Keeping the lights on… or not?

I find it bizarre that we have a government that is nominally in favour of innovation and enterprise, but in the energy sector it seems to be busy rigging the rules to keep the innovators at bay. 

There’s a fascinating transition underway. In the 1970s, when I started my career working in large scale power generation, the basic model for the electricity industry was to build big expensive power stations near coal mines, then distribute the power through a network of transmission lines to consumers. This was an expensive process for both consumers and tax payers, and at least 5% of power was wasted because of the distance between power station and end user, but there was little alternative.

The Central Electricity Generating Board (CEGB) sat at the centre of the web, pulling the strings and telling power stations what to do to meet the forecasted demand. I remember watching one evening in the control room of Drax power station, as the system was lumbering into motion so that in about half an hour’s time they could switch in more generating capacity during the TV ad break. Coal was being poured into the boilers to bring up the steam pressure, to power the turbines, to turn the generator, to feed power into the grid, to power the millions of kettles that would be switched on as the adverts started.

The CEGB is no more: it was split up and privatised in the 90s. This created some profitable private sector utility companies, but consumers just got a “confusopoly” of tariffs and providers to choose between and fundamentally the business model changed little.

More interesting changes are now underway and the power system is becoming much more complicated. In part this is due to dramatic improvements in the cost effectiveness of renewables, so power is now being generated all over the place by businesses, farmers and consumers, often much closer to the end user. The “internet of things” is allowing innovative new business concepts, such as the concept of demand management or “Negawatts”, i.e. trading in saved electricity, so consumption can be adjusted to meet supply, rather than the other way round. Power is also being traded internationally via interconnectors that link to the rest of Europe.

It’s genuinely hard for traditional power stations, because renewables are cheaper and becoming big business: in Q1 2015 renewables provided 22.3% of UK electricity. Expensively built traditional generating capacity is oversized (there’s 19% excess capacity in Europe) so it’s only needed for peak demand, but it’s hard to get consumers to pay the costs of keeping it available.

The change has been compared to the switch from centralised main frame computing to distributed cloud computing and the internet, and it’s allowing completely new ways of doing things.

Ecotricity are trialling an energy storage system. This will allow consumers to store surplus electricity to resell to the grid at peak prices a few hours or days later. Tesla are already selling their lithium-ion battery “Powerwall” in the US.

The UK startup Tempus Energy, plans to cut consumers’ electricity bills by 20%, by buying electricity at the half hourly rates and passing much of the saving onto customers, advising them how to make the best use of the cheapest periods and installing special equipment to minimise demand at peak times. This idea is big business in the US, where in 2013 11GW of “negawatts” were traded on the wholesale market, taking $11.8B off electricity bills through demand response and related efficiency savings.

One would have hoped that the utilities companies would have grasped the opportunities for new and innovative business models, but decades of comfortable profits and tight regulation has made the UK utility sector one of the least innovative parts of the economy, so most of the current big players are busy ignoring or fighting the trends.

Sadly, government is going along with this. In the last few months it has slashed support for energy efficiency and renewables, increased taxes and made it harder to get planning permission. Simultaneously it increased the much larger subsidies directed at the fossil fuel sector, reduced their taxation and made it easier for operators to get planning permission for unpopular measures like fracking.

Power companies like selling power, which is maybe why government policy seems to be focussed on large scale power generation, rather than the more relevant question of how to match supply and demand. Cambridge’s Professor David Mackay has pointed out that in government calculations, a megawatt saved is illogically deemed to be worth 7 times less than a megawatt generated.

Over the autumn we’re likely to hear about the need to ensure that we have sufficient generation capacity to “keep the lights on” . Other countries are choosing to match supply and demand by encouraging demand management, trading internationally via the interconnectors, or building up a strategic reserve. These are all relatively cheap options, and ones that encourage a diversity of innovative solutions.

However, the UK has chosen the more expensive option of creating an obscure mechanism called the “capacity market” which pays a retainer to generators who promise to be available during peaks in demand. Even though demand response mechanisms are cheaper than upgrading old power stations, they get less favourable terms.

The innovative demand response company Tempus Energy, has issued a legal challenge at the General Court of the European Union about this arguing that it will result in higher energy bills and illegal state subsidies to fossil fuel generators.   Judgement is unlikely before 2016, but if successful could force DECC to rewrite the rules and ask for the capacity payments to be repaid.

In the meantime, when you hear about the need for public money to go towards keeping the lights on, remember that the more innovative question is to ask is “What could we save by switching some of them off?”