The evenings are hard

Business Standard, 4 March 2024

Solar energy is growing. But in the evening, the sun goes down, and the big users of solar switch back to the grid. Economic growth and changes in the built environment are exacerbating cooling demand in the evening. Grid managers are manfully struggling with this problem of the surge in evening demand, but it is becoming harder to accommodate. The only way out is market prices.

The problem

The price of solar energy has dropped handsomely. For every firm, there is an opportunity to cut energy expenses in the day by obtaining solar electricity through some contracting mechanism. But the sun is a fickle friend, and every evening solar energy dwindles away while electricity demand surges. With economic growth, cheap Chinese manufacturing, and global warming, air conditioning adoption grows by the day. The built environment is transitioning to heavier structures, which have more heat capacity, that irradiate the interiors in the evening, thus motivating more use of air conditioning into the evening.

Every evening, solar users turn back to the grid. This is hard for managers of the grid. The bulk of the Indian energy system is coal thermal, so what is filling the breach each evening is coal thermal. But in the day when the sun is shining, there aren't enough buyers for this electricity. It takes hours for coal plants to increase or lower their generation: they cannot respond to surges and declines that play out over short periods of time. The global financial system will no longer fund new carbon-intensive generation plants. Indian energy firms have therefore pivoted in favour of renewables, and the addition of fossil fuel electricity generation capacity has stalled.

The last piece of the present situation is a revival in private investment. In the CMIE Capex database, projects `under implementation' have gone up from the trough of Rs.44 trillion in 2020 to a current level of Rs.55.7 trillion (both values in 2024 rupees), a gain of 26% real in about three years. As these projects trickle through into completion, electricity demand will rise. Alongside this, there has not been a commensurate gain in electricity generation projects under implementation.

The task of the grid manager

We should all bang the pots and pans out of appreciation for the grid managers who are valiantly fighting this situation. Every evening, the sun goes down, and demand from the grid goes up. Grid managers scramble to make ends meet. Wind power (which is itself fickle) is particularly welcome at this time. Some small storage facilities have started kicking in. Hydel plants and gas plants help. Coal thermal plants are pushed to the limits of economic and technical good sense. What grid managers need, in this every evening battle, is flexibility. They are hampered inflexibility from their legacy: with PPAs (where they are forced to do certain things contractually) and coal thermal plants (which are an inflexible technology).

Grid managers have manfully solved these problems for over a decade now. We tend to extrapolate from the past into the future; we tend to think that things will go on in the way that they have been. But this problem is at breaking point. The headroom for grid managers to keep improvising is declining. This is the structural logic for the summer crises that have erupted in recent years. We should see the forces at work and expect that, in coming days, the fire fighting of grid managers will get harder, and they will drop more balls. While there will always be small fluctuations of varying execution, it is the strategy that is at fault.

Reconciling the gap between supply and demand

The three forces at work (private desire for cheap solar in the daytime, global finance blocking new fossil fuel plants, and rising cooling demand) are beyond the power of policy makers. There is one powerful tool which can be brought to bear on the problem, and that is the price system.

Grid engineers today see the price as fixed, so the demand is a given. They mobilise a supply response every evening. They view the gap between supply and demand as something which the grid manager should solve. The economics perspective adds value over and beyond the engineering perspective. Solving gaps between supply and demand is what the price system does.

The supply and demand of tomatoes fluctuates, and there are no horticultural engineers figuring out the solution. The heavy lifting is done by the price system. The price of tomatoes fluctuates, and generates equality between supply and demand at every moment. And so it can be with electricity. In the afternoon, the sun is shining, and the price of electricity should go to zero (even if it is from a coal thermal supplier who suffers a marginal cost of coal). In the evening, the price of electricity should go up sharply.

Everyone will change their behaviour in response to the price. Buyers of electricity will shift their activities into the day, to enjoy cheap electricity. People will look at the price of electricity before deciding to switch on an AC. The right office attire for Chennai is shorts. The built environment will favour cooler designs. Two-shift operations will be structured with a gap in the evening, so as to do a day shift (when the sun is shining) and a night shift (that starts after the evening price surge).

Storage is the business of buying cheap in the day and selling dear in the evening. The daily price fluctuation will trigger private investments in storage. The decision to build a storage plant should be made by a private person -- based on the possibility of profit -- and not central planners. Wind generators will reap a bounty every evening, which will reshape investments in favour of more wind and less solar. Coal thermal plants will earn zero or low revenues in the day, and reap profits in the evening peak.

The electricity system of the future

At present, too much is being asked of grid engineers. The electricity system of the future is a combination of solar, wind and storage, orchestrated by the price. Decentralised adjustments by private persons will solve the bulk of the problem. This will give the grid engineers a modest problem, to reconcile small operational fluctuations of supply or demand.

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