System integration - a new key theme for energy policy

Climate neutrality requires that we stop using fossil fuels and increase the use of intermittent renewable energy. Different energy systems should be strongly interlinked to secure the functioning of energy systems and improve their efficiency, with due consideration for the large-scale needs of industrial production. However, we must also beware of the pitfalls on the long path towards sector integration.

In the future, a more comprehensive and more strongly interlinked approach should be adopted to the development of energy production and consumption sectors – electricity, heat, transport and industry. Obvious examples of this include the electrification of transport, waste heat recovery in heat networks, and use of synthetic fuels produced by means of emission-free electricity, such as hydrogen, in industrial production.

The Communication of the European Commission of 8 July 2020 on An EU Strategy for Energy System Integration will also serve as the basis for future legislative proposals. The Finnish Ministry of Economic Affairs and Employment has appointed a working group to explore the need for different forms of energy and the opportunities they offer for sector integration, and to identify any obstacles to the integration. The working group is to submit its final report in summer 2021. A functioning clean energy system is the key means for achieving both the EU’s climate neutrality target to 2050 and Finland’s target to 2035.

Discussion on the integration of energy sectors takes place under several headings, but the goal is the same: comprehensive planning and design to achieve emission reductions, incentive-based regulation, and promoting the large-scale investments that will be needed. Active consumers also have the opportunity to influence the use of energy. Electrification and synthetic fuels play a key role in this. Within the EU a particular focus has been placed on hydrogen, and the European Commission published a Communication on this on 8 July 2020 A hydrogen strategy for a climate-neutral Europe. 

Hydrogen inspires but diverse solutions are needed

Hydrogen is a good example of the opportunities related to the integration: hydrogen could make a significant contribution towards emissions-free process industries. The main obstacle is economic profitability: conventional solutions will remain less costly at least for the next ten years. The Commission’s response is to invest heavily in the development work and infrastructure related to hydrogen, and the proposed visions also include some kind of financial support for the production of renewable, low-carbon hydrogen.

Obviously the strategy towards a hydrogen economy also involves certain risks. One of these is that the “winning technology” is chosen too soon. It is important that competing and complementary technologies are being developed on a broad front and for multiple purposes. Another risk is overcompensation, which has been widely recognised as a problem in promoting windpower. In many countries financial support schemes have proven too generous or otherwise badly planned, causing problems that may also affect the neighbouring countries. Problems can be avoided by making sure that the steering instruments are as market-driven as possible, such as those based on the regulatory framework provided by emissions trading and functioning electricity markets.

It has also been suggested that system integration is needed for higher energy efficiency. This is true in many respects, provided that resources are being used in the spirit of a circular economy e.g. by making use of waste heat recovery. However, integration between sectors will also require various kinds of energy transformations, including fuels and raw materials generated from electricity and making use of energy storage facilities, which in fact increases the need for energy. It is important to stress emission-free operations as the priority objective. The objectives now included in the Energy Efficiency Directive do not serve this purpose in all respects.

Long-term action to promote sector integration

What the integration of energy sectors needs most is functioning and cost-efficient solutions. Energy infrastructure must be strengthened, also because of electrification. Smart solutions are needed not only for electricity grids but also for steering the heat networks and charging electric vehicles. Flexible solutions for energy storage as electricity, fuel or heat play a key role as well. In future, strategies will also be needed for the recovery, use and storage of carbon dioxide.

Demonstration projects concerning the new solutions are important for bringing innovations into commercial use. These may be eligible for financial support to minimise the investors’ risks associated with new technologies. With respect to e.g. heat pumps and energy storage facilities, sufficient incentives should be provided through energy taxation.

At present most of the regulatory challenges come from the EU. Often the rules set out in the directives are far too many and the level of detail is too high. While the member states are still implementing the extensive Clean Energy Package introduced by the previous Commission, the present Commission is already planning new proposals. To ensure investment certainty for companies, the EU legislation should focus on questions that are relevant with respect to climate policy and functioning of the single market.

In Finland the obvious way to proceed is to include the objectives and measures related to the system integration and e.g. the role of hydrogen in the next climate and energy strategy. Preparatory work concerning the strategy was started in May, led by the Ministry of Economic Affairs and Employment. The strategy should be ready in about a year.

Riku Huttunen is Director General of the Energy Department at the Ministry of Economic Affairs and Employment.