The ‘f’ word that’s critical to ensuring a successful global energy transition

You might not be aware but there’s a new ‘f’ word being floated in the energy industry. Ok, maybe it’s not that new, but it is becoming increasingly important as the world transitions to a low emissions energy system.  

(While those of us in who have worked in the energy sector for some time might have used a certain ‘f’ word at times to describe the challenges of navigating the energy transition, rest assured I’m not referring to that one).  

I’m talking about flexibility. 

The concept of flexibility came up time and time again at the recent International Electricity Summit held in in Sendai, Japan where the Australian Energy Council formed part of an Australian delegation with Energy Networks Australia, alongside Japan, the US, Canada and Europe to share insights and experiences in navigating the global energy transition.  

There were many energy transition opportunities and challenges discussed, and flexibility was a central theme of many of the topics covered.  

To illustrate this proposition, I want to focus on the important role that flexibility will play in three key energy transition areas that were widely debated at the Summit: data centres (as a proxy for demand growth), decarbonisation, and resilience.  

Data centres: can they flex?  

For the purposes of this article, we can consider data centres as an excellent way to demonstrate the challenges of forecasting future energy demand and how much additional energy infrastructure might be required to service it. Significant shifts in electricity demand often present material cost challenges, stretching the bounds of affordability and reliability.  

Rapid increases in energy demand places pressures on existing energy infrastructure and often requires a step change in investment in new assets (i.e. more capital costs), whereas decreases in demand can result in low asset utilisation and less electrons to spread fixed costs (i.e. more ongoing costs).  

In the US, data centres are a major source of demand growth resulting in shortfalls of energy capacity. The US consequently faces a dilemma –in a time where it can take many years to develop and build new energy assets, how can it service this rapid uptick of energy demand while keeping energy prices affordable? 

Australia too is grappling with the extent to which data centres might drive future demand, although we are not seeing the levels of demand growth being experienced by our American friends. A critical question that Australian energy markets are currently dealing with is whether data centres are likely to drive significant increases in future electricity demand. And if they do, then like the US, Australia will find itself grappling with how to fund the required infrastructure investment in a way that doesn’t contribute to material increases in electricity prices.  

Data centres traditionally have been price sensitive, flat loads requiring electricity 24 hours a day, 7 days a week, which makes them very costly to supply. The evolution of AI and other types of data processing requirements are increasing energy demand once again. There are some views that data centres of today should be much less price sensitive given the demand and potential for AI. But as AI processes become more efficient, technology evolves and competition in the sector intensifies it is difficult to say whether will data centres will actually be less price sensitive, or and look for efficiencies to improve performance and reduce costs like many other large energy users. So, is it a wise investment to build a large chunk of new grid infrastructure based on emerging energy demand that may not be permanent or ongoing?  

One thing we all agreed on at the Summit was that supplying low emissions, fully firmed energy at 100 per cent reliability for new loads like data centres has the potential to be incredibly expensive. And we’re all debating who should pay for this if these costs come to bear.  

Data centres that have capacity to flex their load even a small percentage of the time will benefit from reduced costs and collectively less infrastructure will need to be built. So how can we make this happen?  

Summit participants discussed opportunities to support data centres to flex their demand requirements, which included incorporating on site co-generation or behind- the-meter systems, as well as the development of flexible network connection agreements and co-location of data centre sites to drive efficiencies in asset construction, maintenance and operations. Noting long-lead times for the completion of new transmission infrastructure (historically in the order of 10-12 years), the US is also looking at optimising existing transmission hosting capacity in specific locations before considering new transmission build.  

Decarbonisation efforts will require more flex from all sides 

Like data centres, large energy-intensive industrial processes such as steel manufacturing or minerals processing also require a constant, stable energy supply. These industries have traditionally relied on low-cost, high emissions baseload generation to meet their needs.  

As these sources become less available and more costly, governments and industry players are looking for new and innovative ways to support energy intensive businesses to decarbonise. Electrification of heat-intensive industrial loads is a significant focus for European countries given stagnant industrial demand and a strategic need to transition away from inter-regional gas supplies. So much so, that the European Commission has announced the Clean Industrial Deal, a series of initiatives to facilitate decarbonisation and support manufacturing whilst driving economic growth. It includes a suite of financial incentives including direct support for industrial loads to electrify and decarbonise. 

But what does this have to do with flexibility? For our European counterparts, they state that unlocking flexibility for industrial loads is a key part of improving competitiveness and they believe that up to 95 per cent of industrial heat processes can be electrified.  

To ensure that any investment in electrification delivers a net positive outcome, large industrial users will need to consider how to consume energy more efficiently. Like data centres, the benefits of being able to flex energy demand when it counts are significant. As a representative from the European delegation stated during the Summit discussions “everyone flexes when the price is high enough”. Traditionally, energy intensive loads have not been required to do this as fossil fuel supply was cheap and continuous. But as the world decarbonises and electrifies and the nature of energy supply and costs change, this may no longer be sustainable.  

Decarbonisation will require flexibility from both supply and demand sides. From the perspective of a large industrial user, their ability to harness technology to electrify and adapt their processes so they can flex on both energy sources and demand has the potential to drive huge cost savings. And from the supply side, considering the proportion of on and off grid energy supply (and the right amount of transmission hosting capacity), the right mix of renewable energy, supported by flexible, dispatchable energy sources will be critical to ensuring that large loads can electrify at the lowest cost.  

A resilient and secure energy system is all about flexibility 

Resilience is a term that is often used to describe many aspects of the energy transition. At the Summit, there was a focus on strategies to improve grid and energy system resilience eroded by the emergence of extreme climate events. 

All countries present acknowledged the impacts of extreme climate events on reliability, noting that many natural disasters were now occurring that had never been experienced before. For example, Ottawa in Canada had experienced a set of tornadoes for the first time in history and the US and Japan now acknowledged they were dealing with wildfires in parts of their countries that had never experienced them before. A northern European country had recently experienced severe storms that left many towns without power for weeks.  

Noting that extreme climate events often result in prolonged electricity outages, all countries were exploring more flexible approaches to energy supply in times of emergencies, including options for backup generation, microgrids and optimising the location and use of storage assets. In Europe, where extreme cold temperatures often combine with severe storms, opportunities for leveraging decentralised energy supply to provide heating during prolonged power outages was a key focus.  

In Australia, while extreme climate events are triggering similar discussions and responses, we are also grappling with a somewhat unique challenge in maintaining system resilience and reliability once coal exits. Traditional baseload energy sources like coal, gas, hydropower and even nuclear have historically provided essential system services as a byproduct of energy generation.  

Unlike many of the countries at the Summit who have significant quantities of low-emissions baseload like hydropower, once coal exits, Australia will not have sufficient baseload generation left in its energy systems to provide these services.  

Australia’s response to this challenge is for transmission network providers to procure multiple synchronous condensers. And while we may be pioneering the way for a renewable energy system free of baseload generation, Summit participants queried whether Australia’s singular strategy to procure synchronous condensers was the most efficient and feasible way to deliver these services. Surely, they asked, a co-optimisation of energy and system security services through existing and future generation sources such as gas and hydropower was a more efficient and flexible approach?  

All Summit participants recognised the need for flexibility in the way in which grid resilience and system services could be provided into the future.  

So what can we takeaway from these and the many other discussions that were had at the International Electricity Summit?  

In times of change and uncertainty, having a multitude of options to choose from is critical and that is why flexibility becomes so important. The energy transition has been described by some economists as the third industrial revolution, the outcomes of which, when compounded by devastating impacts of climate change, can be very difficult to predict.  

Flexibility and adaptability will therefore be essential in ensuring that we can continue to operate an affordable, reliable and low emissions energy system.  

Perhaps it’s time we embraced the ‘f’ word in the energy industry and rebranded it to define what is effectively becoming an essential component of the energy transition.