Market Insights

Renewable Energy Generation Could Impact Energy Sector Death Spiral

May 19, 2023 by Claire Turvill

As more consumers switch to renewable energy generation, researchers from Japan are considering the effects on the financial stability of electric transmission and distribution.

The shift toward renewable energy systems has resulted in a rise in the number of “prosumers” in the energy market. Prosumers are electricity customers capable of producing their own electricity with a renewable energy source such as windmills, solar panels, or other technologies. 


transmission and distribution

With increasing renewable energy adoption, traditional electricity transmission and distribution could become financially unsustainable. Image used courtesy of Pixabay

 

While the growing number of prosumers is a positive sign for the resilience of the energy sector, there is a concern that it could also contribute to a “death spiral.” 

 

Fewer Customers, Higher Costs

The energy sector death spiral is a cycle where traditional electricity transmission and distribution becomes financially unsustainable due to the increased adoption of renewable energy sources by consumers. 

As more prosumers enter the market, they require less electricity from traditional utility companies. This demand reduction can lead to higher prices for the remaining customers as bulk energy producers try to recover the costs of building and maintaining infrastructure. The increase in transmission charges ‒ fees for electricity transmission ‒ can encourage more customers to switch to self-generation, which will further reduce demand and affect utility companies, thus: death spiral.

However, a research team from the Tokyo University of Science in Japan has recently published a study in Applied Energy that shows transmission charges do not always increase as the number of prosumers increases. 

 

Impact of Going Off-grid

Professor Ryuta Takashima of Tokyo University of Science, along with contributions from Professor Yihsu Chen from the University of California Santa Cruz as Professor Makoto Tanaka from the National Graduate Institute for Policy Studies in Japan, has investigated the impact of prosumers on transmission charges and the energy market. 


Wind turbines

Wind turbines. Image used courtesy of Pixabay
 

In the study, the team utilized the linear complementarity model of the Nash-Cournot competition established by Benjamin F. Hobbs to simulate bilateral markets. The model was extended to incorporate the energy transition network and the optimization of multiple entities in the electricity market, including consumers, prosumers, producers, and independent system operators. Professor Takashima clarified that the study considered the prosumer’s energy production and consumption preferences under perfect and imperfect competition scenarios.

The team also used the PATH complementarity solver for the market equilibrium problem, using the Karush-Kuhn-Tucker conditions and optimization.

These models allowed the research team to find that contrary to popular belief, the transmission charge does not consistently rise with increased prosumers. Instead, prosumer generation can mimic consumer-like behavior when generating a smaller amount of electricity, e.g., 500 MWh or less, which reduces the transmission charge. However, when prosumers generate a significant amount of renewable energy, e.g., 2000 MWh or more, the transmission charge will increase as the death spiral predicts.

The researchers also found that the presence of strategic prosumers who reduce their bulk electricity market consumption in imperfect competition scenarios can heighten the risk of death spirals. 

In economics, an imperfect competition scenario refers to a market where one or more conditions are required for perfect competition ‒ many buyers and sellers, easy market entry and exit, and perfect information ‒ are not present. This can lead to market power, where one or more firms can influence the price and quantity of goods or services.

In the context of the energy sector, imperfect competition scenarios may arise when there are a limited number of energy suppliers or prosumers or when there are barriers to entry for new market participants. This can result in a situation where strategic behavior by some market players can impact the overall market conditions, potentially leading to outcomes that are not in the best interest of consumers or the energy system as a whole.

Thus, as a rise in prosumers can reduce grid demand and affect the profitability of utility providers, the research team proposed implementing a per-MWh tax on prosumers’ electricity consumption from the bulk market to help mitigate the risk of death spirals.

 

Reducing Death Spirals

The tax would help ensure that prosumers continue to support the existing grid infrastructure. However, with the arguably inevitable shift towards renewable energy sources, utility providers can reassess their investments in electricity generation and transmission infrastructure to scale down for the future and move investments toward renewable sources.

The findings presented in this research provide a foundation to further discuss the impacts of a large-scale switch to renewable energy generation on the energy sector as a whole.

 

Featured image used courtesy of Pixabay