Sector Coupling

Energy is consumed in three sectors:  transportation, industry, and to heat and cool buildings. Connecting these three sectors will be crucial for the energy transition’s success. The term describing this is “sector coupling” (or “Sektorkopplung” in German).

For the past years, the focus of the Energiewende in Germany has been on the power sector alone. Little progress has been made with renewable heat and energy efficiency, and the transport sector. Fortunately, the problems with all three sectors can partly be addressed by connecting the power sector with the heat and transport sectors.

German policies for sector coupling

In 2017, German utility organization BDEW published its proposals for sector coupling. They include regional price zones in addition to the wholesale price for all of Germany and Austria (the Phelix zone) because bottlenecks on the grid usually occur locally, not nationwide – the single price zone therefore cannot signal that the grid is congested somewhere. The European Energy Exchange (EEX), which is where wholesale prices are set, does not send out any price signals for regional grid congestion. Rather, the wholesale price merely indicates what the next unit of electricity purchased will cost.

One obstacle for the future is the renewable energy surcharge. At around 6.9 cents per kWh in 2017, it can impact the profitability of sector coupling even if wholesale prices, which are currently closer to 3-4 cents, approach zero or dip into the negative. Obviously, firms using excess renewable power could be exempted from that surcharge for the excess amount used, but the surcharge is used to fund feed-in tariffs paid to the generators of green electricity. So if excess green power is not paid for via the surcharge, those generators either would not receive money for the excess or some other way of financing would need to be implemented.

Electrifying new sectors

Electrification is one example of sector coupling. For instance, solar and wind power are the two fastest growing sources of renewable energy worldwide. Eventually, a growing number of countries will begin to have excess amounts of this green electricity when the sun is shining and the wind is blowing. At that point, electricity will be inexpensive on wholesale markets, so it will increasingly be used to generate heat for use in buildings and industry. The German Energy Management Act now incentivizes sector coupling (power-to-heat) in combination with cogeneration units.

Next comes electric transportation. It already exists largely in form of trains and trams, but increasingly electric bicycles and electric cars will be on the roads. Worldwide the use of electric vehicles has spiked in the first half of 2018, with sales surpassing a million vehicles so far this year. As more citizens use electric vehicles, the need to coordinate charging with wholesale power prices will increase. For instance, power consumption in Germany generally peaks in the evening when people get home from work and start making supper or watching television. If these people also plug in their electric cars at that time, power demand will skyrocket at a time when the grid is already pushed to its limits.

Smart meters would be one way by which vehicles can charge overnight as power demand subsides. The EU states have set a goal of installing 200 million smart meters for electricity – about 72% of consumers should have one by 2020. Germany lags behind other countries like Denmark and France, who have set goals for a 100% and 95% smart meter roll-out rate respectively. If Germany does not move forward with smart metering, it will not be able to take full advantage of renewable energies, but the current government coalition has still not set a date for a smart meter launch.