Secure energy transitions in the power sector

Part of Electricity Security 2021

Fuel report

April 2021

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CC BY 4.0
Electricity security report cover

About this report

Electricity is an integral part of all modern economies, supporting a range of critical services from healthcare to banking to transportation. Secure supply of electricity is thus of paramount importance.

The structural change from an electricity system based on thermal generation powered by fossil fuels towards a system based on variable renewable energy continues apace at various stages across the globe. Digitalisation tools such as smart grids and distributed energy resources, along with the electrification of end uses put electricity increasingly at the forefront of the entire energy system.

As a result, governments, industries and other stakeholders will need to improve their frameworks for ensuring electricity security through updated policies, regulations and market designs.

This report details the new approaches that will be needed in electricity system planning, resource adequacy mechanisms, incentives for supply- and demand-side flexibility, short-term system balancing and stability procedures.

It provides examples and case studies of these changes from power systems around the world, describes existing frameworks to value and provide electricity security, and distils best practices and recommendations for policy makers to apply as they adjust to the various trends underway.
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Executive summary

Building on the Paris Agreement signed in December 2015, governments are showing even greater commitment towards reducing greenhouse gas emissions, including reaching net zero in many economies by mid‑century. Variable renewable energy (VRE) is driving the ongoing decarbonisation of the power sector, and also reshaping the operation of the electricity system.

Policies will need to be updated accordingly to provide the necessary level of electricity security. In order to address risks to adequacy in the long term and operational security in the short term, regulations and market designs must ensure that all system resources are compensated in accordance with their system value. New products will need to be created in response to the development of flexibility sources such as dispatchable generation, demand response, storage, digitalisation and interconnections. Policy makers should particularly focus on the role distributed energy resources, energy source diversity, energy efficiency and fuel security will play in ensuring a secure and resilient power system at lowest cost to consumers. 

The clean energy transition will bring a major structural change to electricity systems around the world. Variable renewable generation has already surged over the past decade. The trend is set to continue and even accelerate as solar photovoltaic and wind become among the cheapest electricity resources due to technological advancements and cost reductions and contribute to achieving climate change objectives. In the International Energy Agency Sustainable Development Scenario, the average annual share of variable renewables in total generation reaches 45% by 2040.

Such rapid growth in VRE will help alleviate traditional fuel security concerns, but it will call for a fast increase of flexibility in power systems. On the other hand, conventional power plants, which provide the vast majority of flexibility today, are stagnating or declining, notably those using coal. On the demand side, electrification will increase demand for electricity, and technology and digitalisation are enabling a more active role for consumers as part of more decentralised systems.

Traditional frameworks for ensuring electricity security will not be sufficient in the face of these changes. The challenge for policy makers and system planners is to update policies, regulation and market design features to ensure that power systems remain secure throughout their clean energy transition.

Experience in a number of countries has shown that variable renewables can be reliably integrated in power systems. Many countries and regions in many parts of the world have succeeded in this task using different approaches and taking advantage of their flexibility resources. They leave to the world a large set of tools and lessons to be integrated into the policy maker toolkit.

Gas security will become increasingly relevant to electricity security. Gas-fired plants will play an expanded role in the provision of adequacy, energy and flexibility in their power systems and thus it will be crucial to ensure that gas will be deliverable when needed in instances of high electricity and gas demand combined with low availability of variable renewables. 

Making the best use of existing flexibility assets and ensuring these are kept when needed should be a policy priority. This will require market and regulatory reforms to better reward all forms of flexibility and careful adequacy assessments of the impact of decommissioning plants of dispatchable supplies.

However, going forward, new additional flexibility resources need to develop in parallel with expanding solar and wind, especially in emerging and developing economies that are facing strong electricity demand growth. Maintaining reliability in the face of greater supply and demand variability will require greater and more timely investments in networks and flexible resources, including demand side, distributed and storage resources, to ensure that power systems are sufficiently flexible and diverse at all times. Development of low carbon fuels in conventional power plants could also help achieve system stability and decarbonisation.

Notably, current investment trends do not support such requirements and will need to be upgraded accordingly, sooner rather than later. Grids are particularly concerning, as annual investment has declined by 16.3% since 2015. Grids also require long-term planning, have long construction lead times and often face social acceptance issues. 

Building new assets to provide needed adequacy and flexibility will require an update of current market designs. Increased reliance on renewables will augment the need for technologies that provide flexibility and adequacy to the system. This will include storage, interconnections, natural gas-fired plants in many regions, and demand-side response enabled by digitalisation. Updated approaches to planning will also be necessary, with more advanced probabilistic analyses that account for and enable contributions from all available technologies to adequacy. 

Balancing is one of the key processes to ensure security of supply. System operators will be faced with new challenges associated with the energy transition, as the factors that affect the need for system balancing become more complex and interdependent. Increasingly, system operators are turning towards market-based mechanisms in order to provide these services at the lowest possible cost, as well as implementing systems that allow for more dynamically managed system requirements such as reserve quantity and short pricing intervals. 

Growth in variable renewables and decentralised power sources present technical challenges for the system to maintain a state of operational equilibrium and withstand disturbances which can compromise electricity security. Ensuring electricity security means that these technical challenges are addressed through appropriate innovative solutions in system planning, operation and services. For example, declining system inertia can be addressed through new system services such as fast frequency response or new infrastructure such as synchronous condensers. It is therefore essential for policy makers to take action, establishing the necessary logical steps in the system planning process to consider system reliability in an appropriate manner. This may involve a review of connection requirements (including grid code revision and mandatory system service), revised operational practices and innovative market-based solutions such as expanded system services markets.

Summary of recommendations

The world’s electricity systems are experiencing profound change. The traditional power sector, where dispatchable sources were controlled centrally with very little reaction from consumers, is gradually transforming into one where variable sources increase their share of the energy mix every year, and where an increasing number of actors and devices actively participate and interact with the power system. This report investigates how policy makers should update existing planning, investment and operational frameworks to maintain the reliability that society requires as its reliance on electricity grows, while accomplishing a successful transition to a low-carbon power system.

This report covers the areas of system adequacy, investment signals in market design, flexibility, real-time system balancing and stability challenges. Electricity security calls for the application of five steps for managing the transition of electricity systems, as follows.

Policy makers, regulators and system operators need to allocate appropriate responsibilities and incentives to all relevant organisations within their jurisdiction and ensure these organisations co‑ordinate their work in practice.

Policy makers, regulators and system operators should:

Recommendations to ensure adequacy

  • Provide enough forward visibility of the policies affecting the power sector – considering inputs from other authorities and stakeholders during the decision-making process.
  • Regularly assess the market design to ensure that it is bringing the adequacy, flexibility and stability services needed for the secure operation of the system.
  • Implement planning frameworks that allow for co‑ordination across jurisdictions and across the electricity value chain including, inter alia, grid planners and operators, project developers, large consumers and city planners. This can allow for better development of planning criteria and for long-term investment (such as in transmission grids and flexibility requirements) to better follow market and policy signals.
  • Set reliability targets to reflect the changing topography of electricity systems, including the re-dimensioning and expansion of reserves.

Recommendations to ensure system balance and stability

  • Provide a clear framework to provide every power sector stakeholder with a clear set of obligations to prevent threats and to react in exceptional circumstances.
  • Assign responsibilities for co‑ordinated action between the operators of the transmission and distribution systems, including where systems are interconnected. 

Policy makers need to ensure that operators of critical electricity infrastructure identify, assess and communicate critical risks. Policy makers should:

Recommendations to ensure adequacy

  • Conduct regular adequacy of supply assessments, including appropriate methodologies adapted to VRE variability and all system uncertainties.
  • Include gas-related contingencies in their adequacy assessments in jurisdictions relying on gas-fired plants as a flexibility resource.
  • Review standards and metrics used in adequacy assessments to ensure all relevant outage risks are captured, including average and extreme events.
  • Ensure that both the technical and market operations of the gas and electricity systems are well co‑ordinated, particularly where natural gas is used extensively for heating.

Recommendations to ensure system balance and stability

  • Consider all flexibility sources as options to satisfy adequacy in planning, including electricity networks and distributed energy resources (energy efficiency, demand response and distributed generation and storage).

Policy makers and industry have to collaborate to improve readiness across the entire electricity system value chain. Policy makers should:

Recommendations to ensure adequacy

  • Set rules that reward resources for their actual contribution to secure operation, instead of an expected or average contribution.
  • Guide investment frameworks consistent with policy uncertainty in adequacy assessments.
  • Mitigate the impact of events (crisis or actual contingency) by assessing and reforming adequacy mechanisms when temporary or structural out-of-the-market measures are applied, to guarantee secure operation.
  • Assess where increased diversity of the resource mix could ensure resilience against social, geopolitical, market, technical and environmental risks.
  • Create market and investment frameworks, including the required digital environment, to enable distributed energy resources to effectively participate in markets and contribute to system adequacy and flexibility needs.

Recommendations to ensure system balance and stability

  • Develop grid codes to future-proof connection requirements, while continuously updating and amending them as the needs of the electricity system evolve.
  • Review and adapt historic load-shedding plans in the context of embedded generation, digitalisation of the entire value chain and greater economically viable demand response.

Policy makers need to ensure mechanisms and tools are in place to evaluate and monitor risks and preparedness, and to track progress over time. This is important at the operational level for individual utilities, as well as at the level of policy makers and regulatory authorities who need to understand if strategic objectives are met. Policy makers should:

Recommendations to ensure adequacy

  • Perform resilience tests and keep track of power system reliability.

Recommendations to ensure system balance and stability

  • Review substantial events like outages to learn lessons and adapt policies.
  • Mandate common planning procedures and information-sharing tools in interconnected systems.

This entails ensuring resilience goes beyond preventing incidents and includes effectively coping with attacks. Policy makers need to enhance the response and recovery mechanisms of electricity sector actors. They should:

Recommendations to ensure system balance and stability

  • Set an emergency response framework with clear responsibilities and liabilities.
  • Execute regular response exercises to capture lessons learned and adapt practices.
  • Stimulate information logging and sharing to facilitate analysis of actual incidents.
Introduction

Over the past decade, global attention on the need to mitigate greenhouse gas emissions has increased, as reflected and reinforced by the signing of the Paris Agreement in December 2015. At the same time that policy makers’ focus on decarbonisation has grown, technological advancement and cost reductions have led to renewed momentum behind clean energy technologies. The convergence of these trends has created highly favourable conditions to transition the global energy system toward low-carbon technologies. Nowhere is this energy transition more apparent than in the power sector, where wind and solar generation, in particular, have surged globally based on impressive technology gains and falling costs.

These forms of variable renewable energy (VRE) have unique characteristics that are not only driving the ongoing decarbonisation of the power sector, but are also reshaping the operation of the electricity system.

Simultaneously, larger volumes of dispatchable generation, namely coal, nuclear and oil, are facing retirement, especially in advanced economies. These forms of generation have historically underpinned electricity security. The energy transition is therefore transforming the fuel mix in the power sector and raising new concerns about electricity security, as the frameworks and tools for ensuring electricity security face new conditions and require the adjustment of current practices as well as new rules.

Moreover, the energy transition is about much more than just VRE. Again driven by technological progress and decarbonisation agendas, the electricity sector is experiencing an increase in digitalisation as tools such as smart grids and smart meters are deployed to achieve decarbonisation and energy efficiency goals. The rise of distributed energy resources is enabled by digitalisation and is driving decentralisation of the power system. These resources include rooftop solar installations, batteries and demand-side response devices, such as water heaters. This decentralisation has the potential to upend the balance between the transmission and distribution sectors and encourage consumers to play a larger role in the future electricity system’s operations.

The energy transition includes a trend toward increased electrification in end-use sectors such as transport and heating, with the potential to drastically alter the balance of supply and demand for electricity and to put electricity increasingly at the forefront of the entire energy system. As such, the notion of energy security for policy makers will entail paying greater attention to electricity security in particular.

These transformations will fundamentally alter the electricity mix and the way the sector is governed, planned and operated from an electricity security perspective. Considerations include increased geographical integration and managing co‑ordination among various energy segments within the system. The transition requires changes in technical specifications, operational practices and market design.

This report offers practical guidance to energy policy makers and other stakeholders on how to deliver a clean energy transition in the electricity sector in a secure manner. The following questions are addressed:

  • How can we measure security of supply to identify systemic flexibility issues and trigger policy action?
  • How can market design or other policy measures ensure adequate investment in capacity and flexibility that is cost-effective and in line with sustainability targets? Which flexibility providers need to be kept in the system and what future sources can be tapped into? How do we ensure timely investment?
  • Given the central role of electricity in various end uses and the linkages with other energy sectors, does our view of electricity security capture all the uncertainties and all the indirect security risks, in particular at the gas-electricity supply nexus?
  • Higher shares of VRE require new technical concepts. How can policy makers guide innovation, facilitate the scaling up of new solutions, steer markets to deliver them and ensure grid codes are future-proof?

Policy is key to guiding the processes and responsibilities needed to appropriately identify risks. Policy makers need to update regulations and market design features to provide the incentives for the necessary level of security during the energy transition. System operators will need to create new products to remunerate resources and manage this evolution. On both the supply and demand sides, policies need to ensure that the contribution of all system resources to system adequacy is remunerated. And sources of flexibility such as dispatchable generation, storage, demand response, digitalisation and interconnection need to be compensated for their contributions to system balance. Particular attention needs to be paid to distributed energy resources and their ability to reduce system costs like grid investment while also enhancing resilience to extremely high-impact events such as system blackouts. Also, policy makers should value the contribution of system resources to goals such as energy source diversity, energy efficiency, resilience and fuel security in a clear and transparent manner in their planning processes.

Supported by

  • This report has been produced with the financial assistance of the European Union as part of the Clean Energy Transitions in Emerging Economies programme. It reflects the views of the International Energy Agency (IEA) Secretariat but does not necessarily reflect those of individual IEA member countries or the European Union (EU). Neither the IEA nor the EU make any representation or warranty, express or implied, in respect to the commentary’s contents (including its completeness or accuracy) and shall not be responsible for any use of, or reliance on, the publication. The Clean Energy Transitions in Emerging Economies programme has received funding from the European Union’s Horizon 2020 research and innovation programme under grant agreement No 952363.

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