Can decentralized energy get good enough, fast enough?

The global transition from centralized grid networks to decentralized distributed energy systems is accelerating. From microgrids, small-scale renewables, and combined heat and power facilities, to distributed energy storage and controllable loads, a plethora of options is emerging.

The primary drivers of this transition are increasing pressure on markets to reach their decarbonization goals and a desire to strengthen energy security, particularly in the wake of the war in Ukraine. A favorable climate for DERs has also emerged, with the cost of technologies falling and regulatory support increasing, notably the tax benefits of the US Inflation Reduction Act and the European Commission’s REPowerEU plan.

DERs offer the potential for increased grid flexibility and have a key role to play in boosting energy resilience, allowing markets to adapt to changing conditions and to recover rapidly from disruptions. Excess electricity generated by self-sustaining distributed systems can be stored and used when centralized grids are hit by outages. This means DERs will be vital in helping counter the high number of grid failures caused by extreme weather in recent years.

Markets around the world are adopting a variety of measures to integrate more DERs, such as metering policies to support distributed solar power and favorable legislation for installing rooftop photovoltaics (PV).

There are challenges to be overcome, however: weather-proofing energy infrastructure to protect it against extreme hot and cold weather, for example, and ensuring there is enough capacity to accommodate the accelerating rollout of electric vehicles (EVs).

The intermittent nature of renewables will need to be balanced by more sophisticated energy storage or conventional power-generation capacity, and smart grids are likely to be at the heart of this changing energy landscape. Equipped with robust data flows, they offer improved reliability, efficiency and flexibility — from smart meters that allow consumers to monitor their electricity usage, to automation that can isolate local faults so they don’t shut down an entire network.

Governments around the world are accelerating their renewables programs to help reduce their reliance on imported energy, as geopolitical tensions and economic uncertainty continue to make this a volatile and unpredictable time.

Download the RECAI top 40 ranking (pdf) for details on technology-specific scores, and see the methodology for details on how ranking and scores are determined.

In this edition of RECAI, we highlight the most significant developments within 10 of the world’s top 40 markets.

Following an extended period of exponential growth, the volume of power generation committed through corporate power purchase agreements (PPAs) in 2022 is set to be less than 2021, although expected to be greater than 2020.

The market has shifted in favor of sellers, with high demand from corporates seeking to use PPAs as a long-term hedge against fluctuations in the wholesale power markets. However, uncertainty around government policy and rapidly changing cost profiles have left developers struggling to reach agreements on commercial terms.

PPAs are increasingly viewed as a valuable financial tool and a strong green credential by companies that have already gained RE100 status. The large gap between low long-term PPA prices and high short-term market prices gives corporates an early financial benefit, and developers a long-term monetary boost and flexibility, compared with a state subsidy in many markets.

While current market conditions have been a stumbling block for the execution of PPAs, the fundamentals remain strong for further global market expansion.

PPA Index

The EY corporate PPA Index uses key parameters from four pillars to analyze and rank the growth potential of a nation’s corporate PPA market. For details on data and methodology, download the EY corporate PPA Index (pdf). 

To compare the attractiveness of renewables markets, the RECAI uses various criteria that reflect the absolute size of the renewable investment opportunity. Hence, it naturally benefits large economies. By normalizing it with the gross domestic product (GDP), however, we see markets that are punching above their weight when it comes to renewables.

In this edition of RECAI, we look at the ambitious plans for energy transition in three of these smaller economies.

Morocco (Normalized ranking: 1, RECAI ranking: 19)

Morocco has ambitious targets to generate 52% of its energy from renewables by 2030 and 80% by 2050.² While it fell just short of its interim target in 2020, the market is now on track to meet its 2030 goal.

Boasting 3,000 hours of sunshine a year, Morocco is an ideal setting for solar power,³ while topographical features such as the Atlas Mountains offer pumped storage hydropower, allowing flexibility to be built into the power system. Policy support has also been strong, with the market reaching the lowest renewable prices in the world at less than three US cents per kilowatt-hour in the wind sector.

Looking to the future, Morocco is seeking to build a green hydrogen sector. It is counting on foreign direct investment through the Moroccan Agency for Sustainable Energy’s institutional framework to bring together permit processes, land acquisition and financing, and, potentially, provide a state guarantee for the investment.

Chile (Normalized ranking: 5, RECAI ranking: 17)

Blessed with tremendous potential for renewable energy generation4, Chile is striving to achieve carbon neutrality by 2050. By the end of 2020, it was generating more than half of its electricity from renewables, and it is on track to meet its target of 70% by 2030.⁵

Chile’s success to date can be partly attributed to its innovative auction process: Electricity providers can bid for contracts in four supply blocks — whole-year 24/7, quarterly, daylight, and nighttime. Nevertheless, challenges persist for the renewables sector, including getting power from where it is produced (in the north and south), to the metropolitan center around Santiago. The National Electricity Coordinator estimates US$3.2b will need to be spent on transmission projects by 2025.

Chile is taking on a considerable and multifaceted challenge, including phasing out its 28 coal-fired plants by 2040. Added to this, regulation of stand-alone storage systems to make up for the transmission deficit has taken longer than expected to be approved, and price allocation mechanisms will have to be resolved if the market is to resume investing.

Chile sees green hydrogen as a big part of its plan for carbon neutrality and wants to be the world’s top exporter of the fuel by 2050. The path toward this objective is set out in the National Green Hydrogen Strategy, but the mechanisms to implement such a strategy remain unclear. The ambition is good news for the world, however. Decarbonizing Chile’s mining industry would be a big step toward a global transition to a low-carbon economy.

Portugal (Normalized ranking: 8, RECAI ranking: 25)

Portugal has traditionally relied on hydro and wind power, but 2019 marked a change in direction for the market. After years of underinvestment in solar PVs, it allocated 2.3GW of new solar power capacity in its 2019, 2020 and 2021 solar auctions. The tenders set world records for the lowest solar tariff price.

In 2020, Portugal also took the unconventional approach of awarding eight of the 12 blocks put to auction to the storage option. As a result, it was one of the first markets to possess so-called large-scale hybrid projects with renewable generation plus storage.

Maintaining its innovative approach to renewables, Portugal’s 2021 auction allocated 263MW of floating PV at seven dams. On the current trajectory, boosted by 12GW of solar projects in the pipeline, the market is expected to reach 80% of its electricity production from green energy by 2030.

Ensuring the cybersecurity of energy infrastructure has been front of mind in recent years, following a spate of attacks, the most notable of which was a ransomware attack on the US’s largest fuel pipeline, the Colonial, in May 2021⁶. The energy sector’s transition toward decentralization and the implementation of smart grid technologies has only served to magnify the importance of exemplary cybersecurity.

Critical equipment – ranging from power plants and electricity grids to pipelines and cloud systems – is susceptible to cyber attack. Protecting it is only going to become more challenging as new technology relies increasingly on connectivity to the Internet of Things (IoT) and the industrial Internet of Things (IIoT).

Use of IoT devices, such as smart meters, increases the potential attack surface area, and additional problems are posed because many of these devices do not have full operating systems and are poorly configured, sometimes with hard-coded passwords. With these devices being typically inexpensive, they are often forgotten about, remaining connected, but not managed.

Monitoring is also a problem because of the hurdles involving log generation. The tendency for these devices to be similar in configuration and design also means they are exposed to accelerated lateral movement or attack vectors by threat actors. Thus, with many devices using the same hard-coded password, one successful attack means a tremendous number can be taken over within seconds.

Older equipment also creates issues, because many legacy operational technology systems are part of billion-dollar infrastructure investments and cannot be upgraded until another large, 20- to 40-year investment takes place. Short-term fixes also pose a risk of disrupting systems that are running around the clock.

Markets, including Australia and China, are taking regulatory action by establishing, revising or enhancing their cybersecurity regulations. The European Commission, meanwhile, has unveiled a proposal for an EU Cyber Resilience Act. If passed, it would require manufacturers of “products with digital elements” to meet minimum cybersecurity standards if they want their product to be available on the EU market.

With the nature of the cybersecurity landscape changing rapidly, threat actors are becoming increasingly sophisticated, so cooperation between and within markets could also play a crucial role in establishing more effective protection strategies.

Last year, for example, the US established the Office of the National Cyber Director⁷, which will broaden engagement and information sharing between the private sector and a number of federal agencies. The US has also strengthened bilateral cybersecurity cooperation with South Korea, which has more than 30 years’ experience in developing and implementing cyber resilience for its critical infrastructure.

Meanwhile, government units in the US, the UK, Australia and Canada issued a joint alert to companies earlier this year to increase their cybersecurity measures in the face of threats posed by actors that the partners believe are affiliated with the Iranian government’s Islamic Revolutionary Guard Corps.⁸

Protecting critical energy infrastructure from such threats is only going to become more challenging as increasing amounts of connected grid technologies come online and the sector continues to decentralize. Exemplary cybersecurity is of vital importance, therefore, if markets are to avoid potentially major disruptions to their energy supplies.