The Risk of Treating Energy as a Simple Commodity

Engerati’s The Future of Transmission and Distribution: adapting networks to the challenges of renewable and sustainable electricity generation report examines the complexity of the electricity industry and discusses the complicating factors that role-players face.
Published: Thu 03 Jan 2013

The plain fact is that end-user energy requirements are increasing. In response, energy businesses around the world must increase supply to meet demand.  Unfortunately, the increase in power to match supply ends in power failures which are hugely inconvenient for energy customers and very costly for suppliers in terms of fines and damage to reputation.

Taken at face value, energy is a relatively simple issue of matching supply to end user demand at the right time. However, electricity is a complex business where introducing competition to change the commercial and competitive energy landscape has already thrown up unexpected consequences. For instance, clean energy initiatives can be “vote winners” for politicians but there is evidence that pressuring energy companies into increasing renewable usage is actually suppressing carbon reduction initiatives. This outcome would surely be a “vote loser”!

A relatively simple solution to increase energy supply is to find new sources of energy such as shale gas. This source, however, tends to be unpopular with the general public, in contrast to sources from renewables that can be easier to justify under the guise of clean sustainable energy. Unfortunately, renewables provide inconsistent supplies of energy, requiring unpopular sources of “instant” energy to prop up the system, such as fossil fuels or nuclear power.

According to an Ofgem report, the UK faces a growing energy gap between supply and demand which could be realized as early as the winter of 2015. If nothing is done to close the energy gap within the next two to three years, the country will have to prepare for power reductions and significant outages. The media reaction to the Ofgem report puts generation, transmission and distribution issues firmly on the front pages of mass media news coverage, providing a potential platform for utilities to discuss energy sensibly with stakeholders at a critical time for the industry.

Case Study:

The top causes of the short-term issue of the energy gap in the UK are:

  • Closures of existing plants brought forward by environmental legislation, combined with changes to the profile of energy available through an increase in intermittent/renewable sources
  • Failure by government to put in place consistent policies to support energy supply
  • Lack of investment as investors and companies across the energy supply chain react to uncertainty by delaying plans and investment for the future

Why energy is a complex commodity

Energy and electricity supply has in recent years risen steadily up the political agenda of most nations as a matter of national strategic importance. However, Engerati believes that political bodies will not navigate the best course through the energy supply landscape, partly because electricity is not a simple commodity, but for the sake of appealing to voters, many policy-makers deal with it as though it is. 

There are a few complicating factors :

  • Storing electricity is not yet possible- Electrical energy cannot be stored in large volumes as yet. Available generating capacity must be capable of meeting any reasonable forecast peak demand and this is difficult and costly without stored supplies
  • Profiles of fuel sources are indistinguishable at point of delivery-Systems operators rely on the profile of the fuel source to generate electricity at the right time but the source that electricity is generated from is indistinguishable at the point of delivery. Operators need to draw on energy from a generating plant that may be best suited to baseload or peak demand matching. The source of energy may be intermittent or predictable and “dispatchable” or “non-dispatchable.”
  • Politics shape the energy mix- National security and a drive to reduce dependence on traditional fossil fuels that are high emitters of greenhouse gases is tending to push national policy toward increasing the role played by renewable in the energy mix
  • The systems are imperfect-Transmission and distribution systems are imperfect because grid capacity is constrained by the laws of physics governing the amount of electricity that can be dispatched in a given time interval between two points and this constraint is compounded by phenomena specific to electricity grids, such as loop flow

Engerati Analysis

The analysis shows that the power industry is far from being perfect and, with most essential industries, there will always be “complicating factors” that it will have to overcome. The worldwide escalation in energy demand and a realization that something must be done about climate change has put significant pressure on the power industry to change its operations and technology. This major overhaul is bound to present a number of hurdles which role-players will need to tackle as they present themselves.