In the heart of Europe, a vast expanse of water holds the key to the continent’s energy future. The North Sea, long a hub for oil and gas, is now at the center of a transformative shift towards renewable energy. But as the region plans for a future powered by wind, solar, and other clean sources, it faces a daunting challenge: uncertainty. The timing and scale of future electricity demand, driven by factors like electrification, data center growth, and hydrogen production, are notoriously hard to predict. This uncertainty poses a significant risk for power system planners, who are often risk-averse but typically operate under a risk-neutral modeling perspective. Now, new research from the Norwegian University of Science and Technology (NTNU) is shedding light on how this risk aversion could shape the future of the North Sea’s power system.
Lars Skjelbred Nygaard, a researcher at NTNU’s Department of Electric Energy, led a study that explores the implications of risk aversion concerning demand uncertainty for power system planning. The findings, published in Energy Strategy Reviews, which translates to Energy Policy Reviews in English, suggest that embracing risk aversion could lead to a more sustainable and resilient energy future.
The North Sea region is a microcosm of the broader European energy transition. With substantial new investments in electricity generation capacity on the horizon, the region is grappling with considerable demand uncertainty. Nygaard and his team used stochastic optimization to model different scenarios, comparing risk-averse planning with the traditional risk-neutral approach.
Their results are striking. By 2040, risk-averse planning under demand uncertainty leads to a higher share of renewable and storage investments. “Renewables and storage can provide a hedge against demand uncertainty,” Nygaard explains. This means that as demand fluctuates, a power system rich in renewables and storage can better absorb the shocks, providing a more stable and reliable energy supply.
But the benefits don’t stop at reliability. Risk-averse planning also leads to lower expected CO2 emissions. This is a significant finding, given the European Union’s ambitious climate goals. As Nygaard puts it, “Our results suggest that by embracing risk aversion, we can accelerate the transition to a low-carbon energy system.”
The commercial implications are substantial. For energy companies, the shift towards renewables and storage represents a significant investment opportunity. But it also comes with risks. The uncertainty around future demand could lead to over-investment or under-investment, both of which could be costly. However, Nygaard’s research suggests that by embracing risk aversion, these risks can be mitigated.
The findings also have implications for policy. Governments and regulators play a crucial role in shaping the energy market. By understanding the benefits of risk-averse planning, they can create policies that encourage investment in renewables and storage, while also promoting a more sustainable and resilient energy system.
As the North Sea region navigates the complexities of the energy transition, this research provides a valuable roadmap. By embracing risk aversion, the region can build a power system that is not only cleaner and more sustainable but also more resilient and reliable. And as the rest of Europe watches, the lessons learned in the North Sea could shape the continent’s energy future.
