Reform energy market to ensure supplies when it’s not windy.

Mar 17, 2021

Ed Birkett looks at policies needed to manage the up and downs of increasing wind power on the UK’s electricity grid.

 

New figures show that 2020 was the greenest year yet for the UK’s electricity supply, with nearly 60% of electricity produced by low-carbon sources.[1] Offshore wind is now the driving force behind the UK’s greener grid, growing by around a quarter annually and already providing 17% of our electricity.

More renewables increasingly lead to prolonged periods of low electricity prices, which is good for customers, but this winter has also seen periods of record high prices caused by a combination of high demand due to cold weather, power plants offline for maintenance, and periods of low output from wind farms.[2]

Last year, I argued that more wind power won’t lead to blackouts, with the caveat that this relies on building alternatives to gas-fired power stations, which we currently use to keep the lights on when it’s not windy.[3] However, despite positive noises in the Energy White Paper, the Ten Point Plan and the Budget, there’s still a long way to go before we have a comprehensive plan to replace gas-fired power stations.

Government needs to tackle intermittency head on

Rapid price reductions for offshore wind farms mean they will play an increasingly important role in the UK’s electricity mix, quadrupling by 2030 to meet the Government’s target of 40 gigawatts (GW) of capacity.[4] To date, grid operators have been able to accommodate more wind without too much difficulty, although there are now signs that the design of Britain’s electricity market is under pressure.[5]

As we plan for more wind farms, we must tackle the challenges of intermittency head on. Data from the last few weeks shows the coming challenge (see Figure 1). For one week in mid-February, wind farms generated nearly 40% of Great Britain’s electricity, keeping electricity prices low and reducing carbon emissions. However, two weeks later wind power had almost disappeared, providing just 7% of weekly generation and leading to higher prices.

Figure 1: Weekly market share of electricity generated by wind and gas. Source: Drax Electric Insights.[6]

Today, we can rely on gas-fired power stations to balance the fluctuations in the wind, ensuring reliable and increasingly low-carbon electricity at the flick of a switch. However, Net Zero means that gas-fired power stations must eventually close. The Climate Change Committee has called on the Government to phase out all electricity generated by fossil fuels by 2035, unless the plants use carbon capture technology.[7]

The CCC’s advice is contributing to an increasingly bearish view from investors on the prospects for gas power stations. Last summer, a company operating gas power stations went into administration, taking two gas power stations offline.[8] The prospects for new gas are no better, with Drax recently confirming that it has scrapped plans for a new gas power station in North Yorkshire.[9]

As gas power stations are decommissioned, the UK will need new, low-carbon energy sources to smooth out the wind – known as ‘firm low-carbon resources’ – and we’ll also need to plan for much bigger swings. By 2030, we could see whole weeks where wind generates almost all of the UK’s electricity, followed shortly after by week-long lulls in generation.

UK must apply offshore wind-style innovation to new technologies.

To date, the Government has taken a piecemeal approach to funding new sources of firm generation. Alongside last year’s Energy White Paper, the Government announced the next stages of its plans for gas power stations with carbon capture, known as ‘Power CCUS’.[10] The Government plans to sign bespoke contracts with Power CCUS plants, an approach that could be extended to other types of resources, for example low-carbon hydrogen or bioenergy with carbon capture. This new business model, whilst innovative, risks shutting out alternatives that fall outside the scheme, like geothermal and long-duration energy storage.

In the Budget, the Government published new details on the ‘Net Zero Innovation Portfolio’, including a £68m competition to implement energy storage prototypes or demonstrators.[11],[12] Again, this funding is welcome; however, £68m is a small sum to accelerate the development of a new class of technologies, and some of the projects won’t come online until as late as 2025.

Alongside these individual approaches, the Government must urgently develop an overarching market framework to bring forward resources that can replace gas-fired power stations. In our recent report, Powering Net Zero, we recommended reforms to the Capacity Market that would increasingly support early-stage firm low-carbon resources.[13]

Our proposals for a reformed Capacity Market would mirror the Government’s successful support for offshore wind, using a ‘Pot 2’ for ‘less-established technologies’. The Contracts for Difference scheme used this approach to support newer technologies such as offshore wind, wave energy, tidal energy, and advanced technologies for generating electricity from waste. By following a technology-neutral approach, the Government and the private sector quickly identified that offshore wind was the most promising of the ‘less-established technologies’, with prices falling by two thirds in the following five years.[14] Doing something similar with the Capacity Market would help to develop a suite of firm low-carbon energy options that will manage the impact of intermittency.

As the 2020s progress, offshore wind is set to deliver bigger projects at lower costs. The challenge for the Government is to answer the question “what happens when the wind doesn’t blow?” We know that, increasingly, the answer can’t be gas-fired power stations; and we know that battery storage and demand flexibility will get us some but not all of the way. The rampant success of offshore wind shows the Government the way forward: harness the market to find the best solutions. It’s time to apply that same market competition to get the UK off gas.

[1] BEIS (February 2021). Energy Trends: UK electricity. Table 5.4 (Provisional figures for 2020). Link

[2] Ambrose J. The Guardian (January 2021). UK electricity prices hit record level as Britain’s big freeze looms. Link

[3] Policy Exchange (October 2020). No, more wind power doesn’t mean the lights will go out. Link

[4] UK Government (November 2020). PM outlines his Ten Point Plan for a Green Industrial Revolution for 250,000 jobs. Link

[5] Policy Exchange (June 2020). Electricity markets under pressure. Link

[6] Weekly market shares of electricity generated by technology type. Drax Electric Insights (accessed 10/03/2021). Link

[7] CCC (December 2020). Sixth Carbon Budget – the UK’s path to Net Zero. Link. Page 134.

[8] Shrestha, P. Energy Live News. Calon Energy’s UK gas plants put in ‘dormant state’ by administrators. Link

[9] Ambrose, J. The Guardian (February 2021). Drax scraps plan for Europe’s largest gas plant after climate protests. Link

[10] BEIS (December 2020). Carbon capture, usage and storage (CCUS): business models. Link. Page 43 onwards (Section 4).

[11] HM Treasury (March 2021). Budget 2021. Link. Page 70/110. 2.150: Energy innovation.

[12] BEIS (March 2021). Net Zero Innovation Portfolio. Link

[13] Policy Exchange (December 2020). Powering Net Zero. Link

[14] KPMG (September 2019). Blown away: CfD Round 3 delivers record low prices for offshore wind. Link

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