New Industries Can Feast on Volatile Wind, Solar: Q&A

By Angus McCrone, BloombergNEF Chief Editor. This article first appeared on the Bloomberg Terminal

A new breed of “flexible electricity demand” projects in areas such as water purification and hydrogen electrolysis could prosper in the coming era of plentiful wind and solar generation, according to Allianz Global Investors.

Thomas Engelmann, director and head of transaction management for infrastructure equity at Germany-based AllianzGI, told BloombergNEF in a phone interview that, in the new phase of the energy transition, we “need to focus on projects that absorb the volatile supply of energy on the demand side”.

Allianz Global Investors raised 348 million euros ($400 million) for its second renewable energy fund, AREF II, in 2016. That is now fully invested, and backs a total of 420 megawatts of wind and solar projects in Europe. The most recent deals were the purchase of 13 solar plants in France and Italy in December.

Engelmann said the company is now looking to set up a third fund, which would contain not just renewables but also assets that could take advantage of periods of excess wind and solar generation.

Engelmann said that these technologies could include water purification by heat, distributed district heating and electrolysis to produce hydrogen. All could adjust their levels of production to take more, or less, renewable electricity, and hence help to balance the overall power system.

“Hydrogen electrolysis can run 24/7 and 365 days a year on baseload, and you can increase the amount of production by 50-60 percent during winter nights when there is a lot of wind generation and not much electricity demand,” he said.

The Q&A with Thomas Engelmann is below:

Q: As I understand it, your role is with Allianz Global Investors and its renewable energy funds, rather than with the insurance company Allianz SE. Is that right?

A: The difference is that Allianz SE can invest [in renewables] on its own balance sheet, via Allianz Capital Partners. Allianz Global Investors is investing in infrastructure equity via a fund structure. Allianz SE is one of our clients but has not more than 20 percent, with the rest taken by institutional investors. Our theme in the future will be the energy transition, [and] our second renewables fund, AREF II, is now fully invested. We are now preparing a new fund, to come to market potentially late [this] year.

Part of our thinking now is that the power system is creating a lot of volatile electricity supply, so there is opportunity for the infrastructure investor to invest in volatile demand-side projects – for example, water incineration or district heating for the municipalities of Germany. Also perhaps the market for fuels.

About 10 or 12 years ago, the big utilities were saying that it would not be possible for small wind farms ever to be competitive with big steam-fired power stations. However, things have changed so much that now some of the utilities are splitting themselves up, separating fossil fuels from their renewables businesses.

I think we are going now into a new phase of the energy transition, in which power purchase agreements for renewables will touch households, industry, retailers and traders. But we also need to focus on projects that absorb the volatile supply of energy on the demand side: in 2017, for instance, according to the transmission operator TenneT, the amount of electricity that was produced by renewables but could not be used was 5.2 terawatt-hours [in Germany]. It still got paid for, via the feed-in tariff, but there was no demand to take it.

Q: I agree with you about the potential for projects that make use of that excess wind or solar electricity. But since it’s not clear yet what technologies will emerge to take that electricity, doesn’t that mean that this is rather a high-risk area for infrastructure investors?

A: Well, the feed-in tariffs of the past removed price risk from renewable energy projects, and that made them optimal for infrastructure investors. In the new world, in which PPAs are the way renewable energy projects secure revenues, investors will still face a greater degree of price and volume risk, and that means that projects will be more like a commodity, not pure infrastructure.

So we have to change our investment guidelines in order to invest in these projects. We can reduce risks by diversifying between countries, and between PPA buyers. So I wouldn’t be so keen, for example, on investing in a huge onshore wind project in Sweden – that would be putting all of our eggs in one basket. For our fund, we could also think to diversify by investing in different types of commodity – so not just electricity, but also water, heat, hydrogen and gas.

Q: Please say more about the processes that you expect will help, on the demand side, to balance volatile renewable electricity production.

A: One example would be water incineration: turning used water from the municipalities into potable water again. At the moment, wastewater plants tend to use chemical and biological processes to produce fresh water. But in the future, for instance in the Netherlands, we see problems arising of land areas having more and more nitrates in the water, and also antibiotics, which can’t be absorbed by chemicals so easily like in the past. It has always been clear that the process of water purification can also be done by heating up the slush to produce potable water. In the past, unfortunately, the base technology for heating was always fossil fuel, and so the business case always collapsed because the cost had to take into account the price of gas or coal.

Now you can as a utility buy in excess power and heat up the wastewater, and that means municipalities reduce their chemicals costs. You could have a treatment plant running 6-7 months a year with chemicals, and 4-5 months a year with heat, and that could reduce the overall cost of fresh water production.

Another example might be district heating. In the last 30-40 years, this has generally been based on producing energy through a steam or gas-fired plant. With the resulting high pressure, you can be 25 kilometers or more away from the centralized power plant and still receive its heat.

But if you want as a country to shut down coal-fired generation, where do you get the heat you need? You can use gas only or, if you rethink, you might argue that one large district heating plant is the same as a number of smaller, decentralized boilers using heat pumps or immersion heaters. And if there are 10 to 15 of these in a city, then the pressure and temperature can go down. In winter, if offshore wind is producing a lot of electricity, cities may be willing to swap their fossil fuel-based fleet to renewables-based heat production.

We are also discussing with market partners the possibility of producing and selling hydrogen. At the moment, most hydrogen is produced by cracking methane (CH4) into H2 and CO2, and therefore adding carbon dioxide to the climate.

But hydrogen has the potential to be a huge industry because we can transport it. H2 can be produced by water and electricity, via electrolysis. This did not use to be competitive with the other method, but now you can do it using renewable energy. This is a game changer, if we face more and more production of renewable energy [that exceeds] demand needs.

You could even put the H2 and some CO2 (from, for example, biomass plants) together, in order to produce methane gas, ready to send it into the gas grid.

Q: What about the problem that electrolysis will only work efficiently and at minimum cost if it runs constantly, and that doesn’t fit in with the variable electricity generation profile of an offshore wind project? What you are suggesting doesn’t sound like “flexible demand”.

A: Yes, it has to be a constant process. But if you have 1,000 megawatts of renewable energy capacity, for instance, you can give a part of that – perhaps 5-10 percent – to the hydrogen plant, and be confident that that much will always be available. Hydrogen electrolysis can therefore run 24/7 and 365 days a year on baseload, and you can increase the amount of production by 50-60 percent during winter nights when there is a lot of wind generation and not much electricity demand. You could be competitive against “black hydrogen” [produced from cracking methane] if you could buy your renewable electricity in an area 3.5 eurocents per kilowatt-hour.

This obviously won’t be our next project. You need partners to do it, and it will take time to prove the economics. But there is an additional advantage in that oxygen is the waste product from electrolysis, and that can be used by the municipality to increase the efficiency of producing fresh water.

Q: So your next fund will invest in renewable energy projects, many of them with long-term PPAs rather than subsidies, and in other aspects of the energy transition such as “flexible demand”. What about storage?

A: We may look at storage, and there may be opportunities in grid investments too. With battery storage, there is a very limited number of projects where the economics make sense. Shifting the delivery of electricity between day and night is one thing, and stabilizing energy production for the grid is another. But if the battery is full and you cannot use that electricity for two months, then the economics do not work.

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