What’s the hold-up? On the Ins and Outs of Grid Congestion
The success of the Energy Transition's last decade is now imposing limitations - what are they and how can they be overcome?
This article covers grid congestion and the risk it poses to the energy transition and the economy at large. Despite my best effort to stay on topic, it has proven difficult to encompass the full breadth of the issue without digressing here and there. If things got too confusing, please reach out.
Grid Congestion; a stumbling block for the Energy Transition
From companies queuing up to connect to the electricity grid, to delays in housing construction to litigation against grid operators - for a taste of what grid congestion has to offer, one need not travel further than the Netherlands. This densely populated country with its energy intensive industry and service sectors is seeing years of kicking the energy transition can down the road coming home to roost, as spectacular price dynamics have caused mass proliferation of both generation- as well as consumption of electricity, specifically renewable electricity. Let’s take a closer look at the Dutch predicament and see if we can draw from it lessons applicable to a broader framework.
Everything you always wanted to know about energy grids
The Dutch core energy infrastructure is roughly made up of two main components: an electricity grid and a natural gas grid. As ballpark figures; the electricity grid has a capacity of about 30GW, comparatively the natural gas grid ‘s capacity is about 10 times that – 300GW. By capacity we mean the maximum amount of energy that can be transported over the network at any one point in time. It’s the electricity grid that we are interested in for the purpose of this article, but its important to take note of the gas grid.
Why? Well, if you hadn’t noticed: The Gas Grid is pretty big. This is due to the Netherland’s historical status as a market place and an exporter of natural gas, the so called ‘gas roundabout’ of North-western Europe, as well as having the highest degree of connectedness in all of the EU – about 80% of households and businesses are connected to the gas grid. An important fact to consider given the country’s ambition to completely decarbonize the energy system by 2050 means moving away from natural gas completely.
The Dutch Electricity Grid can be subdivided into a central grid and its connected local grid. We call these a Transmission System and a Distribution System. Rather like main arteries and veins in our bodies. Why? The Transmission System is designed to efficiently move large amounts of power over long distances with few offtakers. Conversely the distribution systems are meant to move smaller amounts of power over smaller distances with a large amount of offtakers. These systems are managed by their respective Operators, the TSO and DSO. Some countries make things more complicated by adding a Nodal System (and thus a DNO) but this doesn’t apply to the Dutch context – and it’ll save quite us a bit of complexity for the purposes of me writing and you reading this article.
The grid serves to connect producers and consumer of electricity to one another. Continuously, the electrical grid performs a rather impressive feat. Whereas the Gas Grid is pretty flexible; in cases of oversupply or overdemand, most people won’t notice a little more or a little less pressure in the pipes, the Electricity Grid is not. The consumption of electricity must always be equal to the production. Too much or too little electricity can damage electrical equipment or even cause a power outage. This means balancing supply and demand. It also means having sufficient room on the grid to transport supply to demand.
Dutch Electricity Grid System Operators are owned by shareholders almost entirely comprised of local and regional governments. Their chief incentive is grid availability – guaranteeing an extremely reliable grid is vital to the Dutch economy. To illustrate; in 2021 the total cumulative down time on the Dutch grid was 20 minutes – this translates to 99.99% availability. That’s great news if you are a business or a household in the Netherlands.
This availability is partially achieved through immaculate balancing of supply and demand and having some back-up capacity at hand for any unforeseen fluctuations. It is also achieved through having a large redundancy in the grid. The latter determining technical availability of the grid, the former having not yet ever affected un-availability. That means that the grid’s capacity far exceeds the maximum usage of the grid at any one point in time. For the Netherlands, with its 30GW grid, the maximum usage at any moment in time is roughly 15GW. In other words; the grid is twice as big as what is currently required of it.
The grid: ‘An unrestrained demon’ - anti electricity propaganda from 1889
Oh, one more thing about the grid: It’s pretty dumb. The actual amounts of electricity getting transported at a specific point in time over a specific cable are rarely known. Because of this, to estimate how much grid capacity is needed for any given location, grid operators work with a concept which I have liberally translated to mean ‘Simultaneousness’. That means they estimate simultaneous usage of the grid. Fortunately, more and more metering is done on the grid in an effort to transform it into a ‘smart grid’.
Congratulations for making it this far. Let’s get into Grid Congestion
Grid congestion occurs when, in a given area, the theoretical amount of electricity, whether produced or consumed, or rather the sum of both, exceeds the available grid capacity. Theoretical? Yes, as per the concept of simultaneousness, for the TSO’s and DSO’s it doesn’t matter whether this actually occurs – for them it’s a matter of adding all producers and consumers up, applying a measure of simultaneousness and determining whether a specific part of the grid is capable of servicing demand. If not; then one or both of two things happen:
In this specific location, grid operators determine that no one can connect to the grid until it has been upgraded.
Grid operators will oblige connected parties to curtail their grid usage – usually for production but increasingly also for consumption.
In doing so, grid operators are acting in accordance with their central directive: to make sure the electricity grid is up and running. They are additionally bound by strict regulation for in-depth and long-term investments and so they cannot frivolously upgrade the grid left and right. Moreover, they have a hard time predicting and coordinating exactly where supply and/or demand are set to increase. That’s all rather unfortunate, as grid operators are obliged by law to connect those seeking grid capacity within 18 weeks of their making a request. An obligation they’re increasingly unable to deliver on.
What does this have to do with the Energy Transition?
For the longest time, the transition to a low carbon economy was motivated by climate change. While that still holds true, for the EU and its member states the 2022 invasion of Ukraine and the subsequent boycotts and destruction the natural gas infrastructure painfully drove home the problem of energy dependency on unaligned foreign regimes. A new strategic independence agenda was born. Flanked by structurally high gas, coal and oil prices, a powerful incentive to move away from fossil fuels and into renewables became reality - If not for climate change, then to prevent economic disaster.
The Energy Transition can be subdivided in three major themes: the Electricity transition, the heat transition and the mobility transition. In other words: how do we decarbonize the way we produce and consume electricity, the way use heat and cold for our buildings as well as industrial processes and last but not least the way we move our goods and ourselves from A to B? Oh, and of course how to do more with less. Four major themes then.
For the Electricity Transition, the central challenge is increasing the amount of renewable electricity in the total mix to eventually be 100%. That means no more fossil fuels. For heat and mobility, there are multiple solutions for decarbonizing consumption and production, with Electrification currently constituting the most important one. That means taking something that’s currently not done with electricity and turning it into something that is done with electricity. Like for instance trading in an internal combustion engine car for an electric vehicle or substituting a gas boiler for an electrical boiler to generate steam for your industrial processes. This increases demand for electricity. By a lot.
I get it; more electricity means we need to expand the grid!
The energy transition also means a transition in the way we organize our energy system from a supply and demand point of view. In the world we are leaving behind us things were centrally organized; coal- and nuclear power plants produced all required electricity and natural gas-powered plants provided whatever was additionally required on short notice. the challenge for grid operators was then to anticipate within a sufficient timeframe what new demand was required where. It was comfortable and predictable, like mealtimes when you were still living with your parents – but the time has come to move out and stand on our own two feet.
The energy system towards which we are moving is dramatically different from our centrally organized and predictable state of being. On the supply side every rooftop could produce solar energy and every suitable plot of land could house solar panels or wind turbines. Similarly, increasingly so, demand side is not anymore merely about planning new housing and business/industrial developments. Increased use of heat pumps, development of an EV charging grid and other forms of electrification introduce increased demand with different timing dynamics and less predictability with regard to their spatial planning. Added are new technologies which can consume as well as produce, like electric vehicles with bidirectional charging or battery energy storage systems. Taken together these changes increase the amount of requested grid connections as well as adding complexity in predicting and planning where the grid needs to be expanded and to what degree.
Another marked change is found in the nature of supply and demand. Most noticeable is the supply of renewable electricity – wind and solar only work if there is some measure of wind and sun available. We call these sources ‘Intermittent’ – occurring at irregular intervals. Over the past decade, the amount of Dutch wind generation has steadily increased. The amount of solar generation, however, has absolutely exploded – going from roughly 0 to 19GW in a decade’s time and still rising. To drive the point home: when the sun is out in full force, more solar electricity is produced than the Dutch know what to do with – leading to negative prices. That’s good news. It also means that every significant ray of sunshine that hits the country between, say, the hours of 11AM and 3PM, spikes the amount of electricity the grid must handle. On this topic – it is increasingly evident the country needs much more wind and perhaps a bit less solar development, but that’s for another day.
Summarily, the energy transition imposes problems on the grid as we now have it: increased demand for connections by both suppliers and consumers, intermittent supply, less predictability of when and where the grid must be expanded and when and where demand and supply increase. And all this in the context of System Operators that are incentivized for a stable, reliable grid – not necessarily for facilitating the Energy Transition.
That’s a lot of complications, what are the consequences?
As demand for grid connections and capacity increases, in a more intermittent and less predictable environment, System Operators have struggled to keep up. This led first to delays and later to announcements of full-stops to any new connections in certain areas of the country. As such, a crucial enabler of the energy transition and indeed economic development has, perhaps inadvertently, thrown a wrench in the works. Several consequences of this mishap:
As grid connections become scarce goods, their value has gone up. Those developers in possession of a grid connection agreement for whatever development they were eyeing, now find themselves the lucky owner of a much sought-after good. Conversely, those seeking a grid connection are put on a waiting list or worse. This has led to litigation against the System Operators, forcing them to adhere to their legal timelines (and pushing those who do not litigate down the waiting list). Its also led to phantom requests whereby companies submit grid connection applications just because you never know when you might get connected – a situation reminiscent of the centrally planned economies of Eastern Europe under Communist rule.
the Dutch Competition Regulator ACM has therefore launched a grid congestion program, whereby those endeavours deemed crucial to the Dutch State and Economy are given right of way for their grid connection requests. Additionally, System Operators have started a congestion management measures whereby they are allowed to vary the size of the connection based on what the grid can handle. Grid connected producers and consumers could thus be limited in what they can use their connection for, based on market circumstances – thus adding risk to their businesses as it diminishes the certainty with which electricity can be delivered or used.
There are a whole host of secondary problems caused by grid congestion. It’s become a factor in the nation’s housing crisis, preventing new houses from being built or causing vacancy in newly constructed houses and thus reinforcing market scarcity. It’s prevented companies from setting up shop or forced them to lower production thus impacting their revenues and impacting the job market. It’s put a strain on skilled labor, increasing competition for experienced and properly schooled personnel.
In short: grid congestion bad. No grid congestion good.
The Netherlands Grid Congestion map: Orange but not in a good way.
This is bad, isn’t electrification one of the core enablers of a successful energy transition? How do we solve this?
Given that the grid’s Operators are understaffed, overworked and misincentivized (this should be a word), are there perhaps other ways for solving the congestion problem? Or better yet: solutions that work alongside the Grid Operators? This is where things get interesting and where opportunities for impact investing are found.
Battery Energy Storage Systems, which we shall refer to as ‘Batteries’, have the most immediate and probably also the largest impact on the issue of grid congestion. They do so in a number of ways. Firstly, the issue of grid congestion and increasing intermittent supply has led to System Operators opening up new markets; markets where demand for grid stabilization and grid capacity are sought. Batteries operate on these markets, thus providing System Operators with such services. The main problem with electricity storage is as follows: you can efficiently store electricity for short periods of time or inefficiently store it for long periods of time. Most Batteries operate on a 2 to 8 hours timeframe. This means that their services are only good on the short term – for instance shaving the peak in solar electricity production around noon and moving this electricity to be available during early evening hours. An entire article could be (and many have been) written on the use and usage of batteries, but for now it suffices to say that as Battery capacity increases, the grid’s robustness and capacity grows.
Another interesting application for Batteries is their deployment ‘behind the meter’. Imagine a business seeking a grid connection of a sizable scale. The System Operator kindly informs them that their earliest date of connection is in 6 years from now (this is not uncommon). A smaller connection could be obtained, but that is not what is needed. Here, Batteries can provide solutions by sitting between a smaller grid connection and the business. The battery slowly charges itself during periods of low demand/cheaper pricing and can deliver what is needed during business hours. Such a solution can more efficiently use whatever connection is available and help forego the need for a new or heavier grid connection. This also works on the supply side of things, where co-siting a Battery with a generating asset such as a wind farm or a solar park can help them shift their production to better match the demand profile and optimize earnings while doing so.
For some business parks, the number of occupants wishing to invest in the Energy Transition have piled up. Logistical operators seeking to electrify their fleet, process heat to be sourced without gas, and so on. So much so that in some instances, companies have come together to see if they can align and arrange their energy needs together. By investing in a so-called Closed Distribution System – a sort of private grid that connects various parties – companies can cooperate locally on their energy needs. For instance, when one party wishes to electrify their cooling installation and another wishes to invest in a rooftop solar panel installation, through a Closed Distribution System, possibly with the addition of Batteries, they can align their production and consumption profiles and forego the need for a new or better grid connection. So too, space can be created for new businesses by sharing existing connections and optimizing for their usage. The first of these so called Energy Hubs are currently under development.
Can’t we just change our behavior to influence supply and demand for electricity?
A number of behavioral stimuli exist. We’ll discuss a few of these, though more exist, and discern between market-based and policy-based solutions.
Let’s start with a more market friendly version of the so-called non-firm or curtailed grid connection agreement. For the Netherlands this is the so-called ‘GOPACS’ framework wherein the Operators offer fees to producers or consumers to temporarily lower their supply or demand.
In terms of policy, ‘Net Metering’ is a hot topic for the Netherlands. A net metering policy means that consumer households are able to net their electricity production and consumption over a given year. Their energy provider takes care of this. This makes for a great stimulus to purchase solar panels, as the electricity produced - so long as it matches consumption - is ‘sold’ at an equal price. Virtually, of course, as it is the household’s Utility who is then tasked with actually selling the electricity produced. As more solar panels are added, more solar energy gets produced simultaneously, leading to less space on the grid, and negative prices, thus deteriorating Utilities’ business models. Net metering treats the electricity grid as a massive battery, when it is in fact quite the opposite needing instantaneous matching of supply and demand without any leeway or buffers in place. Proponents of net metering argue it is not for individual households to solve these issues. Opponents argue that net metering policy delays a host of innovations, such as home batteries, smart appliances, local grid solutions, better algorithms and alike. The net metering policy is now set to be abolished in 2027- much to the surprise and demise of its proponents.
A market solution is found in so called ‘dynamic energy contracts’. Rather than fixing household’s energy prices for one or more years, dynamic contracts follow the market, which operates on a quarterly basis. This incentivizes consumers to use energy when prices are low or even negative – when renewable energy is produced in abundance – and avoid moments when prices are higher. The point here is to not only reward using electricity when it is available, but also to balance out the grid by shifting demand patterns, thus making optimal use of the available capacity.
On a side note: the Netherlands are quite flat. The country has no hydro dams and no proximity to countries that do have such installations. As it winds down its fossil fuel power generation assets, it is unlikely that Utilities are able to offer multi-year contracts at affordable prices (how would they hedge their purchase?). This means that the market for smart energy usage solutions, both for household consumers as well as businesses, might well be set for growth.
Great news, take me to the summary!
Grid congestion is a complex issue that obstructs the transition to an independent, low carbon, energy economy. As the operators of the electricity grid steadily grind away by putting more cables in the ground, a number of interesting technologies and business models seek to create value by solving many of the issues presented by grid congestion in a myriad of ways. This perhaps best illustrates that the Energy Transition is not just an issue of technology or policy, but rather the transition from a centrally coordinated, predictable system, to a decentral, less predictable system. However, this decline in predictability gives rise to new markets and services where value can be found. Conversely, predictability could still be sought, but what at what premium and are consumers willing to pay such premiums? Volatility creates opportunities for value creation. As intermittent generation capacity is added and demand increases, new markets are created and investment flows to innovation. The companies that develop the solutions to mitigate the hurdle of grid congestion will take the Energy Transition where it needs to go.