Where Grid Regulation Went Wrong

Where Grid Regulation Went Wrong

The Smart Systems and Flexibility Plan is the UK government’s and Ofgem’s proposal to achieve Net Zero emissions in the energy system. Most of the other current BEIS consultations are detailed looks into elements of this plan. Our response is long and detailed, including pointers as to how to reform and improve the plan and the system to be affordable, reliable and resilient, and is available on a consultancy basis. This is one section of our response.

Where We Are Now

Achievements in decarbonisation and procuring flexibility on both transmission and distribution grids have been laudable. However, the grid and entire system appear to be both rickety and deteriorating inexorably, as indicated by (for example) the:

Number of grid failures and near-misses;

Ever-escalating (currently £1.5bn p.a., or 15% of all energy expenditure, p52) costs of balancing and flexibility services;

Ever-increasing frequency, types and scale of interventions;

Continually aging grid and grid-connected assets;

The cost of £1-1.25bn capital plus ~£125m annually to connect each GW of new offshore wind (see below), and

Anticipated ever-increasing nature of all of these.

It is evident that much needs to change, to fit the grid and entire system for a Net Zero world. We cannot deliver 21st-century needs with a system (including, most importantly, its regulation and contracting) designed for the 20th century plus numerous patches. Indeed, these patches are so numerous that it is increasingly difficult to discern the system underneath that is being patched, which is why electricity costs make up less than half (and decreasing) of electricity prices, and the British electricity system is one of Europe’s most expensive and getting continually dearer.

The savings trumpeted as successes for each patch can be likened to the receding of a wave on an in-coming tide: it does nothing to reverse the rising sea level. The main difference is that, on present policies and proposals, the tide will never turn.

The focus on DSR, V2G and distributed systems to support the grid is analogous to having a flat car battery, and connecting mobile phones to its USB sockets to try to start the engine. (In fact, the differences in scale are orders of magnitude worse than this.) They don’t have the scale, duration or ability to take the loads.

You Get What You Pay For

Reforming markets to reward flexibility, stability and other services is right and necessary, but only a very tentative start of addressing what is needed. You get what you pay for, so if you pay for only part of what you need, you get only part; if you pay for the wrong things, you get the wrong things.

Current energy markets pay for:

1. Energy;

2. Capacity for future energy;

3. Ancillary services;

4. Some measures of flexibility;

5. Minimising short-term costs;

6. Quick fixes, as opposed to optimal solutions.

The markets do not pay for:

1. Delivering the energy when needed;

2. Emissions reduction;

3. Stability;

4. Duration;

5. Back-up for longer periods of need;

6. Minimising medium- and long-term costs;

7. Designing and optimising the system in the medium and (especially) long terms;

8. Minimising whole-system costs: construction, operation, maintenance and control;

9. Minimising whole-system contractual costs to provide the required services;

10. Minimising the costs, instabilities and disruption of the energy transition;

11. Major new capital investment (other than a few market-distorting special arrangements such as CfDs and OFTOs);

12. Enabling the best solutions to be built (e.g. lead time, breadth of capabilities, whole-system cost-effectiveness);

13. Optimisation of offshore and onshore systems and assets;

14. Introduction of new technologies.

Therefore, in order to obtain what the markets do not pay for, special market-distorting interventions and contracts are needed, adding enormously to grid costs while reducing flexibility, controllability, stability and resilience. As the Soviet Union discovered before it collapsed, this kind of central planning does not work in the medium and longer terms.

Excessive Costs of the Current System

National Grid’s (NG’s) Network Options Analysis 2021 proposed ~£16bn grid reinforcement to accommodate ~17GW new offshore wind by 2025, almost £1bn/GW. This ignored that NG would also have to source balancing and stability services elsewhere, and connect those services, and manage the complexities and the disturbances between the source of the problem (the wind farms’ grid connections) and the solution (the balancing and stability service providers’ grid connections); Storelectric guesstimates the total cost to be of the order of £1.25m/GW capital costs alone. Based on previous reports, annual maintenance costs are ~5% of that, and management costs are also ~5%, so (even before considering the costs of the balancing and stability contracts) annual costs are of the order of ~£125k/GW.

Non-grid solutions to this have potential to provide enormous savings (well over 50%) on this, saving the majority of the grid costs of the energy transition. BEIS, Ofgem and National Grid are right to investigate ways of achieving this, and the Early Competition Plan shows great promise. Its main shortfalls are short-term thinking and a lack of joined-up whole-system approach.

Costs of Privatised Electricity in the UK

In the years soon after privatising Britain’s electricity system, ministers enjoyed bragging that the country’s electricity was the second cheapest in Europe; now it’s among the most expensive. At privatisation the UK had one of the world’s most reliable and resilient electricity systems; in recent years our grid has been saturated, dependent on imports through interconnectors and subject to black-outs, near misses and ever-escalating costs. This article considers why.

Loss of Focus

The basis for managing and operating the electricity system should be best value-for-money for all consumers, long-, medium- and short-term, with a more-than-adequately reliable and resilient grid. This basis is mostly lost by the mantras developed by BEIS, Ofgem and National Grid, supposedly to deliver it. These mantras include:

1. Lowest-cost wholesale electricity, regardless of total system cost, which is why total consumer bills are such a political hot potato now and why Ofgem is involved in setting price caps for consumers.

2. Lowest cost now, sacrificing tomorrow’s consumers on the altar of today’s, explained in more detail below.

3. Ever shorter-term contracts, preventing large-scale long-term investment without special financial instruments, discussed in more detail below.

4. Not “picking winners”, which has been derailed into the mistaken interpretation that no assistance should be given to any developer/technology, instead of offering the same opportunities for assistance to all.

5. Competition everywhere (derived from not picking winners) to the point at which developers are greatly discouraged from developing and putting forward imaginative proposals. A level playing-field would be achieved equally by allowing all developers equal access to bilateral negotiations, and agreeing contracts that reflect the modelled capabilities of each plant and adjusted for actual capabilities.

Which Consumers?

BEIS, National Grid and Ofgem continually (including in this consultation) focus on “value for money for consumers” but never define which; in particular, when. Over the last 30 years there has always been a short term focus as opposed to the medium and long terms, sacrificing the consumers of tomorrow on the altar of today.

As an example, the cheapest way to procure energy over a 2-year period is with a 2-year contract. The cheapest way to deliver it is with a fully amortised plant. At the end of the contract, it’s won again in the same way, only the plant is older, more clapped-out, less reliable and more expensive to run. Over a 20-year period, prices rise gradually to be more expensive overall than having let a 20-year contract to start with. And the cheapest way to deliver a 20-year contract is to build a new and better plant, so the longer-duration contract provides for the ongoing renewal and resilience of the electricity system at cheaper overall cost. And the situation is getting worse, with moves towards real-time half-hourly contracts which are, of course, supported by incumbents because they know that it excludes major capital investment and hence new market entrants / competition.

This is why nearly all the major investment since privatisation (other than what was already in the pipeline at that time) has been against special financial instruments such as ROCs, OFTOs, CFDs, CATOs, T-4 Capacity Market etc. But each such instruments has rules and is therefore a market distortion.

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