Aurora Energy Research Limited. All rights reserved. Are kalte Dunkelflauten killing the electrification of the heating sector?

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1 Aurora Energy Research Limited. All rights reserved. Are kalte Dunkelflauten killing the electrification of the heating sector? Excerpt from an Aurora study October 18

2 Executive Summary 1. Challenges in electrifying the heating sector are low renovation rates, high household electricity vs gas prices and impact on peak demand; Aurora expects a penetration of 3 million (medium case) to 5 million (high case) in 35.. Heat pumps will have limited impact on average prices (Central: 1 EUR/MWh in 35; High: 5 EUR/MWh), higher prices in peak periods do not incentivizes additional flexible capacities 3. In extreme weather situations, German domestic capacity margin shrinks up to -16 GW. However, cost for additional backup capacity is negligible compared to other investments necessary to decarbonize heat Source: Aurora Energy Research

3 Building sector target aims to reduce emissions by 4% until 3 and to achieve climate neutrality by 5 Emissions, million t CO.Aqui 1, 1, Today.8 million heat pumps are installed in million homes Other Energy (industry, electricity, transport) Buildings Two key options to decarbonize the heating sector: 1. Electrification with heat pumps. Replacing gas and oil with synthetic fuels -4% % -8% -95% Historical 3 Target 5 1) International transport and emissions from land use change are not shown; non-energy related emissions include industrial processes without fossil fuel combustion, ) The heating sector emits around 6% of CO emissions of the German economy. Private buildings emit around 75% of that (55% space heating, % warm water heating), whereas industrial heating the other 5%. Sources: UBA (18), Klimaschutzplan 5, BMUB (17) Sektorenziele 3, Aurora Energy Research, KfW Research (16) 3

4 Starting from 8 heat pumps in 18 three scenarios with varying renovation rate and heat-pump penetration are tested Today Medium High Status Quo Renovation Rate 1% Very little new policy or economic impulse to change from current trend Increase from 1.% to 1.4% due to future incentives to reach 3 climate target Increase to % in 3 due to significant shift in policies % Renovated Houses with HP 4% Current trend slowly rising but little additional policy or economic impulse Extrapolation of current trend. Share rise from 5% to 15% in 3 Reform of levies for power and gas improves economy of HP. Share rise to 38% in 3 % Newbuilt Houses with HP 33% Current trend slowly rising but little additional policy or economic impulse Stricter EnEV boost share heat pumps in new buildings. Increase to 4% in 3 Ban of oil boiler and inefficient gas boiler. Increase to 5% in 3 Source: Aurora Energy Research 4

5 Aurora analysis suggests a heat pump penetration of million in 3 Installed heat pump units, in million dena-el8 Agora 95 dena-tm8 Prognos Aurora-Low Aurora-Medium Aurora-High Sources: Agora Energiewende: Wärmewende 3, BDI: Klimapfade für Deutschland Geea/dena: Gebäüdestude Szenarien für eine marktwirtschaftliche Klima und Ressourcenschutzpolitik 5 im Gebäudesektor, Aurora Energy Research 5

6 Average price increase moderately until 3, peak prices rise significantly in 35 in the high scenario Baseload price, EUR/MWh (real 17) Status Quo Medium High Average price for 5 highest priced hours, EUR/MWh (real 17) Source: Aurora Energy Research 6

7 Heat pumps increase imports, coal- and gas production until 3 and incentivize additional wind capacities In 3 imports and fossil production increases In 35 wind covers most of additional demand Gas Import Coal Wind (on) Additional production compared to status quo, TWh Medium Capacity additions in 35, GW High Medium High Medium 7 5 High Source; Aurora Energy Research 7

8 While heat pumps increase profitability of dispatchable plants, this is not sufficient to incentivise new investments Aurora Central incl. High heat pumps Wholesale market gross margin for representative plants in 35, EUR / kw p.a. (real 17) 1 hours of activation of reserve capacity CCGT OCGT New build fixed cost and depreciation estimate Notes: 1) CCGT: CAPEX 8, EUR/MW; fixed cost 5, EUR/MW/a ) OCGT: 4, EUR/MW; 1, EUR/MW/a Source: Aurora Energy Research 8

9 Data suggests once every 1 years critical periods with several days of residual load >7 GW in a 35 system Duration and frequency of high average residual load periods in a 35 power system Average 4h residual load in 35 (Central incl. high heat pumps), GW used for further analysis on following pages Duration of critical periods #days Residual load >7 GW 65-7 GW <65 GW Aurora Central incl. High heat pumps Average occurrence Once every 1 years Once every years Every year Sources: Aurora Energy Research, Renewable Ninja (18) 9

10 In extreme weather years gas plants earn % of normal gross margin Wholesale market gross margin for representative plants in 35 for 1 in 1 year weather event, EUR / kw p.a. (real 17) Aurora Central incl. High heat pumps New build fixed cost and depreciation estimate Addition in extreme weather year Normal weather year hours of activation of reserve capacity CCGT +155% % OCGT Investors are unlikely to bet on one in ten year weather events to earn their expected return on investment Notes: 1) CCGT: CAPEX 8, EUR/MW; fixed cost 5, EUR/MW/a ) OCGT: 4, EUR/MW; 1, EUR/MW/a Source: Aurora Energy Research 1

11 If government wants to reduce capacity gap created by heat pumps it has to incentivise new capacities 35 German capacity versus residual load for one hour in an extreme weather week with 5 million heat pumps, GW 86 Aurora Central incl. High heat pumps Heat pump demand Remaining residual load 1 Used capacity 69 Neighbours provide security capacity in critical periods, degree of dependency is a political decisions We have compared two options: Selective capacity payments to incentivise new peaking plant GW domestic gap 31 Keep coal plants in reserve Cost of security of supply measurement needs to be considered when assessing abatement cost of heat pumps Residual load Dispatchable capacity Interconnector capacity 1) Demand generation of onshore, onshore, solar, pumped storage Source: Aurora Energy Research 11

12 Backup capacity for extreme weather periods is not a key obstacle for electrification of heating Aurora Central incl. High heat pumps Annual cost for 5 million heat pumps 35 1, Billion EUR/a % Cost for other consumers would be lower if backup capacity would participate in the wholesale market Backup capacity Electricity demand heat pump 3 Higher power prices,4 5 CAPEX heating appliances Notes: 1) For 5 million heat pumps capex assuming a share of 4% newbuild and 58% refurbished houses. ) Assuming an abatement of 14 MtCO from heat pumps. 3) Cost for wholesale electricity without taxes and levies. 4) Increased HP demand leads to increasing power prices which cause additional cost for other electricity consumers. 5) Assuming an abatement of MtCO due to different comparison base. Source: Aurora Energy Research, dena 1

13 Research & publication coverage Aurora offers power market forecasts and market intelligence spanning Europe s key markets Comprehensive Power Market Services Power Market Forecast Reports Bespoke forecasts Power market forecast reports Forecast data in Excel Global energy market forecast reports Power market forecast reports Forecast data in Excel Analyst support Aurora can provide power market forecasts upon request Strategic insight reports Regular subscriber group meetings Bilateral workshops Analyst support For more information and pricing, please contact Sebastian Just, Head of Commercial Aurora Energy Research sebastian.just@auroraer.com +44 () or +49 () Cambridge Terrace, Oxford OX1 1TP Source: Aurora Energy Research 13

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