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Electricity kWh are not all the same

18 December 2019
1. Our appliances and, in general, all equipment that converts electricity into work, heat or light, is generally indifferent to both the way in which it was accessed and the source of that electricity. This does not mean, however, that we should be indifferent to these two aspects.

2. Regarding the transmission and distribution of electricity, it should be noted that the spread of generation has a very interesting saving potential in terms of investments in transmission and distribution infrastructure.

Over the past 20 years, generation has shifted from a predominantly centralized model to the proliferation of power plants, the overwhelming majority being renewable and with a generating capacity between few MW and tens of MW. At the same time, the local generation for local or communal shared consumption is about to go massive. It is therefore legitimate to assume that, given the greater physical proximity between generation and use, there may be less pressure on transmission and distribution networks.
However, for this to happen, this path will have to be accompanied by a digitalisation that the industry has to embrace quickly to allow the user to properly manage cargo and a regulatory framework that effectively empowers him for that purpose.

3. Regarding the origin of electricity, the obvious first division is to be made is that of renewable origin and that of non-renewable origin. Specifically in our country, if the former relies on intrinsically endogenous resources and therefore tends to be beneficial to the trade balance, the latter is diametrically opposed to it.

However, this is not the only difference. In the wholesale market dimension, renewables, even at a regulated or administratively fixed tariff, result in a decrease in the price of electricity in the wholesale market. And in Portugal, the difference between this reduction and the extra cost of Special Regime Production (renewable) has translated over this decade into a cumulative consumer benefit of EUR €2400 million [1].

Environmentally, electricity from renewable sources has been responsible in our country for preventing the annual emission of more than ten million tons of CO2, an important but insufficient contribution to safeguarding a habitable planet for generations to come. At this level, it should also be noted that there is an economic valuation of these avoided emissions in a mechanism, the Emissions Trading System, which has enabled countries to more immediately reap the economic benefits of good environmental practices. In 2018 Portugal raised 265 million euros [2] by this means.

Finally, the distinction between the macroeconomic impacts of renewables on conventional sources in terms of local job creation, skills creation, the emergence of new businesses and leveraged industrial units in this new economy is also not inconsiderable. Our country in particular has been performing at a level that, given its size, cannot be rated below the mark in the matter. In addition to wind clusters, there are quite a few companies in Portugal for engineering design, installation, maintenance and exploration in the field of renewables.

4. However, just as it is necessary to distinguish renewable electricity from those of fossil origin (and, although not applicable in our generating mix, from nuclear), it is also necessary to make the proper distinctions between renewables.

Wind kWh, whose generation profile varies over time (no two equal days) and space (the northern interior is completely distinct from the west zone), solar kWh, whose generation profile is not to be placed on the same plate, identical in time and space while differing essentially in intensity, the hydro kWh, which derives from a system that goes beyond the electrical system by encompassing the management of an essential good such as water and the kWh generated from biomass, fully dispatchable and available, both electrically and thermally although with limitations on the quantity and competitiveness of the available resource.

In fact, the various sources should not be regarded as competing but complementary. In fact, even in a context of reducing the costs of supporting the increase in renewables in the system, many Member States often introduce mechanisms that inhibit direct competition between sources, even under the formal cover of technological neutrality.

Why? Because there are differences between the generation profiles of the various sources and the inability of the grid to receive the electricity generated in a given profile may require additional investments in the grid itself or in ancillary services (such as dams), allowing the availability of all electricity to consumer.

Additionally, one must take into account the value chain associated with these kWh - some more capable of adding value than others. It is noteworthy that part of the European Green Deal, whose master lines are known but should not be finalized until early next year, explicitly recognizes the opportunity for renewable energy sources for European industry to reaffirm itself.

5. In order to remain a leader in building a positive environmental legacy in the energy field for generations to come and to reap the economic value of this path, it is important not to promote cannibalization of the power sector, either through auctions that view kWh as a commodity, to which no economic value is recognized that exceeds that of electricity itself, or treating equally what is not equal.

Quite to the contrary, the value of electricity must reflect both its role in the demand-supply balance and its entire value chain. To this end, it is necessary, on the one hand, to establish market models that will gradually gain weight in the negotiation of electricity vis-à-vis the currently prevailing marginal market.

On the other hand, there is a need for a strong and capable public administration that can, at any given moment, be able to project, within a reasonable horizon and to all stakeholders in the sector, the energy needs and the right electroproducer mix. Of course, it also requires a clear and consensual view on the part of political actors on the subject, but that goes without saying.

[1] Study "The Impact of Renewable Energy”, Deloitte and APREN, 2019.
[2] Environmental Fund Activity Report 2018.

Opinion article by José Carlos Matos, director of Wind Energy area at INEGI.
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