Smart Power: How to build a smarter, more flexible power system

September 26, 2016

It’s officially conference season! Today I’m in Liverpool at the Labour Party Conference, and next weekend the whole Policy Exchange team will be de-camping to Birmingham for the Conservative Party Conference (see our full line-up of events here and here).

One of the highlights of my conference schedule this year will be the series of events we are doing on the topic of “Smart Power”. These events are linked to an ongoing Policy Exchange research project which I first outlined in a blog earlier this year.

Labour: Smart Power: Is local energy the future?

Monday 25th September, 13:00-14:00
Room 2H5, ACC Liverpool, L3 4FP

Speakers include Jonathan Reynolds MP, Member of the Business, Innovation and Skills Committee, and representatives from Centrica, Open Energi, and Tesla.

Conservative: Innovative Solutions to ensure security of supply

Monday 3rd October, 09:30-10:30
Hotel Novotel, 70 Broad St, Birmingham, B1 2HT

Speakers include James Heappey MP, Member of the Energy and Climate Change Committee, and representatives from Centrica, and National Grid. This event will be chaired by Andrew Ward, Energy Editor of the FT.

As outlined below, the power system is going through a period of transformative change, and this is creating new challenges for the operation and management of the power system. Both the events and our report will discuss the potential to create a smarter, more flexible power system, involving new technologies such as battery storage and demand-shifting – and how this could be greener, as well as reducing costs to the consumer.

The report is due for publication in a few weeks’ time, but I thought I would reveal a few of our emerging findings.


Transformation of the power system

As I outlined in my earlier blog, the GB power system is going through a period of significant and transformational change. The key changes taking place can be thought of as the four ‘Ds’:

  • Decarbonisation of the power system to hit carbon targets, with a massive growth of renewables (including wind, solar and biomass), and decline of fossil fuel generation such as coal;
  • Decentralisation of the power system, away from large-scale power stations towards distributed renewables and small-scale power stations;
  • Digitalisation of the power system due to the advent of smart meters and controls;
  • Demand adjustments, due to the impact of efficiency improvements and the electrification of heating and transport (we looked at the electrification of heating in a recent report here)

These changes are creating some significant challenges for the management and operation of the power system, for example:

  • Balancing: the growth of intermittent renewables capacity (e.g. solar and wind) makes the job of balancing demand and supply more challenging.
  • Capacity adequacy: the “capacity margin” in the GB power market is falling to very low levels, due to the loss of a significant amount of thermal capacity (coal, gas, oil and nuclear) in recent years. The retirement of ageing coal and nuclear power stations is expected to continue over the next decade.
  • Excess capacity and constraints: parts of the GB power system now experience an excess of generation at particular times, for example on windy or sunny days during the summer when demand is low. This can lead to generators being constrained off the system, and in some cases being paid to turn down.
  • Connection: there are now parts of the GB power system where it is difficult to connect new generation due to a shortage of spare grid capacity.
  • System (in)stability: the grid is designed to operate at a constant frequency. The loss of thermal power stations makes it more difficult to maintain frequency at the required level.

All of this points to the fact that if we want to decarbonise the grid, and integrate low carbon sources of power, then we need to build a power system which is smarter and far more flexible.

There is a strong evidence base to suggest that increasing the amount of flexibility in the power system would result in significant savings to the consumer. Or to put it another way – attempting to decarbonise the power system without ensuring there is sufficient flexibility, could be very costly.


Flexible Technologies

Flexibility can be provided by a number of different technologies including thermal power stations (coal, gas, diesel), demand response (backup generation, or demand shifting away from peak times), storage (batteries, pumped hydro, other), interconnectors, and renewables. These providers of flexibility have different characteristics – in terms of their speed of response, duration of response, cost, performance, and emissions of greenhouse gases and local pollutants.

Even within each of the technology groupings there are many different options at differing stages of development. For example pumped hydro storage is a very mature technology – with 2.8 Gigawatts already installed in the UK. Lithium-ion batteries are developing rapidly, and are already becoming competitive in some markets. Other storage technologies such as compressed air storage and super-capacitors are still at an earlier stage of development.


Barriers to deployment

One of the areas of focus for our research has been to identify the barriers to the development of flexible power technologies. Speaking to companies in the sector, it is very apparent that there is not a level playing field between technologies.

Some of the cleanest forms of flexibility (such as demand response and storage) are being held back due to a number of policy, regulatory, commercial and institutional barriers. To take just one example: there is currently an issue concerning the design of clean energy policies such as the Renewable Obligation and Feed-in Tariff – specifically how the cost of these policies is levied on consumers of electricity. Storage projects pay these levies when they take power from the grid, then when they export power later the charges are levied again on the final consumption of the same power. Other forms of flexibility such as diesel generators and interconnectors do not pay these levies at all. This “double-charging” could be overcome by calculating charges on a “net” basis for storage projects.

At the same time, the dirtiest forms of flexibility (such as diesel generators) are getting a relatively easy ride. Diesel generators produce very high emissions of greenhouse gases, as well as contributing to local pollution (as discussed in our recent report on air pollution here). Despite this, there has been a proliferation of diesel generators in recent years, in part due to their success in recent capacity/reserve auctions. One way to level the playing field would be for Government to tighten emission standards for local pollutants such as Nitrogen Oxides (we discuss this further here). Government also needs to reconsider the structure of grid charges, which currently create a strong financial advantage for “embedded” small scale generators such as diesel.

This is not about Government “picking winners” and subsidising a technology, nor is it about Government excluding any particular technology outright. It is simply about levelling the playing field between technologies to enable cost-effective flexible technologies to succeed.


Long term vision

Whilst these “quick fixes” are important, we also think that some longer term thinking is needed about how the power system is likely to evolve in the future, and what this means in terms of system operation. It is clear that creating a smarter, more flexible power system is a pre-requisite to decarbonising the power system and integrating more renewable power. The challenge is how to reform policy and regulation to deliver this in the most cost-effective manner. The current framework of policies and regulations is far too complicated, and frequently creates barriers to the deployment of flexibility, as well as unintended consequences.

Our report will set out the case for a fundamental redesign of the power market, to better reflect the new system challenges identified above, and provide clearer signals to invest in flexibility. In our view, this is best achieved using technology-neutral market mechanisms, designed around system needs, complemented by more cost-reflective charges for the use of the grid network. There is also the potential to create more localised energy markets, in which Distribution Network Operators take a more active role in managing their networks.

One of the highlights of my conference schedule this year will be the series of events we are doing on the topic of “Smart Power”. These events are linked to an ongoing Policy Exchange research project which I first outlined in a blog earlier this year.

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