Developing a smarter power grid could save households up to £90 a year by 2030

Richard Howard

Director of Development & Head of Environment & Energy

Zoe Bengherbi

Energy and Environment Research Fellow

New Policy Exchange report sets out the economic and environmental case for creating a smarter power system, using clean technologies such as battery storage and demand response.

The new report by leading think tank Policy Exchange, estimates that the savings associated with developing a smarter, more flexible power system could amount to up to £8 billion by 2030 – the equivalent of up to £90 per household.

The report says that in order to decarbonise the power system and accommodate the growth in wind and solar power, it is essential that we create a smarter, more flexible power system. Renewable generation capacity has increased ten fold since 2000 and now stands at 32 Gigawatts (GWs). Meanwhile, the amount of conventional generation capacity has reduced by 23GWs since 2010, and many more coal and nuclear power stations are due to close by 2025.

This is creating new challenges for the management and operation of the power system. Dirty forms of generation such as diesel generators are increasingly being used to balance the system and keep the lights on – exacerbating air quality problems in cities.

The Policy Exchange report suggests an overhaul of the power system to encourage smarter, cleaner technologies such as storage and demand response (where power users vary their demand to meet supply). It identifies how to remove the regulatory and policy barriers facing these technologies, to create a level playing field, and reduce the reliance on dirtier forms of generation such as diesel.

The report proposes that in the short-term:

  • The Government should clamp down on the development of polluting diesel generators, by regulating their emissions and exposing them to carbon taxes.
  • The Government should review Capacity Market rules to ensure that clean technologies such as storage and demand response are able to access 3 year capacity contracts on the same basis as power stations undergoing refurbishment.
  • Regulatory changes are needed to remove the ‘double-charging’ of environmental levies on storage, which is undermining their viability.
  • Distributed Network Operators (DNOs) should be encouraged to consider new approaches to managing their networks such as demand response and storage. The rules and regulations governing DNOs are outdated, and need to be updated.

In the longer-term, the report calls for a major reform of the wholesale power market to value and encourage flexibility. It suggests moving to a ‘nodal pricing’ model – which would better reflect the geographical patterns of demand and supply across the country, as well as the physical constraints within the network. Evidence from power markets in New Zealand, Singapore and several US regions suggests that the use of nodal pricing can lead to improvements in efficiency and significant savings to consumers.

The report also calls for a major overhaul and simplification of the balancing services managed by National Grid, as well as network charging arrangements.

Richard Howard, author of the report, said:

“Making the power system smarter will also mean it can provide cheaper and cleaner electricity. The current set of policies is encouraging a growth in dirty diesel generators – exacerbating air pollution in UK cities and towns. The Government needs to level the playing field to encourage the use of cleaner technologies such as demand response and storage. This approach is not only greener, but could also lead to savings worth £90 per household per year by 2030.”

Professor Sir David King, Special Representative for Climate Change, Foreign and Commonwealth Office, commented on the report:

“In order to move to a low carbon power system, incorporating more renewable energy, we also need to create a smarter, more flexible power system. This important report from Policy Exchange shows how Government can encourage smart technologies such as storage through changes to policy, regulation, and market design.”

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