Defining the static index of energy security in market environment

Svijest o dinamici tržišta energije presudna je za donositelje odluka i investitore pri formiranju informiranih mišljenja o tome kako uskladiti niz tehničkih, ekoloških, gospodarskih i društvenih čimbenika, a u cilju osiguranja najboljih rješenja uzimajući u obzir specifičnosti i zahtjeve okruženja. Cilj rada je odrediti metodologiju koja će, uzimajući u obzir paradigmu energetske sigurnosti, moći procijeniti stanje elektroenergetskog sektora i pomoći pri formiranju daljnjih putova razvoja. Kvaliteta elektroenergetskog sektora promatrana je s tri aspekta: ekonomičnost, pouzdanost i održivost. Svaki od aspekata predstavlja jednu od dimenzija indeksa i sastoji se od više promatranih parametara. Pomoću predložene metodologije moguće je odrediti trenutnu elektroenergetsku sigurnost za pojedini elektroenergetski sektor, a koristeći optimizacijski softver i predvidjeti utjecaj tržišnih kretanja na njegovu buduću izvedbu. Prava kombinacija politika i tehnologija mogla bi omogućiti gospodarski rast i u isto vrijeme pružati sigurnu i pristupačnu energiju u skladu s ciljevima zaštite okoliša. Oni koji uspješno predvide kretanja energetskog sektora mogu izvući značajnu prednost na tržištu, dok oni koji ne uspiju prepoznati važnost novih kretanja riskiraju odabir loše strategije i donošenje neuspješnih investicijskih odluka. U radu je prikazano istraživanje čiji je cilj pomoći razjasniti ključne aspekte iza implementacije uspješnih strategija i pojedinačnih projekata. Ključni znanstveni doprinos je identifikacija parametara elektroenergetske sigurnosti u tržišnim uvjetima i formiranje matematičkog i simulacijskog modela za računanje statičkog indeksa elektroenergetske sigurnosti u tržišnim uvjetima.Understanding the world in which we live in requires understanding the importance of energy. All that surrounds us is energy. Energy sector is the very backbone of each economy. It is the cost of energy that determines the competitiveness of a county’s industry while the amount of energy a person spends determines its standard of living. Facilitated by a sting of factors, the energy sector is experiencing fundamental changes. Instead of simply considering techno-economic issues, the emphasis is now put on four main problem areas: technology, economy, environment and geopolitics. Because of changes in principles of understanding development and a much stronger focus on environmental protection issues, technologically or economically optimal solutions are often not best suited for the preferred development of a sector as a whole. Multidisciplinary approach is becoming more and more important in tackling energy-related issues. Considering the fact that the energy sector is the world’s largest contributor to greenhouse gas emissions, it is also expected to make the biggest cuts regarding its reduction. Among other, this calls for implementing various low-carbon technologies in the electricity generating process. The biggest concern, globally, are forecasts of temperature increases that might, potentially, have a significant, negative influence on the quality of life. The quest upon which the energy sector embarked searches affordable, safe and sustainable solutions to energy related issues. In this thesis a practical approach to quantitatively measure and compare the quality of an energy sector is developed observing three different dimensions of energy security: cost, reliability and sustainability. The paper proposes a mathematical and optimisation model that is able to take into account a string of factors in line with EU energy policies and market trends. The model can be used for evaluating current status, but also future sector progress. Pursuing new solutions that take into account the reality and a wider set of interests of the community is a necessary step towards achieving an objective of choosing a generation portfolio best suited for the potentialities and the constraints of the surrounding environment. The presented analysis is based on a comprehensive database and includes several areas such as: technical data on all existing generating capacities, projects in pipeline, data on hourly demand, demand forecast, system technical constraints, historical hydro conditions, regulatory frameworks, development strategies and tendencies for each country, fuel prices and projections, etc. All data has been collected by the author and all key forecasts are conducted by the author. Conducted research reveals current performance and future medium-term market trends of every country of the South East Europe (SEE) region, as well as the performance and future trends of the SEE region as a whole. Additionally, it raises important questions regarding key issues of the considered energy sectors and offers guidelines for a more successful implementation of new energy policies. Although the work presented focuses more on the production side, it should be pointed out that the trend of change is not tied to generation, but also the other end of the energy equation – consumers. New solutions seek to improve energy efficiency, reusing waste and conserving local resources. The fresh look on the energy sector paired with strong support for applying the ideas of sustainability in practice, creates a new energy paradigm that will change the face of the energy sector in the years ahead. As in most cases, it is the developed countries that exhibit the greatest demand for implementing new strategies and solutions. In this context, the importance of optimal portfolio selection is crucial to further development. The presented application of the Energy Security Index (ESI) is aimed at evaluating two issues regarding the energy sector of South East Europe (SEE). Firstly, it is to determine current status of energy security in the region, and, secondly, to evaluate further progress in the forthcoming period, mainly, up to the year 2020. Forming relevant valuation of the energy sector requires taking into account a considerable amount of data. As electricity systems are interconnected, it is also of vital importance to be able to consider the entire surrounding area of the sector in question. In addition, an array of external influences needs to be considered in the context of a specific, time-dependant demand. To address these issues, an optimisation software is used to gain data necessary for further analyses. Optimisation problem is solved applying Kuhn-Tucker conditions. Energy security, today, is a determinant factor in forming energy policies and development strategies regarding energy sectors across the globe. EU has earmarked energy security as one of the backbones of the energy sector defining its key elements as affordability, efficiency and sustainability and security of supply. Vulnerabilities of the energy sector are essentially a result of its risk exposure and its ability to resist external shocks (robustness). Most studies recognise short-term and long-term disorders, but newer studies, additionally, differentiate between sources of risk. It should be noted that present indices measuring energy security are aimed to evaluate current status, not the future development of an energy sector. The key of the energy security analysis presented in this paper is to determine an aggregated index able to take into account a vast amount of data, break it down to a number of key indicators and present them in the simplest way possible in order to evaluate two key issues: current status and future progress of the selected energy market. Although it might be assumed that the process of parameter selection is simple, it should be noted that it is a very complex issue. One of the key aspects of the methodology presented is the fact that it can help determine not only the present state, but also the future status of an energy sector. It can, therefore, be used to evaluate trends and development strategies using a starting point as a benchmark in further analysis. The methodology consists of data gathering, optimisation process conducted via market simulator and further market analysis. Energy security index (ESI) consists of three dimensions of energy security: cost, reliability and sustainability. In the presented analysis, all three dimensions have equal weights. Cost dimension consists of the three main components: price on the electricity market, incentives and balancing costs. Price on the electricity market consists of domestic production and foreign acquisitions. Cost of subsidizing renewables is either collected from the market operator or calculated by analysing installed capacities being subsidised and comparing their productions with the tariffs in place. Reliability is, in this thesis, interpreted as the ability of the system to rely on its domestic production. Therefore, it was observed through the scope of import dependence and might be considered a self-reliance issue. Import shares are often used when assessing security of supply (SOS). Under optimal energy market operation, it might be argued that import dependence is less relevant to SOS. However, having a more regionalised world where trade barriers and a paradigm of competition prevail over cooperation, import shares prove to be both a straightforward and insightful indicator in assessing SOS. Net import of primary fuel and electricity are both taken into account. The import of electricity is pretty straightforward to calculate, but the import of fossil fuels is somewhat more complicated to take into account. The model used calculates the amount of electricity produced by imported fuels. This is achieved by taking into account the volumes of oil, gas and coal that the generation units imported during the course of the year. By comparing the amount of production to the share of imported fuel, the production achieved by foreign primary sources can be calculated. With regards to climate change and the use of non-renewable energy sources, the most adequate way to consider the long-term sustainability of electricity generation is to take two basic issues into consideration. First, the specific CO2 emissions and second, the amount of fossil fuel energy used in the production process. Electricity sector's efforts to switch from carbon intensive fuel portfolios might also be considered an indicator for social acceptability. Out of numerous results gained, final key conclusions of the energy security analysis are revealed as follows: 1. Kosovo, Serbia, Bosnia and Herzegovina and Macedonia all have electricity sectors misaligned with market trends. Despite the relative success they presently might be able to achieve, their generation portfolios are old and unsustainable looking at the long term. It seems it is only a question of time when these sectors begin experiencing noticeable problems. 2. Hungary, Albania, Macedonia and Croatia do not have satisfactory indicators regarding reliability. Hungary needs to be additionally pointed out as a country with far the highest import of electricity by share in overall demand as well as volume. 3. Romania, Bulgaria and Croatia have the highest costs of electricity. Most of the responsibility falls on their renewable energy sectors which are paid considerable amounts of incentives and, additionally, require higher balancing costs. Romania and Bulgaria are faced with considerable problems in fulfilling commitments towards the renewable energy sector and are even starting to enforce retroactive laws in an effort to stabilise the energy sector. Looking at current status and future projects, Croatia may well face similar issues in the near future. As things stand, the burden will have to be carried out by end consumers. Raised tariffs for green energy will only be the first step. Additionally, results of the energy security analysis for 2020 are compared to the results calculated for 2017. This is done for an easier overview of trends and achieved progress. Results show that market contraction is less likely, even considering relatively optimistic assumptions on the progress to be achieved by the renewable sector. Romania and Bulgaria will cut their incentives, while in other countries costs for incentivising renewable energy are expected to incentivise stable growth of the renewable energy sector. Overall consumption is estimated to be only 1.8% higher following predictions on slower growth. Market value will rise by 6.2% and equal approximately 6.4 billion €, partially due to growing demand and partially fuelled by higher prices of electricity, which are expected to go 5.8% up. Lower costs in Romania and Bulgaria will be compensated by other countries, so, overall, renewable energy costs will be approximately equal in 2020 as they were in 2017, just less than 2.2 billion €. At the same time, renewable energy production will rise by 21.1%. This will, in turn, raise balancing costs by about a 100 M€ (18.2%) to over 600 M€. Overall, producing electricity and system balancing is estimated to cost 5.3% more than in 2017, at just less than 9.2 billion €. Finally, the indices of the two referent scenarios (regarding years 2017 and 2020) are compared in order to determine country specific trends. Albania, Bulgaria, Croatia, Hungary and Slovenia will all achieve an increase in their indices corresponding to lower energy security, while other countries will be able to record positive shifts. The most significant improvement is achieved by Kosovo, while the biggest declines are recorded for Croatia and Hungary. Croatia will face difficulties because of higher costs which will rise due to incentives for renewables while not adequately dealing with import issues. Hungary will have difficulties related to the relatively inert development of its generation portfolio. It is estimated that the development of new capacities will not be able to meet the growth of demand. Hungary will certainly remain the biggest importer and it potentially risks having an even bigger energy deficit. Despite the relative improvement, Kosovo is far the worst performer, having an unsustainable energy sector for the long term. It is important to refresh the fact that market electricity prices are expected to grow by 5.8%. This, somewhat external factor, will raise costs and consequently lower energy security. Times when low costs were the most important determinant of energy sector’s quality have long passed and although affordable energy has always been one of the main drivers of economic growth, it is no longer the dominant factor when assessing optimal development strategies. Huge number of participants, countless variable parameters, external factors hard to predict, risks difficult to quantify – there is a string of reasons which make energy security analyses extremely complex and the choice of optimal course of development uncertain. What does seem certain is that renewable energy sources like biomass, hydro and wind should play a crucial role in encouraging the development of domestic industry, reducing the carbon footprint, achieving a reliable and diversified supply of energy and securing an affordable and sustainable source of electricity. In recent times, a number of researches have been conducted to address the issue of incorporating biomass, cogeneration, small hydro and various distributed sources in a completely sustainable energy system. However, it seems research on impact of renewables on energy security matters still does not receive the attention it deserves, as a number of existing planning models underestimate their true benefits. It is generally considered that diversification of RES can reduce their short-term variability and long-term technological exposure. Achieving sustainability without lowering reliability or increasing costs will be an arduous task. This is why careful planning and detailed strategies are essential for successful development. Huge number of parameters that need to be taken into account raise the importance of various optimisation software as tools in evaluating key aspects of the energy sector. Although the share of renewable energy continuously rises in most industrialised countries enabling a sustainable and environmentally acceptable source of electricity, it also raises costs and carries a potential to create significant problems in managing electric systems while balancing supply and demand. Renewables need incentives because of high investment costs as RES are still a capital intensive industry. However, after investment costs are paid off, their production costs are considerably low and this is where they draw one of their advantages. As shown by this paper, cost of electricity on the production side is made of three elements: electricity market price, incentives and balancing costs. Implementation of renewables inevitably raises cost of incentives and balancing, but also somewhat lowers electricity market prices. Overall, however, renewable energy currently brings higher costs. In SEE, Romania and Bulgaria were the frontrunners of renewable energy implementation, but without creating proper conditions to support the surge of renewables, they now face significant financial difficulties. Additionally, a number of renewable energy sources require increased efforts in overcoming balancing challenges. Balancing issues do not include biogas, biomass, reservoir-hydro or geothermal power plants, but do involve units that use wind and solar energy. Wind, solar, wave and tidal energy are, as a group, also known as variable renewable energy (VRE) technologies. The fluctuation of their production currently does not present an issue for the reliability of the SEE electricity sector, but the general consensus is that an increased volume of variable production might, over time, cause noticeable problems during day-to-day operation. The issue should be timely addressed carefully considering are the technical capabilities of the system able to support planned renewable capacity additions. In this light, conventional power plants, especially natural gas fuelled, might prove crucial in providing reliability to the system in this transitional phase of the energy sector development. However, gas based electricity generation is, at present, not market competitive in Europe. If the situation is to improve, either market trends will need to change or incentives for these types of power plants will need to be established. Gas fired power plants significantly reduce the occurrence of disrupting imbalances during system operation and, therefore, provide increased reliability for the system. Having lower CO2 emissions than the opposed coal fired units, gas power plants might play a significant role in balancing wind energy in SEE, especially when considering current status of carbon capture and storage technology (CSS) which is still far from being feasible in a commercial sense. It seems safe to deduct that a shift towards a 100% sustainable system will be an enduring process that will need significant resources and innovation and will, additionally, take time to successfully complete. Developed countries are moving towards renewable energy and sustainable growth and, sooner or later, this policy will prevail across the globe. For SEE it is only a question of how to implement new solutions without endangering domestic economies, not whether to go along the path of sustainable development on the first place. At present, it seems there is only one way to go. The question now is how to construct a framework capable of limiting disadvantages of renewables while, at the same time, use their potential to fuel economic growth. As renewable projects flourish across the countries of the region, the importance of understanding the elements they include is crucial in providing the framework capable of fostering their growth. Energy Security Index presented is used to evaluate the quality of energy sectors across the region of South East Europe. Additionally, progress of each country towards meeting its objective of having an affordable, reliable and sustainable energy system is evaluated. Altogether, the energy sector of SEE will, as a whole, achieve a positive improvement only regarding its sustainability. On the other hand, costs will rise and reliability might significantly decrease as needs for imported electricity grow. Based on current prospects, renewable energy will cover approximately 9% of the electricity demand in SEE by 2020. Comparing performance in 2017 and 2020 will result in concluding that costs of subsidising renewables will remain similar despite the 1-percentile increase in covering overall demand, that balancing costs might increase for over 90 M€ and that CO2 emissions should be 7.7% lower. Looking at the medium-term future, there are two big concerns: the lack of domestic share in new capacity additions and the lack of strategy regarding further sector development. There is a strong need to consolidate existing capacities (financial, technological, R&D etc.) on a country or regional level and form a coherent cluster able to respond to the new energy market paradigm and provide sustainable development in the region. Otherwise, SEE will experience significant cash flows leaving the region as electricity and technology imports become more and more a way of life