And another thing that’s not in the Budget…

This article originally appeared in BusinessGreen on 13th March 2017.

I suppose it is the prerogative of the Opposition to bang on about what is not in the Budget as a response to what actually is: “If only the government had put X, Y, Z in the Budget/put this tax down/helped this group of people, all would be fine, but they didn’t.” Writing this on Budget day does tempt me in that direction, but I will resist it… almost. What I want to bend your ear about is something that was not in the Budget, but should have been, because, well, the government said it would be.

The Levy Control Framework (LCF) -the arrangement that funds and caps underwriting for renewable energy development – comes to an end in 2020. No extension of the framework has been in sight for some time now, which is potentially very destabilising for renewables investment since it is now 2017, and it takes rather more than two and a half years to get a renewables project up, running and generating. Not knowing whether there is going to be any support in place when your project seeks backers – who, not unreasonably, will want to know how it is going to be funded and supported – tends to kill off those developments. Rather important, then, that we know what the next stage of the LCF will look like both in terms of what will be funded and to what extent.

The government seemed to recognise this at the time of the last Autumn Statement. Whilst they couldn’t tell us at the time of the statement what the control total for 2025 was going to be, we would be told soon. “The government is considering the future of the Levy Control Framework…” the Treasury red book told us (except rather confusingly it happened to be a green book on that occasion) “…which it will set out at Budget 2017”.

About time, too many people thought, especially since the LCF was running into some serious deep waters.

Shortly after the Autumn Statement, the National Audit Office reported on the overspend that had gathered in the early stages of the 2015-2020 phase of the LCF. The control total of spending (on Renewable Obligation Certificates and latterly Contracts for Difference) was supposed to be £7.6bn by 2020, but turned out to be a projected £9.1bn – £1.5bn over the cap. Since the rules of the Levy Control Framework require any overspend to be clawed back very quickly from future years, there arises an immediate conundrum for the future of the framework: will any new control total announcement include the fact that £1.5bn needs to be clawed back from new spend, since all (or most) of the £9.1bn will have to go on continuing payments for 15-year ROC and CfD contracts.

The overspend has been attributed to some rather predictable variances: offshore wind has proved to be rather more efficient than envisaged, meaning that it will collect more payments from more output. And energy prices have been going down and not up, meaning that the difference between the ‘strike price’ (the overall total sum the operator gets) and the ‘reference price’ (the money the developer would get from selling the output) is widening, meaning more money from the LCF for existing schemes and less available for new entrants.

A rather badly designed scheme is going into its next phase more or less bankrupt, and unable to take on new commitments. Except that… the government has effectively borrowed some £700m for new entrants from the next phase of the (as yet unannounced) scheme by holding auctions for new offshore wind over 2018-19 which will pay out in CfDs in the early 2020s when the winning schemes are up and running.

So, regrettably – but perhaps unsurprisingly – in view of the almighty mess that is the LCF at this moment in time, the government has not actually included a new programme and control total in the Budget. Instead, the red book (and it really is red this time) says: “the government recognises the need to limit costs to businesses and households as the UK decarbonises its energy supplies. The existing Levy Control Framework has helped to control the costs of carbon subsidies in recent years, and will be replaced by a new set of controls. These will be set out later in the year.” Which rather suggests that the government looked over the cliff at the LCF, decided that it was too horrible to contemplate, agreed that something else should replace it, hasn’t figured out yet just what, but BEIS and Treasury officials are hard at work with hot towels round their heads thinking about what it should be. They have now given themselves until “later in the year” to find something.

And that’s the end of the Levy Control Framework for now. But all is not yet lost. As we have been reminded by the Chancellor, there will be TWO Budgets this year, as the Budget day reverts to the autumn. So perhaps the prediction in the Autumn Statement will turn out to be true: there will be an announcement in “Budget 2017”, only not in the Budget we all thought the statement meant. So all they’ve got to do is figure out a new scheme, hide the overspend, work out how new entrants can get paid, honour the money committed in advance to the next round of offshore wind projects, and all will be well. Just you wait until the next Budget. It’s bound to be in there.

The Three Ds of Labour’s Energy Policy

This blog post was adapted from a speech I delivered to the Cornwall Energy Associates conference: ‘Towards a Smart, Flexible Energy System’ in February of this year.

Labour’s policy for the future direction of our energy system can be summed up by the three Ds – decarbonisation, decentralisation and democratisation.

Not exactly the snappiest of slogans, I know, but what do I mean by each of them?

Well firstly, we clearly need to maintain a steady route of our energy systems towards a process of decarbonisation. We are committed to making sure that the UK meets its climate change targets set both by the recent Paris accords, and by our own Climate Change Act.  And we know that energy use – by which we mean of course all energy: heat, electricity and transport – accounts for something like 70% of our greenhouse gas emissions. We are in the process now of contemplating our energy obligations under the Fourth and Fifth Carbon Budgets – Parliament has adopted the Fifth Carbon Budget running up to and beyond 2030 without, on present policies, having the ability to meet the energy goal of achieving an overall carbon output of below 100gms/kWh.

We have got to get to that sort of level both to meet the terms of the Fourth Carbon Budget and have a chance of meeting the Fifth. And that means pushing hard along the route of greater renewable and low carbon generation perhaps aiming for about 60% of electricity and heat to be supplied by renewable and low carbon means by 2030. And to maximise the effect of that low carbon generation, we will need radically to improve both the energy efficiency of the grid in delivering power, and the energy efficiency of our homes and offices, hence saving on the need for new capacity by making our homes and offices far less demanding of energy in their daily operation.

I am, by the way, not convinced that decarbonisation of heat – on which we are lagging currently, with only about 5% of heat provided by low carbon means – can reasonably be effected by electrification. This is because the demand range for gas for heat at present far exceeds the daily and seasonal demand for electricity by about six times. The consequence of electrifying all our heat requirements would be to place an intolerable load on electricity generation, and more importantly, the capacity that would be required to safely serve such an arrangement in terms of peak demand would largely undo the gains that could be made by introducing a smarter and more efficient electricity system.

sansom-heat-and-electricity-demand-chart-2

Synthesised national half hourly heat demand (red) for 2010 and actual half hourly national electricity demand (grey). Source: Dr. Robert Sansom

Not only that, but the cost involved in ripping out all our gas networks and all our domestic boilers to replace them with electrically-driven heat pumps would be very difficult to sustain, even if the British public felt ok with the idea that in many instances their boilers would be taken away, and their gardens would be dug up to install heat pumps. We think that a green gas route to heat decarbonisation is a preferable route. That will involve medium term injection of green gas – biomethane, syngas and hydrogen – into the grid to substantially decarbonise delivery of heat, and in the longer term, move towards full hydrogen supply along with a substantial expansion of district heating programmes where appropriate. And of course there will be an element of heat pump installation, particularly in new build properties.

So to the second D: Decentralisation. The development of a more decentralised energy system becomes possible with the developments we are discussing today – a flexible, smart system which enables energy properly to be produced in smaller units and fed into the system. We see this in terms of self-sustaining local arrangements which involve mini grids and are off the system except for necessary back-up arrangements. It also allows areas of the country – cities in particular – to vertically integrate and run their own local energy retail arrangements for customers. by developing their own local generation, both in terms of actual plant and aggregation for supply of prosumer domestic and small commercial generation, We are already beginning to see this latter development with the emergence of municipal retail companies such as Robin Hood Energy.

It is also on the longer term cards to see Distribution Network Operators becoming instead Distribution Service Operators and entering into partnerships with cities, or those cities taking over taking over grids that serve their areas, balancing their own services locally in the first instance, and trading into a national balancing system in prebalanced blocks. Decentralisation leads of course to my third D but it is worth, in passing, thinking about what the effect of such decentralisation, assuming it was based on smaller blocks of generation, would have on system integration. The reduction of unit size from a maximum of 1.8GW to, say, 0.5GW would decrease system integration costs by about 20% because of the lowered need to hold capacity in reserve to deal with any large plant going out of commission at any one time.

So to the third D: democratisation – that is, to move towards a system where the consumer ceases being a passive recipient of an energy supply but instead becomes either an active prosumer with control substantially of their own energy requirements, or has, through participation in local energy schemes, become a stakeholder in their energy environment. That means of course being a part of a local generating, supply and retail environment at municipal level, or taking a greater part in that local process through active involvement in any of those processes.

Now I do not kid myself that this means that a nation of energy activists will arise – I am well aware of Oscar Wilde’s observation that ‘the trouble with socialism is that it takes too many evenings’ but I do think that a system that relates to its consumers in an active way rather than a passive way has all sorts of benefits for the system itself, in addition to the likely cost and bill benefits to customers. Among other things, it is likely to ensure that energy is used wisely by consumers who can see and be part of the process by which it is sourced and managed. And that, among other things, is something we are going to have to fix over the coming decades – it will not just be about delivering energy more efficiently but changing people’s perceptions of what it is to use energy. We will be entering an era where energy will be a precious commodity, to be used carefully and sparingly, and not sprayed around profligately as is the case today, an approach which is reinforced by the distance energy remains from those who use it

So back to our subject today – a smart and flexible energy system. And the bottom line of all this is that such a vision of our energy future is only possible with the underlying assumption that our systems really are going to change from their present largely uni-directional, centrally balanced and regulated arrangements to systems that use energy more smartly, maximise the actual use of output wherever and whenever it is produced, and enable a proper two-way process to develop in terms of energy generation supply and use.

And developing a smart and flexible system, to my mind, produces multiple benefits in addition to allowing the processes of localism to take place. The ability of smart systems to avoid or reduce investment in network reinforcement, for example – estimated to produce savings of up to £12 billion by 2050. The very clear benefit of avoiding ramping up new generation – perhaps saving the system £5 billion by 2050. The ability to meet binding carbon targets with a far lower deployment of those renewables into the system than might otherwise be the case – also saving perhaps £5 billion on otherwise incurred costs by 2050. The optimisation of balancing on a minute by minute system with smart intelligence on imbalances right up to and beyond gate closure – and by the way, enabling far better visibility of generation into the system from National Grids point of view – producing savings of perhaps £1 billion per annum on present arrangements.

This can come about with efficient use of storage both in domestic and generation environments, enabling a far less variable output from renewables, and at domestic level by allowing for effective load shifting during the day to maximise the use of what goes into the system.

Smart can aid that load shifting as well, by establishing use protocols, usually without the active involvement of consumers, that contribute towards the balancing of the system with minimal additional back up capacity required. And certainly with the advent of electric cars, we are going to need efficient charging protocols based on smarter and two-way responsive local supply systems.

The issue, I guess, that faces us in all this, is: will it just happen as the logic of the system moves forward? We have even now a penetration of variable renewables into the system which suggests to me that we cannot sustain traditional practices of balancing fines, merit order arrangements and so on – or does it need shaping by regulation particularly to make it happen? My view is that we need to regulate urgently to ensure that we stay on this path. We need, for example, to regulate a level playing field for storage even if it looks in its own right to be commercially viable in the not too distant future so that choice editing of technology – without picking winners – becomes built into the system. We need to consider the costs of renewables in terms of their effect on the whole system including where savings result from their presence rather than look at – say – the cost of a CfD alone, and regulate accordingly.

And we probably need long term to contemplate just what our National Grid arrangements will look like in a world of prosumers withdrawing from the system, and decentralisation looping arrangements systematically below the high level grid realm. We will need a National Grid of course, to sustain inputs and distribution of large energy sources and – a key part of the toolbox of smart systems, greater interconnection capacity. But I doubt that in itself a system operator in its own right is going to be profitable as is the case currently. We need to think over the next period of how we are going to support the system operator in the end.

My view is that in the end, we will have to (just as we need to treat interconnections as public goods) contemplate how we recirculate the savings that we will gain from smartening the system both into customers’ pockets through lower and more efficient bills, and into ensuring that a new system has integrity at all its levels.

On pies, fingers and National Grid

This piece originally appeared in BusinessGreen on 1st February 2017.

I see that Ofgem has finally taken a deep breath and launched a consultation on whether the System Operator (SO) functions of the National Grid should be separated out from its overall business activities: and has concluded that, ‘well, yes – to a point it perhaps should, and well, we might think about the SO becoming a more independent company within the National Grid group, perhaps with its own licence, and that might be achieved by something like 2019’. All of which means that if we all respond positively to the consultation, some Chinese walls within National Grid might be on their way within a couple of years.

It is not that National Grid does a bad job of running the System Operator: on the contrary, it does rather well, I think. I wonder though, if this rather tepid approach really is good enough to oversee the transformation of how the grid will work over the next 20 years as it transforms (or rather it completes the transformation – it already is transforming).

We are moving from a centralised system conveying the output of known large power plants across the country, hooking up with lower voltage district systems and finally into your household, office, or factory, into a decentralised system with inputs to the grid at all levels of operation, and with substantial elements of customers effectively going off grid to all intents and purposes.

National Grid is already managing some interesting possible conflicts of interest – it is the regulator, effectively, for the development of interconnectors, whilst having a substantial interest in an interconnector business. It effectively takes decisions about what to construct through the SO and then constructs what it has decided to construct for the good of the system itself. The system operator uses transmission connected generation and demand to support its management of system frequency, and then charges for those decisions and levies charges on imbalances subsequently. More recently the SO became the delivery body for the Capacity Market and for Contracts for Difference for renewable power. The SO has also now got responsibility to identify investment needs and to coordinate and develop investment options.

All of this screams out ‘conflict of interest’ in principle, since National Grid is a very successful publicly quoted company with responsibilities to its shareholders, and indeed has substantial business outside its role as SO to look after, not only in the UK but in North America. The fact that it has done well in operating the system without too many apparent clashes with its wider remit in the world is good news to date, but looks increasingly difficult to maintain as the system transforms.

How will such a company manage the inherent difficulties involved with the complex interactions of demand side reduction, system fragmentation and more than possibly finding itself in the role, in the end, of a periodically-used back-up system for a decentralised ‘grid’ that mostly will get along without it? As that possible outcome looms, will simple defence of its own interests as transmission owner conflict with this movement and perhaps, even with the best of intentions, distort or impede it?

And it is this latter prospect, at the end of the transformation process, that ought to give some pause for thought. For at that point, it is very likely that a residual National Grid will simply not be profitable, and will need to be maintained as a public good, rather like we maintain roads for public use and (mostly) don’t try to make them pay their way.

So I suppose government has two options for the long term future of National Grid. One would be to keep all the SO functions in-house and tied to an otherwise profitable and expanding company, in the hope that they will continue to keep a decreasingly viable high level system under their wing, even if that means those conflicts become very unmanageable. The other would be, for the sake of a better and more effective transition, to bite the bullet and effectively set up a SO that is fully separate, not-for-profit and is not tied to anyone else’s company decisions.

I know which route I’d choose: and I can’t help worrying that the Ofgem consultation, thoughtful though it is in some ways, doesn’t even start properly to address that choice.