We wouldn’t build a house or a ship without an architect. So why would we build a new energy system without one? We have come to the end of a long period where the UK had surplus energy capacity. At over £200 billion, the scale of investment required for new capacity is unprecedented. And we must confront the complexity of a low carbon energy system. Knitting together a pot-pourri of renewable, nuclear and low carbon fossil power requires considerable knowledge and planning.
Yet the UK doesn’t have an energy architect with the necessary combination of independence, skill, accountability and authority. That leaves us open to costly mistakes.
The need for a new approach isn’t hard to explain. Our demand for energy – both electricity and heat – shows, not surprisingly, significant peaks after dark in winter. A system has to be built that will reliably meet these demand peaks. Once built for peak demand, that system remains available all day and all year.
In daylight hours in summer, spare electricity capacity is around 50% of demand. Even if demand peaks can be shaved and economic use made of more energy storage, there will be lots of spare energy capacity during much of the year.
Thus, keeping energy costs to a minimum is a rush-hour problem similar to the rush hour problem for trains and buses. The total annual cost of the system is significantly influenced by the capital cost of the infrastructure required to meet peak rush hour demand. Idle and redundant capacity has to be kept to a minimum.
So here is the problem for our new energy architect. To beat climate change, we are probably going to need a lot more electricity for things like heat pumps and batteries in cars. Decarbonising electricity is essential but adds cost. Nuclear lacks flexibility. Fossil fuel plants are flexible but need to have carbon capture and storage (CCS) fitted. Renewables are low carbon but don’t necessarily work precisely when they are needed. Solar doesn’t deliver after dark when demand is at its highest in mid winter. The wind blows harder in the winter but there can be significant lulls in the wind during widespread winter anticyclones lasting a few days.
Taking all this together we should not despair. But we need an architect to work out and implement a combination that does three things – keeps the lights on, reduces emissions and minimises costs. Technology development, option management, diversification and getting the very best out of the private sector all come into the reckoning.
To emphasise the need for a wise and independently minded architect, the UK Energy Technologies Institute has estimated that the wrong technology choices could eventually cost us over £40 billion a year more than necessary for low carbon energy. The costs of getting things right can save us are getting on for half the annual budget of the NHS.
Does any UK institution have the job of energy architect at the moment? The 2013 Energy Act gave the Secretary of State at DECC and his successors, exceptional powers to design and implement our electricity system.
The team at DECC is experienced and knowledgeable. The Government should keep the team together and adequately resourced. But in the longer term, should the energy architect be located inside Government?
Where can we look for existing models for an energy architect? In the United States there are Independent Systems Operators (ISOs). ISOs are not for profit entities that were set up under federal regulation after some painful episodes of blackout. They have the obligation of keeping the lights on and getting best value for the consumer.
They stand as intermediaries between the power generators and millions of consumers. Private sector companies generate electricity and there can be several hundred buyers and sellers in the wholesale market, regulated by the ISOs. They can conduct competitive auctions among the generators and they are beginning to wrestle with the impact of renewables and carbon reduction.
Perhaps setting up an ISO-UK should be the next step towards the best institutional arrangements for the UK energy market. ISO-UK would be the architect and would use the private sector to get the best energy deal for the consumer. National Grid would still run the network. DECC and parliament would set ISO-UK’s objectives, including emissions reduction, and scrutinise its performance.
There is an important question about the market incentives an ISO-UK would deploy. I believe it is possible to create more competitive energy markets in the UK, based on auctions, together with performance incentives, for a fair return on capital. This would reduce the risk of superprofits and offer attractive investment opportunities that would unlock immense amounts of private capital. This would serve the energy consumer and the UK much better.
This article was first published in Utility Week.