The digital transition

Christian Pilgaard Zinglersen, Deputy Permanent Secretary at the Danish Ministry of Energy, Utilities and Climate, discusses digitalisation in the energy industry and the progress made in Denmark

The digitalisation of energy services is progressing rapidly, bringing with it both challenges and opportunities. This was one of the many focuses of the European Utility Week 2016 event in Barcelona, Spain, which PEN attended as media partner. Alongside this was also an emphasis on the Nordic region and the progress being made there in the energy sector and other related areas. Indeed, Denmark is leading the way when it comes to energy and climate change, for instance, with the country planning to produce 70% of its electricity from renewable sources by 2020 and meet 100% of its energy needs with renewables, reducing energy dependence and increasing exports, all by 2050.

PEN met with Christian Pilgaard Zinglersen, Deputy Permanent Secretary at the Danish Ministry of Energy, Utilities and Climate, and vice-chair of the governing board of the International Energy Agency (IEA), on the sidelines of the November 2016 event to discuss some of these areas.

How are the challenges and opportunities being brought about by the increased digitalisation of energy services assessed?

There are certainly huge opportunities being made available, with perhaps two main ones: an opportunity to increasingly decarbonise our energy system (and, indeed, our economies), most likely via increased electrification, enabled in part via new types of automated solutions (here, digital becomes an enabler); and an opportunity for optimisation and the enhanced efficiency of the provision of various services. These can be achieved by increasing automation and integrating other solutions that will enable ‘more to be done for less’, or at the very least for the same cost.

Will the digitalisation of energy services share the challenges that other areas of the internet of things are going to experience as we move forward, such as security?

Yes, I think so. Looking at things from a distance, technological innovations can sometimes overtake legacy-type technologies. That is, of course, commonplace in every sector, but here it is taking place in a rapidly shifting ecosystem brought about by an energy transition initiated because of climate considerations. We will likely see a future similar to what has happened in other sectors (telecommunications, media, etc.), but arguably more accelerated and enhanced by the ‘transition imperative’.

As the Danish government’s representative at the IEA, I can see a shift in focus over the last couple of years. Not only are we now devoting a lot more time to energy sustainability-oriented issues – which is perhaps to be expected – but also, increasingly when we look at energy security, we are now talking about electricity security and what that means, whereas in the past it was more looking at security from a classical global market fuels perspective.

What now needs to be put into place to ensure that energy markets are fit for the energy transition?

There are perhaps two important things here. The first is getting a market design right at the European level that is fit for the energy transition, i.e. a future decarbonised energy system. There are many different possible market designs imaginable; you can have a market design which is 100% focused on security of supply in a classical sense, and completely unfocused on sustainability, and while that may have worked well in the past, technological innovations were at a different stage and sustainability concerns were at a very different stage than they are now. For this day and age, we need a facilitative market design which is incentivising and encouraging those elements in the market that will enable the transition in the most cost-efficient manner possible. It needs to price flexibility, and it shouldn’t incentivise must-run capacity above and beyond that value to a rapidly changing market (a value which is likely to be low).

That is often a wholesale market-type phenomenon. Also, the linking of retail and wholesale is important, and policy makers and regulators need to be very aware of what barriers there are for innovation on the retail side – such as having over-regulated models for the distribution or selling of electricity, for instance. There is a risk of incumbents ‘sitting on the market’ (inadvertently, from the regulators’ point of view, at least), blocking progress to a more innovative system. It will therefore be important for policy makers and regulators to tear down barriers for innovation and for enabling new players to enter and innovate.

Is that also true at the member state level?

There are certainly differences at the member state level on both of those priorities. Regarding market design, there is a big difference in traditional approaches to regulating price formation. Some member states have a tradition of regulated prices, as well as perhaps a tradition of being less market-oriented and more interventionist, and that can be a risk for an appropriate market design for the future.

When it comes to the linking of retail and wholesale, there is one main difference: many countries are not moving fast enough towards a system in which customer data is given to and made available via a neutral third party. In Denmark, we have a data hub for this purpose, and this is now being rolled out in other Nordic countries. It could also be done by other constructs, of course, but the main point is getting that data to a third party organisation and to make the customer-centric model of the future draw upon that data.

When it comes to the evolution of new players in this sector, is there enough EU-level support for smaller enterprises?

I would perhaps place more emphasis on ‘new’ rather than ‘small’ players, and so I think that the question is whether there is enough focus on allowing new players to gain access. This has become something of a political priority, but the devil is always in the detail, and as someone who gives advice to policy makers I am always concerned about regulatory models being captured by incumbents. At the political level, there is a call to incentivise innovation, but policy makers have to go about this call diligently. One aspect is to see what the possibly legitimate concerns of the current industry players are; another is to ascertain what is essentially a tactic to hold their competitors at bay.

If some of the barriers for new entrants can be successfully torn down, actually some of the ‘small’ players may be at an advantage, certainly if what they’re proposing is a digitally based platform; often, they will have low operating costs compared to big organisations acting as competitors, and so are actually more agile. Size is not necessarily an advantage in a new and more digital world.

Alongside this, is there enough EU-level support for a renewable energy future?

The best thing that can be done, from the point of view of renewables, in furthering the energy transition is to have a level playing field between all generators and, moreover, to get out of the ‘legacy protection’-type phase that we are currently in.

As it stands, the market is fairly dysfunctional. In most parts of Europe there is stagnant electricity demand. In and of itself that might be fine, implying perhaps that energy efficiency efforts generally have worked. At the same time, a lot of new capacity is being put onto the system and too few legacy assets – in the form of inflexible, typically quite carbon-heavy generation – are being taken off. This means there is net addition capacity in a stagnant demand environment. Any economist will tell you that is likely to result in a decrease in price to the extent that new build requires public support, irrespective of the type of generation being built.

While low prices are not inherently a bad thing, it does create a risk for a subsidy-prone system. So, rather than having very generous framework conditions for renewables per se, or even generous support schemes for renewables, a different approach needs to be taken, in my view. That is, we need to get the market functioning again via less renewable support, by being very tough on capacity remuneration mechanisms or capacity markets, and by trying as quickly as possible to find a way to transition to an energy mix relevant for the future, i.e. a mix relevant for a lot of intermittent renewable generation.

This new energy mix will probably be a combination of a lot of intermittent generation, some peak load capacity, and a little must-run classical thermal generation. That market is self-sustaining and should not require subsidies per se. An energy-only market can work provided you don’t intervene in the price spikes that occur at intervals. But we are going to have to muddle through for some years until we get there, simply because of the current thermal generation mix and current overcapacity.

That presents its own challenges for policy makers: there will be those who complain, often very loudly, about job losses and the effects on businesses, and it falls upon those at the political level to steady the course because we need to transition out of a world that is dependent on subsidies.

What opportunities will be brought about by increased system integration, and what is Denmark doing in this area?

There are two major opportunities here. The first is essentially utilising this as a way of decarbonising sectors that are otherwise difficult to reach – transport is one – while in some jurisdictions, buildings may be another, depending on how they are heated and cooled; agriculture could be yet another, although that is a difficult area to decarbonise via system integration.

Secondly, integration is an avenue for increased efficiency and optimisation. An increasing number of jurisdictions in Europe are going to have an electricity market which will have fluctuating prices to a much greater extent than today because of the amount of intermittent generation. Under such a scenario, there is value to be captured in essentially not using electricity when prices are high and using more when prices are low. As such, those sectors which have a fairly high electricity demand pattern can optimise their way of production by integrating more across the system and being more flexible and more dynamic. For sustainability- and decarbonisation-type reasons, as well as for the optimisation of businesses or services, there are significant opportunities associated with that.

In Denmark, we are working in several different areas. For instance, we are trying to dismantle some of the regulatory barriers between the various sectors, some of which are quite heavily regulated, meaning that there are barriers to what they can meaningfully engage with. We are thus looking closer at what barriers we can dismantle. However, it is important to draw the line somewhere: we don’t want a monopoly with no commercial risk to their innovation activities, simply passing on losses to a tied consumer base. This is not conducive to a competitive environment.

Additionally, Denmark is very much a welfare state and we have a very high rate of taxation commensurate with that. And the thing about high taxation rates is that they either enforce or dampen a price signal – sometimes to the extreme. When we think about the integration of systems, at times we risk being caught out because those things that would bring about socioeconomically efficient solutions are held back because we are heavily taxing a particular type of service or a particular type of fuel more than what externalities would warrant. We are working on that, but it is proving difficult to radically reform taxation in this type of field because it was not envisaged as promoting a certain energy or sustainability strategy; rather it was fiscal, plain and simple.

Denmark is committed to a fossil fuel free, 100% renewable energy future by 2050. Is it a realistic target? Are there any examples of best practice in Denmarks approach to the energy transition that can be exported to other European countries?

Denmark sits in a region which is quite integrated, at least compared to other regions in Europe. Denmark’s ability – along with our Nordic partners – to think of our energy policy in a more regionally-integrated way is something of a blueprint for other parts of Europe. This includes the European Commission as it thinks about how the European electricity system should evolve.

When we talk about Denmark, very often we talk about a very high degree of intermittent generation in the electricity mix, and that is certainly true; we will have a total of 70% renewables in our electricity mix before 2020, with some 51-52% of that likely to be wind power alone.

One of the reasons why that is possible is because we sit within a wider region with whom we have strong interconnections and a very well-functioning market. So yes, we do have fairly ambitious national policies, but we try to think them as part of a wider regional system.

Secondly, Denmark is quite good at looking at the energy system in its entirety; we look at supply and demand in an holistic way and at smart grid infrastructure as an enabler for increased ambitions on the supply side.

Thirdly, the way we have approached wind power and offshore power of late holds some lessons for other countries because we’ve been able to create the framework conditions for industry players to innovate and bring down costs.

Indeed, the Danish government has recently announced the lowest bid in offshore wind history, I think, the Kriegers Flak tender. The lowest bid came from Vattenfall Vindkraft A/S, who will establish 600MW in the Baltic Sea at a tender price of 37.2 øre/kWh (approximately five eurocent/kWh). This is an extremely low tender price – likely the world’s lowest ever for offshore wind.

That price in some other jurisdictions with high cost for land (for example, in quite populated areas) would probably be able to compete with onshore wind, and while we as a government obviously cannot take credit for that – that accrues to the developers in this area – one thing that I think we have got right is the way we have gone about these tender procedures, particularly how we scope the seabed and make results available to developers. Another is the tendering process itself: this is a facilitative, dialogue-oriented process, where we have a quite intense period of dialogue with the various bidders, not compromising confidentiality of course, but addressing their concerns at an initial stage. That helps to decrease the perceived risk at their end, thus making for a more attractive price.

Christian Pilgaard Zinglersen

Deputy Permanent Secretary

Danish Ministry of Energy, Utilities and Climate

This article first appeared in issue 13 of Horizon 2020 Projects: Portal, which is now available here.