analysis
#TheGrid: Bending over backwards to tackle demand
The grid is not fit for purpose. When considering how to change it, though, demand will be a key element.
A lack of policy certainty has prevented much-needed investment from moving ahead. Resolving the political questions will trigger commercial certainty. Only then can the UK finally move ahead with its mission to decarbonise energy. E-FWD members discussed these themes at the latest in-person event, The Grid, in Aberdeen in June.
- Political will: Governmental drive to decarbonise the grid is crucial, setting out incentives and penalties
- Prosumers: Consumer flexibility will grow as more companies compete to offer smarter ways of working
- Location: Nodal pricing will not solve the problems created by the UK’s supply and demand mix
- Pace: Accelerating decarbonisation would drive down wholesale power costs
One of the four tents at the event focused on demand. A major theme from discussions was around policy uncertainty. Lack of clarity has hampered investment and, as a result, consumers fail to see the benefit of decarbonisation.
A new government will be in power shortly. Top of the agenda should be a focus on accelerating the transition at the lowest cost. To achieve this, the next administration should draw up a timeline around how fast things will change and put in place policy incentives, most likely Contracts for Difference (CfDs), to deliver this.
These measures would give investors and operators a way to model future cash flows and come to a decision around where to allocate capital.
Rewarding flexibility
One point of change will be making the grid – and consumption – more sophisticated. Octopus’ Kraken platform is the market leader, for now, providing a means to turn demand up or down.
Time-shifting demand to cheaper points of the day will provide benefits to consumers and reduce waste, improving overall system efficiency.
For instance, charging an EV at certain times of day can be rewarded. Octopus Go supplies power in the middle of the night at a tenth of the price of daytimes rates.
Where this lower priced power may occur in the day may change. Demand is lower in the small hours, but as renewables increase their share on the grid, other factors – such as sunshine or when the wind blows – may become just as important.
The market is evolving. Suppliers are not yet passing on wholesale pricing to customers, but competition may cause this to change.
Pricing demand
One of the decisions that could trigger change in the UK’s grid plans are proposals for locational or zonal pricing. This would see different parts of the country pay different prices for power. For instance, in Scotland, consumers would benefit from offshore wind. While in southern England, prices would be higher.
Discussion on the night did not back this. Changing pricing in this way would reduce the incentives to build new generation capacity where it would operate most efficiently. For instance, industry would need to install three times as many wind turbines in Bedfordshire than in Scotland.
The least cost approach must be to develop the highest resource sites to produce power, rather than reward development in sub-optimal resource locations.
Energy storage plans would also suffer. In southern England, many battery installations might face bankruptcy in the face of structurally higher power prices.
The argument for locational pricing suggests industry would relocate to areas with low prices. The ease with which manufacturing could relocate is a challenge – decisions on location are driven by more than just power prices. There is also the need to access customers, logistics and workers.
A move to locational pricing would also require changes in grid balancing. While Scotland would have a greater share of renewable energy driving prices, it would also face higher balancing costs.
Balancing act
Balancing the grid has been a perennial challenge in the drive to decarbonise power. The grid is increasingly reliant on intermittent renewables, at around 40%. As the role of gas in the system is reduced, wholesale electricity prices at peak hours increases.
Gas generators must secure higher returns from higher prices over fewer operating hours, and/or via capacity payments. The system acts to meet the last unit of demand with the lowest marginal cost generator – which continues to be gas.
It is the paradox of renewables that the more the country adds, the higher the balancing and peaking costs are.
The Labour and Conservative parties have both committed to gas power plants for use beyond 2030, in order to fill the gaps. The Conservatives are targeting 2035 to decarbonise power, while Labour is sticking with 2030.
If the next government is serious about seeing this through, the focus must be to decarbonise the grid as fast as possible. To do this at the least cost, it should provide clarity on plans to the market.
Companies considering gas plant investments would benefit from certainty on when unabated operations must end. If, at the same time, government offered CfDs this would allow them to finance projects.
This would also incentivise companies to move ahead with baseload renewable technologies, such as tidal and hydropower. It would also provide backup to the system by encouraging pumped storage hydro.
Both major parties have talked about the opportunities that renewable energy can provide. Decarbonising the grid is fundamentally an engineering problem, wrapped in a political debate. If politicians are serious about achieving the stated goal, they must put measures in place to drive change. Government has the ability to create carrots and sticks, but does it have the will?