Saturday, June 14, 2014

Dear BSW

Dear BSW,

Weighing of the Heart
I’m having a difficult time understanding why BSW is promoting the installation of batteries? Batteries, while interesting, are currently too expensive to meaningfully contribute to the value proposition of solar and will likely remain so for at least 10 more years. With the solar industry currently under attack now is no time to promote uncompetitive technologies. There are two priorities at the moment: 1. Improve the value proposition of solar against the backdrop of falling FiTs. 2. Control the surcharge costs. It is well understood that raising self-consumption rates can significantly improve the value of solar. Batteries can indeed improve self-consumption but there are several other ways to improve self-consumption at a 10th of the cost. Given the pressure of the situation the cheapest and most flexible ways to improve self-consumption should be the focus. Here’s a quote from a solar researcher that summarizes the situation.

"According to Henning’s modelling work, a future decarbonised system will be dominated by variable renewables such as solar and wind, where 40% of the remaining heat demand (after efficiency measures) is met by heat pumps. In such a system, heat pumps are a powerful asset because they can store energy, albeit in thermal not electric form. “Heat storage is much more important than electricity storage,” believes Henning. “Heat pumps are a back-stop technology in a renewable energy system.”

Dr. Hans-Martin Henning - Fraunhofer Institute

Dr. Henning has calculated the future battery needs of Germany at 35 GWh compared to thermal storage needs of over 800 GWh. This speculative forecast suggests that both types of storage will eventually need to be pursued but I’d argue that the current economics strongly favour focusing on thermal storage over batteries. Small scale thermal storage devices cost approximately $10 per kWh of storage. Small scale battery systems cost $1000 per kWh. We’ve all heard that battery costs are falling but I don’t see batteries ever becoming as cheap as insulated hot water tanks that most people already have in their homes.

The combination of heat pumps with thermal storage won't only improve the self-consumption of solar power - heat pumps and thermal storage are also an essential part of integrating wind. This brings me back to Priority 2 – Controlling the surcharge… It is a relatively small technical matter to send signals to homes and businesses telling them how much wind and solar power are available in the market. It is also a small matter to have heat pumps (and smart appliances in general) schedule their operation to be coordinated with the availability of solar and wind. If you meaningfully increase load on the system when wind and solar are available it will hold up the prices of electricity on the wholesale market. This means the surcharge will be held in check and quite possibly reduced. Polls suggest that Germans overwhelmingly support wind and solar. Give them the market signals they need to prove their support. While I don’t give a damn about coal plant operators I’m sure they’d appreciate it if wholesale prices stopped going down.

The electrification of heating via heat pumps has multiple benefits of which I’m sure you are aware – environmental, economic and political. I’d like to point out a benefit I haven’t seen mentioned. The use of electricity for heating will increase the volume of electricity sold on the market. More electricity sold means the surcharge costs can be reduced by division over more sales. The ultimate potential of heat pumps to increase electricity use is very large – several hundred TWh per year.

While heat pumps and smart appliances could be used to improve the value of solar/wind and help control the surcharge moving forward they could also help control the surcharge moving backwards. By this I mean a focus should be put on deploying heat pumps and smart appliances at locations that have installed solar in the last few years. Every kWh of homemade production that is used in-house will help reduce the surcharge pool. I don’t have high quality statistics that would allow me to make a rigorous estimate of the potential savings but my ballpark calculation is that the surcharge balance can be reduced by 500 million using this technique. It is not the maximum savings that matter so much. What matters is that positive steps are being taken to control the surcharge. Too often I hear solar/wind promoters say that Germans don’t mind paying extra to support solar and wind. Even if this is true I’m willing to bet that Germans wouldn’t mind paying a little less extra to support solar and wind.

The math shows that solar will continue to be an attractive investment in Germany depending on how much production can be self-consumed. I think the numbers also show that attractive Internal Rates of Return would exist even if the solar FiTs were universally reduced to the level of Wind FiTs - 9 cents/kWh. If solar FiTs were reduced to 9 cents/kWh it would make them approximately 6 cents above the current wholesale rates of 3 cents/kwh – wholesale rates which appear to be bankrupting generators so I don’t see them going lower. This 6 cent/kWh differential price is roughly equal to the current surcharge. If load continues to fall in Germany the surcharge will inevitably go up because the total costs are being divided by less volume. But if load increased by X amount a year you could add X amount of new 6 cent premium wind/solar a year and it wouldn’t change the surcharge. What would this look like? In rough numbers, 500,000 new residential heat pumps would increase load by around 2 TWh. This would allow 2 GW of solar to be installed without impacting the surcharge. Again, this is not rigorous math – I’m only showing how controlling the surcharge is a function of future FiT rates as well as future load and to make the case that there needs to be a more integrated policy that manages these factors. It pains me to see BSW promoting batteries when it’s imminently clear that your best allies are heat pump manufacturers and installers, the wind industry and the smart appliance manufacturers.

Here’s a parting thought. One way to reach a compromise with industry would be to leave the legacy surcharge costs where they are and focus on incremental costs moving forward. This means you’d grandfather industry from the first 6 cents/kWh of the surcharge. If industry were forced to share in all incremental surcharge costs above 6 cents/kwh it would somewhat address the concerns from Brussels. If you could make a rigorous case that the surcharge won’t go any higher industry would have a strong incentive to support this kind of a deal because they would be buying free protection from the current surcharge – it goes without saying that industry would be required to support a mandate of zero self-consumption taxes across the board.

Good luck with the upcoming compromise. I very much want to see your energy transition succeed.


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