On 4 March 2016, the National Infrastructure Commission (“NIC”) issued its first report: “Smart power: A National Infrastructure Commission report” (“Report”) on how the UK can balance supply and demand for power and create an electricity market with commercially accurate costs. The Report can be found here.
The UK must meet its legally binding carbon target under the Climate Change Act 2008 of cutting CO2 emissions by 80% by 2050 while simultaneously dealing with the closure of around two thirds of its existing power stations, ensuring energy security and managing the costs to the consumer. Investment in renewables, including onshore and offshore wind, solar and biomass, alone is not sufficient to meet the energy “trilemma”. The system itself must adapt and adopt innovative technologies to ensure that the UK’s future supply is secure and consumers are able to save money – a so-called “smart power revolution”. The Report focuses on three innovations that should be prioritised if the UK is to lead this revolution – interconnection, storage and demand flexibility. In anticipation of a more flexible market, the Report makes further recommendations to maximise its benefits.
Interconnection offers great flexibility to the electricity system by facilitating cross-border trading, thereby bringing down wholesale costs and improving profitability and security of supply. Great Britain’s existing regulatory regime has facilitated a healthy pipeline of interconnector projects in recent years. There is currently 4 GW of interconnection capacity in place, and this is expected to triple by the early 2020s to equal around 10% of domestic generation capacity.
The Report finds that, due to uncertainties about varied generation mixes, different demand patterns and price volatility across borders, it is difficult to set out a precise future optimal level of interconnection. Interconnectors will, however, provide benefits in a future market with a higher proportion of low carbon generation and greater variations between minimum and maximum demand.
The Report notes that the most significant benefits to investment in interconnection will be found in pursuing new links with those markets which have considerably different prices and demand patterns. While investment in interconnectors will mainly be led by the private sector, ‘government-led diplomacy’ can help to forge ties with markets offering plentiful low carbon power, like Iceland and Norway.
The Report states that energy storage will play an increasingly key role in ensuring that the UK has a resilient and flexible power supply moving forward. However, the current policy framework for energy storage is inadequate, lacking a specific definition and leading to problems like double-charging for storage providers (for both charging from and exporting onto the electricity system).
The Report recommends that Ofgem and DECC should review the legal and regulatory status of storage in order to create an appropriate framework in which energy storage can operate and thrive. Reforms to the policy regime are expected to be proposed in Spring 2017, and should then be quickly implemented.
Ofgem should also incentivise network owners to use storage to increase the capacity and resilience of their networks, which will also allow for a more responsive, actively-managed system.
Demand flexibility, also known as demand-side response, refers to a range of ways in which the demand for electricity may be reduced or shifted during peak times; these may include providing incentives to reduce demand for power or utilising off-grid power sources. Demand flexibility may also encourage the integration of low carbon power, for example, through the connection of smaller, directly connected generators and local storage. The use of smart meters may also help consumers manage their power consumption and reduce their electricity bills.
The Report recognises that demand flexibility may come from a range of different sources:
- Industrial and commercial consumers: back-up generators to switch on and reduce demand on the grid.
- Industrial and commercial consumers: reducing or shifting demand (for example, heat, refrigeration, ventilation, air conditioning) to off-peak periods when electricity is cheaper.
- Domestic demand-led: may similarly reduce or shift their demand, for example for heating or charging electric vehicles.
- Smart grid technologies: energy storage and voltage control systems may be used by network owners to help better manage networks.
A More Flexible Future Market
The pace of change in the energy market has stepped up significantly and as a measure for facilitating a more flexible future market, the Report recommends that the Government and Ofgem set out the methodology and timeframe for managing embedded generation and the increasing impact on energy networks by Spring 2017.
The NIC supports Ofgem’s continuing incentivisation of long term upgrades to networks through innovative technologies (e.g. storage and demand flexibility), as it considers that the potential net gains for future consumers outweigh the risk of stranded assets.