In October 2015, the National Infrastructure Commission was asked to consider how the UK can better balance supply and demand, aiming towards an electricity market where prices are reflective of costs to the overall system.
Today (Friday 4 March), the Commission publishes that analysis.
The Commission’s central finding is that smart power – principally built around three innovations, interconnection, storage, and demand flexibility – could save consumers up to £8 billion a year by 2030, help the UK meet its 2050 carbon targets, and secure the UK’s energy supply for generations.
‘Smart power’ makes practical recommendations to this end - not new subsidies or substantial public spending - but towards the creation of a level playing field and a better managed network:
government should pursue additional interconnectors with other European countries where the benefits are most significant
the UK should become a world leader in electricity storage systems. Two steps are required: a review of the regulatory and legal status of storage, removing outdated barriers to be completed by Spring 2017 and implemented as soon as possible, and Ofgem should encourage network owners to use storage
the UK should make full use of demand flexibility by improving regulation, informing the public of its benefits and piloting business models
Lord Adonis said:
Quality infrastructure is fundamental to our quality of life. Better decision making, clearer planning, and more efficient and timely delivery can help create the world class infrastructure this country needs to succeed.
To radically improve, we have to do more than simply adapt to a changing world - we must shape that change to our advantage. The developments in our electricity sector are a case in point.
Our existing power stations are closing down and their replacements will be radically different as we decarbonise supply to reduce emissions. This represents an enormous challenge, but it also leaves the UK uniquely placed to benefit from three exciting innovations set to transform the global electricity market – interconnection, storage and demand flexibility.
The UK can lead the world in harnessing these innovations, bringing jobs and investment into the country and cutting bills for consumers. The National Infrastructure Commission report, Smart Power, makes a series of strategic recommendations to help do exactly that.
We do not call for new subsidies or significant public spending, but rather a level playing field through fairer regulation and a better managed network to allow these exciting new technologies to compete.
If we get this right a smart power revolution could save consumers £8 billion a year.
Smart Power: In brief
Part 1: All change
Our energy sector is changing fundamentally. Two-thirds of our existing power stations are expected to close by 2030 as our coal, nuclear, and oldest gas fired power stations reach the end of their lives.
This report makes recommendations to help ensure that our electricity system is fit for the future.
Our existing infrastructure was designed for a post-war world where homes and businesses were supplied almost exclusively from large fossil fuel generators.
As we modernise and decarbonise our energy system we need to find new ways to manage the network in the most efficient way possible.
This represents a serious challenge and an enormous opportunity. If we get this right, it will provide the efficient, flexible and secure energy infrastructure our country will need to thrive. DECC and Ofgem have already made a start.
Part 2: Smart power
In the coming decades the UK is uniquely placed to benefit from three innovations which could help fire a smart power revolution.
Interconnection - connecting our electricity network to our continental neighbours is already bringing down bills and helping to balance the system. More connections to cheap, green power supplies, such as Norway and Iceland could bring great benefits to the UK. Government should redouble its efforts to open new connections.
Storage - technology is accelerating at a remarkable speed. The UK could become a world leader in making use of these technologies, not through subsidies, but by ensuring that better regulation creates a level playing field between generation and storage.
Demand flexibility - A new generation of hi-tech systems means consumers can save money and cut emissions without inconvenience. Government should ensure the UK’s benefits by improving regulation, informing the public of its benefits and piloting schemes on its own estate.
Part 3: Maximising the benefits of a more flexible market
For the smart power revolution to realise its full potential we must ensure that our networks and systems keep up.
This requires more active management of our local electricity networks, a national system operator able to keep up with an increasingly complex system, and a strategic approach to upgrading our network.
The UK is uniquely placed to lead the world in a smart power revolution. Failing to take advantage would be an expensive mistake.
A smart power revolution could save consumers up to £8 billion a year by 2030
Work commissioned from Imperial College London and the University of Cambridge energy policy research group for the Smart power report found that the flexible smart power system recommended by the National Infrastructure Commission could result in savings of up to £8.1 billion a year by 2030.
In summary, one of the key observations from this study is that operational flexibility can significantly reduce the integration cost of intermittent renewables, to the point where their whole-system cost makes them a more attractive expansion option than CCS and/or nuclear.
However, sufficient operational flexibility must be available to ensure that the system can cope at times of stress (e.g. lots of wind, very low wind over several days, unexpected nuclear outages, low fuel prices, high demand).
Additional analysis carried out to quantify the potential regret of pursuing a more flexible power system, against a business-as-usual evolution with limited operational flexibility. Even in a system that is less decarbonised (e.g. reaching 200 g CO2/kWh in 2030), increasing flexibility was found to be low-regret option, reducing the overall cost while maintaining security of supply requirements.
For example, the analysis shows that gross benefits of flexibility for reaching the 50 g CO2/kWh intensity are between £7.1-8.1 billion per annum, while the corresponding benefits for the 100 g/kWh target amount to £3-3.8 billion annually (savings in the system with 200 g CO2/kWh would also be significant at around £2.9 billion per annum).
In additional studies carried out on DECC scenarios, the analysis demonstrates that flexibility could reduce the amount of low carbon generation that would need to be built to meet the carbon targets. In the core DECC scenario, the presence of non-generation flexibility can reduce the amount of nuclear and wind generation to be built between 2030 and 2050 by 14GW and 15GW respectively, while still meeting carbon targets of 25g/kWh.
Gross benefits of flexibility in these scenarios could reach £10 billion/year. This demonstrates that flexibility does not only assist in accommodating renewables output but results in significant savings in investment in low carbon generation (a decarbonisation target can be met by building less low carbon plant).
Research from ‘Future proof energy infrastructure](/government/admin/publications/600239), by Goran Strbac et al.
Recommendations in full
Recommendation 1. Government should pursue additional interconnectors with other European countries where the benefits are most significant
Interconnection investment decisions should continue to sit primarily with the private sector but there is a role for government-led diplomacy to unlock those markets that can offer potentially large benefits to UK consumers.
The government should therefore focus its efforts on exploring increased interconnection to markets with abundant sources of flexible low carbon electricity, such as Norway and Iceland.
Recommendation 2: The UK should become a world leader in electricity storage systems
To steps are required for this.
DECC and Ofgem should review the regulatory and legal status of storage and remove outdated barriers to enable storage to compete fairly with generation across the various interlinked electricity markets. The reforms should be proposed by Spring 2017 and implemented as soon as possible thereafter.
Network owners should be incentivised by Ofgem to use storage (and other sources of flexibility) as a means of improving the capacity and resilience of their networks as part of a more actively managed system.
Recommendation 3: The UK should make full use of demand flexibility by improving regulation, informing the public of its benefits and piloting business models
Ofgem should start an immediate review of the regulations and commercial arrangements surrounding demand flexibility with a focus on making participation easier and clarifying the role of aggregators; this should be complete by Spring 2017.
DECC should make future changes to the capacity market to reduce the costs and barriers to entry for demand flexibility.
DECC, Ofgem and National Grid should ensure that large users and opinion formers are aware of the money saving opportunities that demand flexibility can offer and encourage more industrial and commercial consumers to take part.
Pilots focusing on business models which make demand flexibility easy and attractive to consumers should be established and fully evaluated. Government should demonstrate best practice by investigating the scope for demand flexibility on its estate.
Recommendation 4: The system operator must create new markets that will allow open competition for the services it procures and ensure it keeps pace with the network it oversees
The creation of an entirely independent system operator should not be treated as an immediate priority but should be kept under review in the light of progress towards strengthening National Grid’s independence.
Ofgem should consider how it encourages the system operator to develop new markets to provide ancillary services which allow new technologies to participate more easily. The long term goal must be for a more strategic and transparent approach to the procurement of ancillary services and more cost-reflective charging.
Recommendation 5: Enabling the transition to more actively managed local networks should be a government priority
By Spring 2017 DECC and Ofgem should consult and set out how and under what timeframe this transition should best take place.
Recommendation 6: Where upgrades to our networks are needed Ofgem should continue its work in encouraging network companies to make long term strategic decisions.
Whilst this does increase the risk of stranded assets, the Commission believes that if there is a potential net gain to future consumers then this approach may be justified. If network owners are not best placed to manage this risk, they should work with third parties to help facilitate these investments.
The National Infrastructure Commission has been created to enable long term strategic decision making to build effective and efficient infrastructure for the UK and will operate in interim form until it is established by legislation as an independent body.
Image by Antoskabar on Flickr. Used under creative commons.