of market coupling and price coupling” sparking “huge potential” in opportunity demand that would impact electricity market prices and price-set “in times of abundant renewable generation”, said report authors Theo Bosma, Marcel Eijgelaar and Rob van Gerwen.
The DNV GL report, Sector coupling: Creating an interconnected decarbonized energy system benefiting industry, the power sector and society, expects this to set wheels turning for markets and prices to be coupled “as opportunity demand develops”.
“It will have a balancing effect between energy markets, eventually leading to greater economic prosperity,” said DNV GL, especially if energy infrastructure is “well developed” and sectors can “fuel-switch”, with, for example, industrial heating being powered electricity rather than fossil fuels.
Current tax regimes were “not fit for the energy transition”, said the authors, who forecast market coupling will result in electricity taxation “becoming the benchmark and oil & gas taxation adjusted”.
“With the production of renewable electricity through solar and wind, the availability becomes time dependent. Sometimes there is a shortage of renewable power, sometimes there is a surplus,” said the authors. “The future taxation scheme should adapt to make sure that it is economically feasible for opportunity demand to use surplus power.
“It may help to increase the value of surplus electricity generated from PV and wind turbines, support the economic feasibility of variable renewable generation in the long run and mitigate risks of the energy transition.”
Fixed, high electricity taxes would have the “adverse effect”, said the authors, adding: “Special regimes or an ad valorem taxation could solve this elegantly.”
“Through electricity, other energy value chains, such as natural gas, oil and hydrogen, will increasingly be decarbonised and become more tightly connected, forming one large interconnected and increasingly dynamic energy system," said DNV GL Energy CEO Ditlev Engel.
“We strongly believe that with sector coupling and the changing nature of electricity, taxation should be harmonised per energy unit for the different energy carriers or even better per CO2 footprint.
“The use of renewable wind and solar electricity during times of oversupply need to be encouraged instead of being punished. This would be a win-win situation, helping to decarbonise heavy industry while remaining competitive and benefit consumer pockets.”
The DNV GL report highlights green hydrogen as an “important” emerging energy carrier, saying: “Decarbonised, that is, green hydrogen will be mainly produced from renewable electricity and will serve applications in buildings, industry and the transport sector, and may also be used as a carbon-free fuel for peak power generation.
“Hydrogen production from electrolysis will, however, compete for low-priced electricity with other flexible energy consumption, such as transportation and heating.”
The authors noted that industries would need to adapt to “a much more dynamic energy sourcing portfolio” incorporating hydrogen, natural gas and electricity “in order to grasp its opportunities”.
“Sourcing electricity at the wholesale market level needs more involvement than, for instance, sourcing of natural gas,” they said.
“The electricity market is more complex and has more short-term elements. Managing energy sourcing will become an increasingly important aspect for industry.”
The DNV GL report highlights green hydrogen as an “important” emerging energy carrier, saying: “Decarbonised, that is, green hydrogen will be mainly produced from renewable electricity and will serve applications in buildings, industry and the transport sector, and may also be used as a carbon-free fuel for peak power generation.
The report concludes that the “first opportunity” for sector coupling in the industry would be in the area of “opportunity heating”, where investment to integrated low-cost electric boiler systems into existing steam grid would allow industries to fuel-switch switch “based on actual fuel prices”, while “opportunity hydrogen production” is spotlighted too.
“Given the current projections for the energy transition and the penetration of solar and wind, it seems wise to be aware of sector coupling effects when considering current investments. The impact on energy prices and of the missed opportunities mentioned, may be large,” said the authors.
A report by BloombergNEF earlier this year calculated electrification of the transport, heating and heavy-emitting industries — including switching to renewables-powered green hydrogen — could reduce greenhouse gas emissions by 60% by 2050.
The EU committed in September to a 2030 CO2 emission reduction target of 55%.
