In order to phase out fossil fuels from the Finnish energy system and to secure the transition towards clean district heating and cooling systems, we need to solve the following challenges:
Profitability of clean energy investments
The recent IPCC report emphasized the need to reduce greenhouse gases as fast as possible to avoid the most severe impacts of climate change on ecosystems, human health and well-being. Whereas wind and solar power, energy storages, and heat pumps are becoming cheaper, the price of coal and emission allowances (eur/tCO2) have been increasing in the market. Despite these favorable market developments, it is important to further increase the carbon price in order to promote a faster transition to clean energy. The carbon price that would reflect the cost of climate change mitigation, is estimated to be 42-85 eur/tCO2 by 2030.
District heating market and partnership models
The recovery of excess heat, distributed energy solutions, and demand response automation require the integration of energy users and buildings into the district heating system. The current natural monopoly model of the district heating companies that manage both the production assets and distribution networks, is not supportive for handling multi-directional markets or attracting energy users to participate. There is a need for a system integrator who can run the district heating and cooling networks as a virtual power plant and establish attractive partnership models for clean heating and flexibility producers.
Electricity market model
Electricity market model 2.0 is needed to enable high shares of wind and solar power production. The current electricity market model is based on the marginal cost of the most expensive production method used in the power production in a certain hour. This highest marginal cost is then the price of all electricity sold in that hour. The challenge that needs to be solved in the long term, is how to enable market-based investments for capacity, when fuel costs are no more the scarcity factor in the market. Wind movements on the earth and solar radiation from the sun do not cost anything, so the only variable cost of wind and solar power plants is their maintenance cost under 10 euros/MWh. Demand response mechanisms also reduce the need for the most expensive production and thus reduce electricity prices eating up its own profitability to some equilibrium point. The mechanism is the same: the first implementation of demand response system has the best profitability when it replaces the most expensive production, but the second one is a bit less profitable since the price got already lower and so on.
The fewer hours the expensive condensing power is needed, the cheaper the electricity becomes for consumers, due to the low marginal cost and the mentioned market price setting principle. In the scenario, the annual average electricity price remains very low with the current price setting mechanism, as bio-CHP with relatively low marginal cost, becomes almost the only power production method based on combustion. The low marginal price of electricity does not cover the cost of investments in 100% fossil-fuel free scenario. The income from the power market, therefore, does not turn the needed clean capacity or demand response automation investments profitable. Thus, a new market model, in which the energy users pay for the clean capacity, in addition to low marginal cost, will be needed.
In order to complete a rapid transition towards a sustainable energy system, the number of wind farms as well heat pumps in both industrial sites and buildings need to considerably increase. Current experience with wind power development in Finland has shown that although citizens, in general, are supportive of wind energy, often they oppose the deployment of this technology in their neighborhood. This phenomenon is often referred to as NIMBY, which stands for “Not In My Back Yard” and it depends more on local factors, such as participation and decision-making procedures, than on general attitudes. Therefore, social acceptance of wind energy is a crucial challenge that needs to be addressed.
A large number of studies has demonstrated that providing incentives for local citizens to invest in wind projects as well as inviting them to participate in planning procedures, can strongly influence public acceptance. More specifically, research suggests a strong positive correlation between community ownership and acceptance of wind power projects. For instance, in a survey carried out in Sweden it was found that public support for wind farms grows when they are located away from recreational areas and they are fully or partly owned by local communities. In addition, the same study also revealed that consumers in Sweden would be willing to pay more for electricity generated by wind power schemes in which the local population was involved in the planning of the wind farms.
Community-based organizations such as cooperatives, village development associations or trusts have played an important role in the development of wind power projects in countries like Denmark, Scotland and Germany. In these countries, deliberate policies have ensured that local communities could directly benefit from wind power projects and, therefore, despite the high number of wind farms, there has been limited public opposition. Research has shown that community ownership can be a significant tool for local economic development and a greater opportunity for economic regeneration than benefit packages offered by project developers.
In Finland, wind power projects do have consultation processes but they are often controlled by the project developer and do not provide two-way communication. Moreover, although some wind power projects have offered monetary compensations to local communities, they can create further problems when it is not clear who will benefit from these compensations. Therefore, in Finland there is a need for promoting participation of local communities 1) in the decision-making process and situating of wind farms and 2) in the sharing of the benefits of wind energy through community ownership.
How can Finland gain more benefits from its cleantech sector?
Clean technologies and service-based solutions represent a huge business opportunity. New companies are emerging and also actors from the fossil industry are seeking ways to get involved in the clean energy business in various novel networks. The estimated volume of global investment in clean power generation capacity is 11 500 billion dollars between 2018 and 2050. Therefore, phasing out fossil fuels can also benefit the economy.
There is an enormous demand for clean heating and cooling solutions in the global energy markets. Therefore, the export potential of Finnish clean energy expertise is considerable and Finland should take better advantage of that by improving export programmes and international marketing strategies.
Figure: New business emerges from technology disruptions. Companies can profit from the ongoing energy disruption by actively participating in the development of the new market, technology and service solutions.
Samuli Rinne, Karoliina Auvinen, Francesco Reda, Salvatore Ruggiero and Armi Temmes. 2018. Discussion paper: Clean district heating – how can it work? (pdf). Publication of the Smart Energy Transition project funded by the Academy of Finland’s Strategic Research Council.