Almost all debate about the future of energy is couched in terms of technologies. What mix of wind, solar, nuclear, and gas generation do we need? How many subsea cables should we have? Which countries should our grid connect to? And so on.
But there is a completely different way of looking at energy provision: by first asking what services we need and then considering what sort of market we’d need in order to procure them.
The most obvious example of a technology-first approach was the commissioning of Hinkley C. This new behemoth of a nuclear power station due to be built on the Somerset coast will, if completed, send £2.5 billion per year into EdF’s coffers, index-linked for 35 years. It was all agreed via a bespoke, opaque contract.
A better approach would have been for the Government to run an open, competitive auction between the three companies that want to build new nuclear power stations. It should really happen as a matter of course under a cost-conscious public procurement policy.
But even better would have been to assess the services that a Hinkley-style power station would deliver, and have a technology-neutral market, or indeed several markets, to procure them.
Assuming it gets built, Hinkley C will do three things. It will pump a certain amount of electricity into the grid during the course of a year (25 terawatt-hours, if you want a number); it will guarantee, barring breakages, to generate when we most need it, during periods of winter evening peak demand; it will generate low-carbon electricity.
In principle, you could set up a market specifically designed to deliver those three services at the lowest price. If we want the overall amount of electricity to come from the cheapest form of generation, that would inevitably be onshore wind – but the Government has effectively decided to ban it.
It could come from gas-fired power stations – but given that the energy needs to be free of carbon emissions, this would work only if they paid some form of pollution penalty or were built with some carbon capture system.
Or, it could come from tidal lagoons or solar panels, or, in future, small modular nuclear reactors, should they prove economic.
Most of these options would not, however, guarantee the availability of electricity during freezing, windless winter evenings. So, the market would also need to deliver a way of matching supply to demand during those peak hours, at the lowest cost.
At least some of that would come through contracts that reduce demand as opposed to increasing generation – for example, by paying factories to turn off non-essential equipment during peak-time hours.
And this smorgasbord of provision, if delivered through open competition, would almost certainly work out cheaper than Hinkley.
It’s what the next generation of electricity markets should look like. In addition to simply selling power, the electricity market of the near future will sell flexibility – or, if you prefer, agility.
The reason we need flexibility is because a unit of electricity is worth very different amounts at different times – depending on demand. Baseload power stations such as Hinkley are perfectly able to meet demand at peak times; but they also chunter along for the rest of the year pumping out the same amount of power, whether it is really needed or not.
Similarly, wind turbines and solar panels won’t reliably generate power at times when it is required. Simple economics dictates that the share of wind and solar powered energy will inevitably rise much higher than the 14 per cent at which it currently stands.
So, whether we go for nuclear or renewables or a mixture of the two, the growth market will be in services that take a low-value unit of power, generated at a time of low demand, and turn it into a high-value unit, making it available when it is most needed.
This value multiplication can be done in several ways:
– through storage – either in batteries, or the use of hydropower schemes in which water can be pumped up to a higher reservoir when electricity is plentiful and released to generate power when it is scarce.
– through international trading, whereby the UK can sell solar electricity to Norway (for example) during summer, and buy hydro electricity back during winter.
– through demand switching, whereby business customers – and, with the advent of smart meters, domestic consumers too – are rewarded for switching demand away from peak times.
– using modern gas-fired power stations, which can be turned on and off quickly on winter evenings, while lying dormant during summer.
A few weeks ago, the UK Energy Research Centre (UKERC) published a report into the costs of intermittent energy provision that illustrates the economic rationale perfectly. Without substantially increasing the use of these flexibility mechanisms, adding more and more renewables to the grid will make energy bills rise. Adding flexibility, however, controls costs.
Spurred on by last year’s Smart Power report from the National Infrastructure Commission and its forecast of an £8 billion per year saving by 2030 if a “smart, flexible grid” were adopted, it seems the Government gets it. In his final Budget, George Osborne said the UK ought to have about 12 or 13 cables connecting our power grids to those of neighbouring countries, an increase from the four we have now.
As Energy Minister, Andrea Leadsom talked of even more ambitious targets for interconnectors, batteries and demand switching. The man in charge now, Greg Clark, has also praised the “smart grid” concept as the route to reducing bills, making energy more secure and slashing carbon emissions.
But how to deliver the much needed flexibility?
The Government could take a technology-prescriptive route, procuring so many gigawatts of interconnecting cables, so many of batteries and so many of demand-switching capacity. Or it could establish a flexibility market, and led the technologies and the companies deuce it out.
In battery storage and demand-shifting, many British companies are all revved up with, currently, no place to go – constantly cavilling at the petty restrictions they encounter.
For example: the annual auction for winter capacity sets aside a tiny market share (1.5 per cent) for demand switching, and allows companies to bid only for one year contracts – when those on the supply side can bid for 15-year deals. Only recently have batteries and interconnectors been allowed to compete at all.
Companies also complain about obstructive local grids, immune to innovation, and a regulator in hock to the Big Six. In fact, everywhere you look in this area you see a power structure that despite the forward-looking, market-oriented rhetoric, is lobbied in to inaction far too easily by vested interests.
Some of our most innovative companies (and “innovation” refers to business models as much as to technology) are now looking abroad, to Canada and Australia, where they see national and state governments doing far more to encourage smart demand shifting and storage. Which means consumers there will reap the benefits.
We do not usually, think in terms of markets delivering energy policy objectives. But they can. The secret is to set up the right market for the services you need. The UK power sector needs a flexibility market and needs it soon. Let the invisible hand cut the pricetag.
Richard Black is Director of the Energy and Climate Intelligence Unit, a non-profit London-based think-tank
