Negative Electricity Prices

UntitledAfter electricity prices in the UK briefly went negative on May 8th, I’ve been curious to understand the economics of this peculiar phenomenon better.   A world powered by renewable energy, a talk I attended on 12th May shed some light on the topic – convincing me we are heading into in a time of great change in the way electricity markets and grids operate. Today the FT has an interesting article (UK power prices go negative as renewables boom distorts market – but behind a paywall) shedding some further light.

The main driver for negative prices is that the UK has a market for electricity where electricity prices are set by an auction mechanism at the operating cost of the most expensive generator required to produce a large enough supply to match the demand that is expected to exist at that moment in time*. Once a solar or wind farm is built, the marginal cost of producing an extra kWh is zero – and negative if the generator is being paid a subsidy for every kWh they generate. In addition, it is hard (i.e. expensive) for conventional fossil fuel and nuclear plants to reduce output rapidly.  As a result the price can be zero or negative when supply from renewables exceeds demand for electricity. On May 8th the price was minus £30 per MWh (or minus 3p per kWh). On New Year’s Day 2016, the price fell to £70 per MWh. Consumers don’t currently pay these negative prices but they do benefit from their contribution to lowering the wholesale price of electricity (NB some of this reduction is merely offsetting the costs consumers are paying for that subsidises renewable generation)

Renewables generation capacity in the UK has grown very rapidly** and is now about 22GW. This is significantly greater than weekend demand which can can drop to 17GW. Of course, the actual amount electricity generated from renewables fluctuates depending on the weather – sunny days for solar and windy days for wind.

Negative prices have been a feature of other European electricity markets since 2007. In addition to the UK, they are a feature of markets in Germany, France, Belgium, Austria and Switzerland according to Epexspot which is an exchange that provides spot and day ahead and transnational markets in these countries.

Enappsys publish good quarterly and annual summaries of the electricity market. In their summary for the first quarter of 2016, they report that:

  • 35.4% of total electricity generation across the quarter came from gas-fired plants, 22.4% from renewable sources, 19.0% from nuclear plants, 16.2% from coal-fired plants and 7.1% via imports from Ireland and the continent.
  • Of the total renewable generation, 46.1% came from wind farms, 33.2% from biomass plants, 13.5% from hydro plants and 7.2% from solar farms.
  • The trend of growth of renewables is well illustrated in this chart

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A note that small scale solar generation (such as the solar panels on peoples roofs that qualify for Feed-in-tarriffs or FITs) is treated as a reduction in demand at a local level in the grid (as shown as embedded generation in the top diagram).  It does not therefore feature in the figures for solar generation above.

* Elexon who operate the UK market for handling the differences between expected and actual demand and supply and ensuring that actual supply and demand balance have a very good guide to how the market works here

** In 2012 the official government forecast for Solar generating capacity was 6.5GW by 2030. In March this year we had 9.5GW installed, an increase of 1.6GW, or 20%, in the last 12 months.

 

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Artificial Intelligence

Tonight’s talk was on Artificial Intelligence by Paul Chong, the Head of the IBM Watson Group for Europe and Middle East, and Verdi Israelyan, Managing Partner of Grishin Robotics with Harvard Business School Alumni at the IBM Client Centre.

It was enlivened by a cute little robot prop.Untitled45

Key learning point: If you want reduce the chances that your job will to be affected by artificial intelligence and robotics then move into sports or become a clergyman!

Firstly, a clarification that we are a long way away from generalised artificial intelligence. What we have is a collection of intelligent assistants or intelligent automation that can help humans with specific tasks.

A doctor is a knowledge worker. His or her work quality and efficiency can be improved by giving them access to a “Watson” (in IBM AI terminology) “programmed” with deep knowledge of the specialisation – because his or her access to deep knowledge is speeded up.

There are 3 drivers of the AI revolution:

1 Big data (They think Tesla is likely to get to a useful semi-autonomous vehicle sooner than Google because it is collecting data on all its cars)

2 Availability of computing power (including for example quantum computers where the public can now programme over the internet a quantum computer made available by IBM using a published API)

3 Better algorithms (eg the Deepmind algorithms that beat the Go champion)

Robots will increasingly be interacting with humans. One highly likely area is in caring for the elderly.

The Amazon Alexa artificial assistant and Amazon Echo microphone and speaker system are ground-breaking advances in interacting with an artificial intelligence (The Echo is not yet on sale in the UK)

Some big challenges are:

  • Natural language – eg General spoken English is very different from legal English
  • Supervised vs self/automated learning. When “programming” an AI device with specific domain knowledge there is a phase of supervised learning – the humans feed the knowledge to the device. The issue is how broad the base needs to be (how many standard deviations away from normal). A good example of the Google car that crashed recently because it hadn’t been programmed to recognise that a bus driver would behave differently than a normal road user (ie the bus driver assumed the car would give way to the bus – and the Google car “driver” assumed the opposite. Conversely, they will now recognise that old ladies may cross the road with a stick leading a group of ducks). The Go programme is another example of supervised learning. Self-learning is much harder.

Good questions on what is intelligence? Answers around it is the ability to make judgements and that there is a progression from understanding to reasoning to learning.

Another good question on will we all become lazy vegetables as a result of all the assistants we are getting? Answers around we will all remain curious to varying degrees – technology has already materially reduced the barriers to learning (to the extent that we are inclined to want to learn).

Notes on my first experience interacting with a robot. It was pretty disconcerting. Particularly the eye movements but also the head turning and body movements of this robot trigger subconscious cues in you that make you think it is human. After this my immediate reactions veered between paranoia – are its little fingers going to amputate my fingers if I put my finger in its hand? To cuteness – oh it is more like a baby’s grip. This robot listened and spoke but not much in this crowded room. It can be connected to a “Watson” AI system but it wasn’t tonight.

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A world powered by renewable energy

A lecture given by  Dr Nick Eyre & Dr Malcolm McCulloch of Oxford University at the Oxford Martin School on 12 May 2016.

Below are my notes. The lecture is here: https://www.youtube.com/watch?v=XolYkuVdI_4  The lecture synopsis was: “Mitigating climate requires a transition to low carbon energy systems and renewable energy looks increasingly likely to play a key role, but the most important resources are intermittent. This lecture will describe the research of the Oxford Martin Programme on Integrating Renewable Energy, on how intermittency and related challenges can be addressed, technically and in markets and policy.”

Summary/Introduction: Solar & Wind are rapidly becoming cheaper and will be key components of any solution to our climate challenge.

Extensive use of them depends on integrating such intermittents into electricity systems.

This will require technical changes, market place changes and governance changes.

Reaching our target of holding the increase in global temperature to 2°C requires a 3% p.a. reduction in our emissions of greenhouse gases.

In order to achieve this, electricity needs to be reduced first and to reduce its emissions by 6% p.a. (This is because it is easier than most other sources of greenhouse gasses – eg air transport = harder)

Dr Malcolm McCulloch

Installed solar generating capacity has been growing very rapidly and is now 10 GW in the UK and 100 GW in Europe.

The price of solar panels has followed a cumulative experience curve. Recently it has been halving after every 2.5 times production – and this has been c.13 months.

In Germany Solar and Wind have been between 2% to 70% of total generation.

There are 3 matching challenges:

  1. Diurnal load – matching excess solar supply in the day with excess demand at night.
  2. In winter there is a windy vs non-windy day matching requirement.
  3. Seasonal challenge of matching summer solar supply with winter demand.

Technical

Meeting the storage challenges above

We can see that battery cost will reach US$100 per kWh soon.

Economic

3 market failures were identified

  1. Climate change externality (ie no linkage between the polluter and the problem. An intervention is carbon pricing
  2. There is an information barrier to distributed technology. This would require regulation.
  3. Monopoly in electric system and network operation

Managing capacity

For the last several years the electricity price has been and is set by an auction mechanism. This sets it at the operating cost of the most expensive generator required to produce a large enough supply to match the demand that is expected to exist at that moment in time.

Nowadays because the marginal cost of solar and wind power is zero that price is often zero (when such supply exceeds demand) – and the price can even be negative. This means there is no incentive for existing generators to invest in any new capacity.  One solution that is being used in the UK and elsewhere is “capacity markets” (the grid pays organisations to make standby capacity available eg by providing standby diesel generators or by not scrapping old coal plants)

Other available solutions are demand response and storage.

Flexibility generator and also ancillary services market are growing in total value (and increasing the price paid by consumers). No agreed definition of flexibility.

Social and Political

Electricity markets were designed for fossil fuel generators and regulated at national level

How should local resources and transnational trading be included?

How should new costs be allocated between participants?

Demand side response implies energy users playing a role in system operation

Deep dive 1 – Emerging electrical systems

In 1900 there were 600 generators in the UK serving local markets. They were nationalized in c.1950 and we had a centralised system and grid. (NB In NZ it can be economic to go off grid)

Fractal Grid concept = Peer to peer schemes = Uber of electricity generation.

Fractal Pythagoras tree. NB the High Voltage, Intermediate Voltage and Low Voltage systems are analogous to a fractal distribution system.

When you look at a household it has must run services and discretionary load (eg hot water heating). It may well have local generation (PV) and in future local storage (eg Powerwall).

At the local road level which is a group of houses you can imagine a manager (human or machine) who creates a market buying and selling from the next level up. And then similarly at the city level and at the national level (where you have an additional role of generator of last resort

The managers will respond to signals = eg frequency at national level, voltage at local level

A fractal grid is something that spans from house to national level

Deep dive 2 – Heating in a high renewables world

Heat = 37% of global energy vs electricity = 21%. Peak heating demand = 2.5 times electricity in UK. Heating trend is in the wrong direction globally (more heat required as countries develop)

Possible solutions:

  1. Efficiency (ie insulation) is very significant estimated to account for 50 – 70% of solution – as new houses are built and old ones improved. (NB heat pumps are very good as efficiency >100%)
  2. Low carbon electricity. Problem of increase in peak demand increase in winter. (The capital cost of that additional generating capacity works out as £1500 to £3000 per household)
  • Inter seasonal storage. This would require a cost of c. $1 per kWh. This equates to a pile of coal – and not to any likely battery
  1. One possible solution is to use electricity to electrolyse water to make H2 (or methane or ammonia). Use excess electricity supply in summer and existing gas storage capacity. NB we made such a transition in 1960’s “town gas” was CO & H2

 

To overcome these challenges requires systemic change. There is a meta-challenge is to maintain a reliable system whilst making the necessary changes.

Other notes

Solar electricity costs now: c.10p kWh = in UK in large scale; 4p in eg Gulf.

Energy demand is going down. Down in developed world and in UK

Electrification of other systems (eg cars) is usually a benefit as a result of increased efficiency.

An electric vehicle (car) = c.30kWh. Battery degradation cost c. 3 c per kWh per cycle.

There won’t be a single price for electricity – it will vary by place and time in UK.

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Early Intervention – Graham Allen’s report for the government

You may have heard that this report was released yesterday. It advocates more money to teach parenting skills. The Guardian introduction gives a flavour:

A national campaign should be launched to educate people in the basic principles of parenting, a government-commissioned review concludes today. The initiative would be similar to a public health campaign and explain to parents the importance of the first three years of a child’s life in setting up emotional and academic foundations. The proposal comes from Graham Allen, the Labour MP who was asked to produce a report into early intervention for the government. He says he was struck by the number of his constituents who remarked that “babies don’t come with a handbook” and concludes that the government needs to do more to help. The article is here:  http://www.guardian.co.uk/lifeandstyle/2011/jan/19/parenting-skills-campaign-graham-allen.

The report is here: http://grahamallenmp.files.wordpress.com/2009/05/early-intervention-7th1.pdf.

He has a strong focus on demonstrating effectiveness of interventions  and investing in “proven” programmes. Annex B on p119 gives a good overview of how he determines levels of effectiveness.

The diagram of effective interventions on p69 is interesting. (This also mentions the MTFC programme).

Paragraph 31 on p71 advocates intervention on an “Incredible Years” basis for 3 year olds at a cost of £5,000 p.a. (He is very keen on the Incredible Years programme elements of which overlap with Balsam. It is an American programme that is described on p125. The US website is informative: http://www.incredibleyears.com/index.asp)

He is to write a second report looking at how some of the effective interventions could be financed by social bonds.

There is also an Interview with Graham Allen: http://www.guardian.co.uk/society/2011/jan/19/graham-allen-interview-early-intervention

 

Nick Clegg’s speech on behalf of the government welcoming the report is here: http://www.libdems.org.uk/latest_news_detail.aspx?title=Nick_Clegg%E2%80%99s_speech_at_launch_of_report_on_early_intervention&pPK=0906f05f-6df0-4b8a-b4f3-2691176e0472

 

 

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Poverty and Life Chances

Yesterday Frank Field published the independent review on Poverty and Life Chances that David Cameron commissioned him to provide. The Foundation Years: Preventing Poor Children Becoming Poor Adults is a great document and one that  I recommend. It may be controversial politically – because he argues that the solution to poverty is not for the state to spend more money, rather it is to focus resources on helping the most disadvantaged under 5’s in order to break the cycle of generational poverty. I agree with him based on my experiences of fostering and helping vulnerable families. I have extracted some highlights that really hit home to me below:

“We have found overwhelming evidence that children’s life chances are most heavily predicated on their development in the first five years of life. It is family background, parental education, good parenting and the opportunities for learning and development in those crucial years that together matter more to children than money, in determining whether their potential is realised in adult life.

But as this report argues, a modern definition of poverty must take into account those children whose parents remain disengaged from their responsibilities.

The things that matter most are a healthy pregnancy; good maternal mental health; secure bonding with the child; love and responsiveness of parents along with clear boundaries, as well as opportunities for a child’s cognitive, language and social and emotional development.”

4. The increased funding should be targeted at those factors we know matter most in the early years: high quality and consistent support for parents during pregnancy, and in the early years, support for better parenting; support for a good home learning environment; and, high quality childcare.  Children’s Centres should ensure all new parents are encouraged to take advantage of a parenting course.

24. This Review is about ensuring that the life chances of the very poorest children are enhanced. We suggest that a new measure of severe poverty should be developed. This will focus attention on prolonged material and financial deprivation and we recommend the Government begins to develop a strategy specifically to help the most disadvantaged children.
• Why should this be so? The Foundation Years argues that the exclusive concern of the adult world about how financial poverty affects children’s life chances has prevented a more comprehensive understanding of why life’s race is already determined for most poor children before they even begin their first day at school. The single purpose behind all of our recommendations is to break that cycle and prevent poor children from becoming poor adults.
I have increasingly come to view poverty as a much more subtle enemy than purely lack of money, and I have similarly become increasingly concerned about how the poverty that parents endure is all too often visited on their children to the degree that they continue to be poor as they enter adulthood.

[Tesco] staff reported on the changing pattern of stealing. Children were now far less inclined to steal sweets. Instead, the targets were sandwiches, to assuage their hunger, and clean underwear which they also lacked. Does anyone any longer believe that this modern face of neglect will be countered by simple increases in child tax credits?
 

Something more fundamental than the scarcity of money is adversely dominating the lives of these children.
Since 1969 I have witnessed a growing indifference from some parents to meeting the most basic needs of children, and particularly younger children, those who are least able to fend for themselves. I have also observed how the home life of a minority but, worryingly, a growing minority of children, fails to express an unconditional commitment to the successful nurturing of children.

Compare the current belief that parenting is taught by a process of osmosis with the care the State takes in educating parents who wish to adopt. Six major areas of study have to be undertaken and this is the training of adults who want to care for children13!

The report is also here: http://www.frankfield.com/files/download.php?m=documents&f=101203100838-TheFoundationYears.pdf

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