Engaging consumers in a decarbonized world with the right pricing

Transcription

1 Engaging consumers in a decarbonized world with the right pricing BEHAVE 2016 Coimbra, 9 th of September of 2016 Ana Quelhas Director of Energy Planning Department ana.quelhas@edp.pt

2 Agenda Achieving decarbonization Pricing distortions Engaging consumers in Portugal

3 Europe has assumed a long term economy-wide decarbonization goal of at least 80% emission reductions by 2050 compared to 1990 level EU GHG emissions by sector 100%=1990 Strong push for energy efficiency Strong electrification of energy demand Full decarbonization of power sector Source: EC, A Roadmap for moving to a competitive low carbon economy in 2050,

4 Renewables and energy efficiency are the main instruments to achieve decarbonization Greenhouse gas emissions reduction by driver Gt, Average annual investment in low carbon techs Trillion $13, Source: IEA International Energy Agency 3

5 Innovation and mass production of renewable energy led to a strong reduction in the costs of these technologies, namely for wind and solar PV LCOE wind onshore $/MWh Cost of Solar PV module $/W Source: BNEF 4

6 The boost in the competitiveness of RES technologies led to frequent upwards revisions of the forecasts for installed RES capacity Wind energy installed capacity forecast GW, Solar energy installed capacity forecast GW, x x x F x F 2006F x x F 2006F Source: IEA 5

7 The increase in intermittent power generation sources needs to be accompanied by investments in techs that provide flexibility to the system TRENDS OBSTACLES SOLUTIONS KEY Centralized Decentralized Grid instability MW Energy storage Conventional Renewable Grid congestion Flexibility Smart analytics Dispatchable Intermittent Volatile markets Source: European Commission 6

8 While historically generation techs have adapted to demand changes, in a decarbonized world it will be demand adjusting to supply changes While in a conventional world, generation techs are able to adapt to demand changes... Portugal s electricity balance at 09/08/ in a decarbonized world, demand needs to adapt to generation changes Portugal s electricity balance at 07/05/2016 Source: REN 7

9 In this context, the energy efficiency concept is also evolving from consuming less to consuming smart CONVENTIONAL POWER SECTOR DECARBONIZED POWER SECTOR Generation Cost structure Scarce resource Fully dispatchable Mostly pollutant and limited resources High fuel cost with low capex Energy Mostly intermittent Mostly clean and abundant resources Low fuel cost with high capex Capacity Energy efficiency Reduced energy consumption Smart energy consumption 8

10 Electricity as a final energy source has grown significantly in the past, and it should remain as the highest growth source in the future Inputs to electricity as a share of total primary energy %, Final energy CAGR by fuel type % CAGR ,5 2,0 Highest historical and forecasted growth Electricity 1,5 Gas 1,0 0,5 Total Oil Renewables Coal 0,0 0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5 CAGR Source: BP Statistical review 2014, IEA WEO 2015

11 Indeed, strongly reducing emissions implies increasing electrification of energy demand, besides decarbonizing the power sector Emissions reduction as a function of the share of electricity in final energy demand % Target % CO 2 emissions reduction B C Decarbonize electricity > Renewables > Nuclear > CCS Emissions factor Zero Today s A Increase electrification > Transport (EV) > H&C > Energy efficiency % electricity in final energy demand Source: EDP analysis

12 Through the electrification of transports and H&C, overall energy consumption decreases due to higher efficiency of electric techs Transport Electrification 1 (Average for 100 km) Heating & Cooling Electrification DIESEL VEHICLE ELECTRIC VEHICLE H&C NON- ELECTRIC HEAT PUMP Primary Energy Final Energy after the engine 58,7 kwh (6 liters) 13,5 kwh (1,4 liters) VS 24,3 kwh 13,5 kwh Efficiency VS 90% 300% Electric vehicles 2,5x more efficient Heat pump 3x more efficient than non-electric technologies 1. It is assumed a primary energy/final energy ratio of 68% for generation and 91% for transport and distribution Source: Deloitte, EDP 11

13 contributing to decarbonization not only due to reduced overall energy consumption, but also due to the ability of use renewable sources Share of Renewables by sector in the EU 1 %, % % 20% 21% 15% 14% 17% 8% 10% 6% 10% 1% Total Electricity Heating and Cooling Transport Higher %RES in electricity is explained by the higher easiness of RES implementation for power generation there are several RES technologies available at a competitive cost 1. EU-27 - excludes Malta Source: Eurostat 12

14 Agenda Achieving decarbonization Pricing distortions Engaging consumers in Portugal

15 In the last years, electricity retail tariffs have been pressured upwards mainly due to the strong increase in the costs related to taxes and policy Retail tariff components Evolution of electricity retail tariff components in the EU cent/kwh, > Energy Costs are related to production in power plants, trading & selling, customer service > Network Costs related to transport and distribution activities > Tax & Policy Costs Costs are related to taxes and energy policy such as: renewable and CHP support, nuclear decommissioning, vulnerable customers, etc. Source: Eurelectric 14

16 There is an imbalance between the way costs are charged to final consumers and the underlying structure of costs... Charge structure Underlying costs Match? Energy Mostly kwh Mostly kwh YES Network Mostly kwh Mostly kw NO Taxes and Policy costs Mostly kwh Fiscal nature (Taxes) Mostly kw (Policy) NO 15

17 ... which generates a significant mismatch between the costs and the revenues structure in the power sector in several countries Structure of costs and revenues of the power sector by country 1 100% 80% Fixed 60% 40% Variable 20% 0% Cost Revenues Cost Revenues Cost Revenues 1. Data for Spain refers to 2015 and comes from BCG analysis; Revenues data for Portugal calculated for all voltage levels; Cost and revenue data for Portugal refer to 2016; in Italy, revenues structure refer to households only Source: Eurelectric, BCG, European Commission, EDP analysis 16

18 Charging fixed costs through a variable retail tariff leads to distortive incentives to reduce demand from the grid Representation of tariff deficit creation due to demand reduction Comments M Revenues Costs > A demand contraction causes a reduction of revenues by α, which is higher than the cost reduction of the system (β), thus leading to a tariff deficit β Deficit Breakeven > Increase power demand costs α to the consumer, but only costs β to the system (α> β) α V 1 V 0 Volume This penalizes demand electrification and overvalues investments that reduce demand at grid (energy efficiency and distributed generation) Clients with higher load factors are paying more than the costs that the system incurs to satisfy that demand, so as to subsidize clients with lower consumption 17

19 This cost to price mismatch leads to a vicious cycle, where system costs will be charged over few(er) customers, increasing the consumer divide Reduction of grid demand DER 1 Loss of revenues > cost reduction Tariff increase required Behavior change Recovering the revenue gap through tariff increases will: Push costs to consumers who didn t invest in distributed resources ( consumer divide ) Increase profitability to invest in distributed resources ( death spiral ) Customer assessment 1. DER: Distributed Energy Resources Source: EEI, Disruptive Challenges: Financial Implications and Strategic Responses to a Changing Retail Electric Business,

20 There are historical reasons for these distortions, but the context has changed and the associated inefficiencies are now greater and need to be addressed Historical motivation Why need to change? Context Robust demand growth rates Power generation mix had a higher share of technologies with high variable cost Power demand stagnation / reduction Increased penetration of technologies with low or null variable cost Emissions/ Energy Efficiency Higher variable tariff provides stronger incentive to reduce demand, contributing thus to energy efficiency and the reduction of greenhouse gas emissions Decarbonization of the power sector With RES abundance, energy efficiency is not about reducing demand, but instead consuming when energy is more abundant Innovation Customers had no viable technological option to reduce grid demand without loss of service Set of new technologies (energy efficiency, storage, distributed PV) allows change in grid demand without changing the clients service level Equity A highly variable tariff protects consumers with low load factors (progressive effect) Equity is more effectively achieved with special mechanisms to vulnerable consumers A highly variable tariff over-incentivizes new technologies, penalizing consumers who are not able to invest (regressive effect) 19

21 The tariff structure also over incentivizes investment in distributed resources over centralized plants, which are more economical Solar LCOE vs Revenues/Savings by segment in Portugal 1 ( /MWh, 2015) LCOE Variable retail tariff Return for investor is higher with investment in distributed resources However, the optimal for the society would be if these investments were in centralized generation (not only in utility-scale solar, but also in thermal and in other mature renewables) 0 Residential Commercial Industrial Utility-Scale Distributed Generation 1. Prices exclude VAT; WACC 8% nominal; CAPEX considered: 1800 /kw (Residential), 1150 /kw (Commercial), 1050 /kw (Industrial); 1450h levelized eq. hours; O&M=10 /kw for commercial and industrial; Regulated tariffs assumed: Residential simple tariff <10.35kVA, Commercial tariff refers to BTE for long uses at horas de cheio, Industrial tariff refers to MT at horas de cheio ; For utility-scale, CAPEX considered is 977 /kw and 1800h. Source: EDP 20

22 Thus, the tariff structure should evolve to a higher fixed share, as occurred in the telecom s business TELECOM /minute /month ELECTRICITY /kwh /month 21

23 Agenda Achieving decarbonization Pricing distortions Engaging consumers in Portugal

24 EDP launched its solar energy offer in Portugal in Innovative offer Customer benefits Solar energy solutions for customers to produce and consume their own energy edp re:dy system is offered to manage consumption, control appliances and monitor solar generation in real time Autonomy Produce your own energy for more than 25 years Savings Reduce your energy bill Ability to pay the solar solutions in 36 monthly instalments in the energy bill, starting from 20 per month with no upfront payment Sustainability Simplicity 23

25 ... with solutions designed to fit each customer consumption profile, reducing grid injection and energy waste Example Self-consumption Recommended system 3 panels 4 panels 5 panels 6 panels 8 panels 5 solar panels 14% electric bill reduction 360 average annual savings Price of 77 /month (36 months) Savings % Electricity bill reduction 9% 12% 14% 16% 19% 1st year savings Average annual savings for 25 years(1) Solar Energy % Self-consumption 91% 88% 84% 80% 72% % Injected energy 9% 12% 16% 20% 28% Home electricity % from solar system 10% 13% 16% 18% 22% % from the electric grid 90% 87% 84% 82% 78% Solar Energy Solution Installed power capacity (kw) 0,75 1 1,25 1,5 2 Annual solar energy production (kwh) Minimum space for panels 6 m2 8 m2 10 m2 12 m2 16 m2 Price (includes installation and VAT)(2) 50 /month 64 /month 77 /month 90 /month 5900 (36 months) (36 months) (36 months) (36 months) (upfront) Licensing cost with VAT Extra costs for selling energy with VAT(3) Environment CO2 emissions avoided (Kg/year) No. of trees with equivalent CO2 absorption

26 EDP solar energy customers receive edp re:dy for free, a home energy management system... Simple so easy to use No worries it does it for me Comfort it feels good being at home Efficient saves energy and money Control do what you want 25

27 ... that allows customers to monitor their generation and be alerted if failure occurs 26

28 edp re:dy not only controls solar energy, but is evolving to be the automated manager for all the home s energy Buy from the grid now to consume later? Consume, store or sell the production? Storage Distributed generation Energy management system House equipment When to turn on equipment? Where to get the energy from? Grid? Production? Battery? How does the electric installation support EV charging? Electric mobility Electric grid How does my house interact with the grid (e.g. DSM)? 27

29 App Web portal With solar and re:dy combined together, customers started to use more the web portal and app More than sessions More than 600 daily sessions More than 5 pages visited per session in the portal More than sessions More than 650 daily sessions Android prevails 28

30 With this knowledge, customers were able to change their consumption habits, to maximize the use of their solar asset... Month March April Total production 194,18 kwh 193,80 kwh Self consumption 43,69% 67,29% Total consumption 303,25 kwh 353,29 kwh Consumption from solar 27,98% 35,90% Example of a Monday in March Example of a Monday in April 29

31 ...helping to increase the system s flexibility 2016 March April 30

32 Key messages In order to reach Europe s ambitious decarbonization goal, a strong push for RES and efficiency is needed The costs of renewable energy have decreased steeply, namely for wind and solar PV, leading to frequent upwards revisions in the forecasts of installed capacity for these technologies This increase in intermittent power generation needs to be accompanied by investments in technologies that provide flexibility to the system (ex: storage, smart grids, DSM...) to guarantee grid stability In this context, the concept of energy efficiency is evolving from consuming less to consuming smart Electrification of transports and H&C is essential for the decarbonization process, not only due to reduced overall energy consumption (more efficient electric technologies), but also due to the ability to use RES sources in electricity There is a mismatch between costs and revenues structure in the power sector, which generates several distortions, namely biased signals for investment decisions and financial imbalances in the system The fact that fixed costs are being recovered through a variable tariff leads to biased price which favors reduction of grid demand, which in turn will lead to a vicious cycle where system costs will be charges over few(er) consumers Furthermore, distorted tariff structure favors investments in distributed resources over centralized plants, which implies a social welfare loss EDP Comercial has launched its solar energy offer, with solutions designed to fit each customer characteristics EDP solar energy customers receive a re:dy for free a home energy management system which allows them to monitor and optimize their energy consumption pattern and use of solar energy, thus contributing to maximize the benefits of clients investment and to improve system s flexibility 31