Responding to Demands: how can the UK deliver a “smart power” system

April 14, 2016

Responding to Demands: how can the UK deliver a “smart power” system?

“Smart power” and “flexibility” are quickly becoming the key buzzwords in the UK power sector. In last month’s budget the Treasury fully accepted the recommendations of a new report by the National Infrastructure Commission on how to create a “smart power” system. The report advocated the use of technologies such as power interconnection, storage, and demand response to create a smarter, greener and cheaper power system.

Policy Exchange is today launching a new project on smart power. The case for smart power has already been made, not only by the NIC, but by DECC and many others. However, there is still uncertainty about how to deliver this in practice. Our new project, Responding to Demands, will seek to identify ways to level the playing field in order to unlock smart power technologies.

Why smart power?

The power sector in Great Britain is undergoing a radical transformation from a system of large centralised coal, gas and nuclear power stations, to a system with far more decentralised generation including renewables. Many coal power stations are closing due to a combination of environmental concerns and more challenging economics, and the Government has signalled an end to unabated coal generation by 2025. In addition, 4GW of nuclear capacity is set to close by 2025 as stations reach the end of their operational life.

At the same time, the decarbonisation of the power sector has led to the deployment of a large amount of renewable energy capacity, including wind and solar, which provides variable or intermittent output and tends to be connected to the local distribution network. There is already around 23 GW of wind and solar capacity combined, and this could increase to 28-40GW by 2020/21 according to National Grid. Patterns of electricity consumption are also changing, as heating and transport start to be electrified.

The changing patterns in the demand and supply of electricity are putting the power grid under increasing stress. The challenge is three-fold. First is the challenge of ensuring that there is enough capacity to meet peak demand. The capacity margin for the winter of 2015/16 was at its lowest level in a decade, and there is a broad consensus that margins will remain tight over the next few years.  Second, as conventional power stations are replaced with intermittent generation, it is essential to ensure that the system retains flexibility to balance the market and respond to changes in demand and supply. Third, the UK is rapidly getting to the point where inflexible supply could outstrip demand at times during the summer, in part due to the growth of wind and solar, which could mean that generators will need to be curtailed.

In order to address these concerns, DECC and National Grid have developed several tools to ensure that there is sufficient capacity and flexibility in the system, such as the Capacity Market, Supplementary Balancing Reserve, Frequency Response, and the Short Term Operating Reserve. The Capacity Market provides a guaranteed payment for existing and new generators which can provide firm capacity. It was originally thought that it would encourage investment in new capacity, but low prices in the first two auctions have meant that 95% of capacity contracts have been awarded to existing generation. More strikingly, of the new build capacity secured to date, the majority of it is small scale “peaking plant” such as gas and diesel generators. Trafford, the only large scale gas plant to secure a Capacity Market contract to date, remains in doubt. Similarly, almost a quarter of the back up power in the Short Term Operating Reserve is provided by diesel generators.

The success of diesel peaking plants has been criticised on environmental grounds, since these generators have greenhouse gas emissions two to three times that of a combined cycle gas turbine, and also give rise to significant local air pollution. As shown in our recent report, air pollution is linked to tens of thousands of premature deaths each year in the UK. This means that the integration of renewable energy into the power market may be inadvertently resulting in deployment of some of the dirtiest forms of generation. It has also been argued that developers of diesel peakers have been able to secure excessively high financial returns. The backlash against the latest round of Capacity Market results, combined with a desire to deliver more gas capacity, has caused the Government to rethink its approach to capacity market design going forward.

There are several alternatives to which can provide “clean flexibility” in the power system– such as Demand Side Response (DSR), storage, and power interconnectors. We previously considered the potential role of interconnection in our report Getting Interconnected (2014), hence our new project on smart power will focus primarily on DSR and storage.

DSR and storage can potentially lead to significant costs savings across the power system – by reducing the need to build extra generation capacity and grid network reinforcements. They can also reduce carbon emissions and air pollution by displacing the use of diesel, gas and coal power stations. DECC estimates that savings could amount to £ tens of billions by 2050, whilst the National Infrastructure Commissionestimates that smart power technologies could save consumers up to £8 billion a year by 2030. The Carbon Trust estimates that the savings from storage alone could amount to up to £2.4 billion per year by 2030 (or £50 per household), or even more if regulatory barriers are fully removed.

The UK already has 2.8GW of operational pumped hydro storage, which was built during the 1960s-80s, but only around 25MW of new storage has been built over the last decade. The take-up of DSR has remained relatively limited to date: in the most recent Capacity Market auction only 456MW of DSR capacity was successful, and no new storage projects were successful despite 135MW bidding in initially. This is in contrast to other markets such as the US and New Zealand, where DSR is far more widespread.

Recent reports by DECC,  Ofgem, the National Infrastructure Commission and the Carbon Trust  have identified a range of barriers to the deployment of DSR and storage in the UK, with a number of common themes emerging, as follows:

  •  Regulatory barriers, such as grid charges, and rules governing storage and demand response “aggregators”.
  •  Market barriers,for example the difficulties faced by DSR and storage providers in accessing markets, and “missing markets” which prevent DSR and storage providers from capturing the system benefits they provide.  
  • Policy barriers, for example the rules governing procured capacity and flexibility services such as the Capacity Mechanism, and the policy risks that stem from the interaction between policies.
  • Institutional issues, for example the roles and interaction between Distribution Network Owners and the System Operator, and how this could potentially evolve in the future.
  • Commercial and financing issues, such as the difficulty faced by DSR and storage developers in combining revenue streams, and hence in raising finance.
  • Technology risks linked to uncertainty in the performance of emerging technologies.

There is an increasing recognition that the potential of DSR and storage is being underexploited in the UK, and that there is a need to address the above barriers and “level the playing field”. Policymakers are actively considering what to do next, but there is still a need for significant thinking to progress from the generic barriers identified about to some concrete policy recommendations.

This is precisely where we plan to focus our work over the next few weeks and months – undertaking a new project, Responding to Demands, supported by Centrica, National Grid and Open EnergiAs part of thiswork we plan to hold a number of roundtables, and also to consult with leading DSR and storage providers. If you are interested in this topic and would like to engage with us further then please contact our Environment and Energy team as follows:

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