July 19, 2021
Last updated:

The four biggest challenges of sector coupling

Philipp Schockenhoff
Account Executive

When talking about the transition of global energy markets towards a more sustainable and decarbonized value chain, sector coupling has become the new buzzword. In general, it refers to the intertwining of traditionally separated energy sectors. But the term has also been increasingly adopted as a synonym for the continuing electrification of fossil-fuel-reliant energy market segments. While this is clearly a prerequisite for achieving a carbon-neutral power supply, the challenges must still be weighed up against the opportunities.

Challenge 1: Electrify the sectors relying on fossils 

It is no secret that abandoning fossil fuels as primary energy sources is the first crucial step in our fight against climate change. However, the rise of renewable energy has been rather sluggish in the early 21st century, as most economies still rely heavily on fossil fuel supply. Alongside regulatory and commercial incentives, substituting fossil fuels with (green) electricity is another major hurdle in this overdue process. As of now, the energy use in heating and transport still accounts for 44% of all global CO2-emissions. Thus, to achieve climate protection goals, it is not only essential to generate sufficient electricity from renewable sources but also to electrify consuming sectors. 

Challenge 2: Strike a good balance

The ongoing electrification of energy consuming sectors translates to a huge increase in electricity demand. In Germany alone, the electricity demand is expected to rise to 700 TWh by 2030 and to 1,400 TWh by 2050 – a relative increase of 17% and 133%, respectively. But the supply side will also see tremendous change in the coming years. The intermittent and uncontrollable nature of renewable energy will call for more flexibility in the grid: both on the supply side with large storage capacities, as well as on the demand side by shifting loads.

Financial incentives are essential to promote demand-side flexibility. To benefit from this, households will need to adopt dynamic time-of-use tariffs or join an aggregation scheme. Unfortunately, if electricity consumption is shifted to hours with lower prices, higher peak loads could bring existing grid infrastructure to its limit. In response, grid capacity could simply be expanded. It has become apparent, however, that adapting the entire grid infrastructure to short-term peak loads is far from cost-effective. Adding a layer of flexibility and efficiency control to grid fees by taking scarcity and capacity constraints into account will therefore be necessary in the future to counteract this issue.

Challenge 3: Match demand and supply locally

The centralized approach of physically separating electricity generation and consumption is becoming less relevant as more and smaller production and storage sites are installed. This is where our second buzzword comes into play: prosumers. The need to physically couple demand and supply has made prosumers a fundamental part of sector coupling. Many private and commercial end users are already struggling to grasp the impact of EVs on their electricity bill. As such, they need holistic solutions that integrate local PVs, battery storage systems, EV charging stations and heat pumps into a comprehensible energy management system, which optimizes local energy flows and further accounts for market signals like flexible tariffs.

Challenge 4: Meet the customer’s demand 

This customer branch is, to date, predominantly unsaturated and offers huge potential for innovative and forward-thinking players. The opportunity for hardware manufacturers to cross-sell comprehensive, digital energy management systems and establish a lasting customer interface should not be disregarded. Innovative players providing new energy solutions are already proactively pushing into this niche and could jeopardize incumbents like OEMs who have, so far, largely refrained from digital innovations. 

The need is clear: sector coupling will not succeed without flexibility on the electricity market. But customers and prosumers are unwilling to manage their daily electricity consumption according to forecasted PV generation and expected prices by taking things such as capacity tariffs into account. Therefore, an energy management system that automatically optimizes consumption and production of local energy resources in accordance with market signals will be a key component of any successful product portfolio.

Going forward

The high emissions of transport and heating imply that current climate goals cannot be achieved without significant transformation of these sectors. Electrification will be the first step, as neither transport nor heating can become carbon neutral if they run on fossil fuels. Increases in demand and supply side flexibility will then be key to account for higher demand and intermittent supply. A decentralized approach with greater integration of energy resources will become more important to lower pressure on the grid and avoid the need for costly new infrastructure. Finally, smart energy solutions will maximize both user comfort and savings.

So what’s the takeaway? Change is coming. Climate goals are becoming more ambitious and heating, transport and energy are the biggest levers to achieve those goals. Tomorrow’s market leaders will emerge by innovating in the aforementioned ways – quickly and efficiently.

Learn more about sector coupling by watching our webinar.

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