The pathways to clean power set out by the National Energy System Operator (NESO) all follow a route along the far reaches of feasibility, necessitating significant changes in approach from industry, regulators, government and NESO.
NESO’s Clean Power 2030 report (CP30) suggests that in order to hit clean power targets, an annual investment of £40 billion will be necessary. Although some of this will come from government initiatives, like the Contracts for Difference scheme, the bulk will be through private investment.
Attracting this level of capital from the private sector will be challenging, particularly for some of the technologies included in the CP30 report. While ‘popular’ (well-established, with proven returns) technologies such as offshore wind do not struggle for capital, riskier investments will have to be supported.
The high level of merchant exposure associated with battery storage investment, for example, will have to be outweighed: CP30 projects between 22.6GW and 27.4GW of battery storage capacity by 2030.
Tom Betts, research associate at consultancy Aurora Energy Research, told Current± that the only way to attract the level of investment that CP30 requires is through “huge expansion in government subsidy mechanisms”.
That, in turn, will be reliant on a lot of factors in order to leave consumer energy bills untouched. NESO states that overall system costs should not increase in a clean power system and other factors, such as a reduction in legacy policy costs and energy efficiency improvements, could help lower energy bills by 2030.
Government subsidy mechanisms to draw private investment for
CP30 considers the government’s approach a crucial determinant of overall costs. Likewise, Betts sees the government’s investment decisions as key guidance for private investment.
The Contracts for Difference (CfD) scheme is one way that the government has (with relative success) subsidised renewable energy build-out. For other technologies, like long-duration energy storage (LDES), the recently proposed cap-and-floor mechanism could similarly encourage private sector investment.
According to the government, the cap-and-floor mechanism support scheme will “remove barriers which have prevented the building of new storage capacity for nearly 40 years”.
Betts says that the LDES assumptions are “some of the more optimistic” in CP30. The new mechanism has not been finalised yet, and historically, LDES has not participated in the Capacity Market (CM) because it has not been able to develop and deploy within the four-year cycles that the mechanism runs on. It is thus hard to believe that in the six (realistically five) years to 2030, this will significantly change.
The CM is another mechanism that the government could use to stimulate capital for storage technologies, but as Betts notes, although battery storage projects are subsidised through the CM, “fundamentally the business case for investment is based on energy trading revenues”.
NESO’s report establishes a broad hierarchy of flexibility options: demand side, short duration storage from batteries or vehicle-to-grid (V2G), interconnector import and, finally, unabated gas.
According to NESO’s CP30, the amount of battery storage, LDES, and demand-side flexibility involved in balancing the UK electricity grid would see so much competition that “it could become very hard to attract the amount of money needed to reach the capacity targets it presumes.”
Consumer engagement and battery storage in the flexibility hierarchy
Betts says NESO is “being very bullish” when it comes to demand-side flexibility. This is risky because it requires “a huge amount of consumer engagement and a huge amount of change in behaviour of consumers that so far we just have not seen”.
Even though CP30 seems to pit the options against each other or even favour demand flexibility in its ‘broad hierarchy’ of flexibility provisions, Betts says it is not a case of one or the other. Indeed, for him, it is fundamentally more difficult to change consumer behaviour than to encourage more battery deployment.
Betts sees some major policy blockers that the government would have to remove in order to achieve the level of consumer engagement CP30 assumes. For example, the fact that the CfD and historical policy costs are levied on a per kilowatt hour basis and spread across consumer bills means that when wholesale prices go negative, consumers do not necessarily benefit.
The argument for redistributing those additional costs onto gas generators is ongoing: 23% of the cost of electricity is made up of environmental and social obligation costs, with the costs of numerous decarbonisation programmes funded through the levy. However, gas costs include less than 2% of environmental and social obligation costs.
Deciding where policy costs go—whether they are redistributed, given to gas companies or into general taxation—will, theoretically, up consumer engagement. As previously explored by Current±, the only way to really incentivise consumer engagement in the energy market is economic.
Betts also raises the issue of fixed-price tariffs, saying that increasing the number of dynamic tariffs or time-of-use tariffs would expose consumers to changing electricity wholesale prices throughout the day and allow them to use energy at lower cost times (when an uptick in demand would benefit the grid).
Ultimately, while it is encouraging to see that NESO’s most recent report puts cost and deliverability at the forefront, more so than in previous years’ Future Energy Scenarios, Betts feels that Aurora is taking a more conservative approach.
He says: “It is really at the edges of what is feasible, and it is not just one sector; not just offshore wind deployment that needs to move at speed, it is offshore wind, networks, storage, it is demand, it is flexibility. Lots of different sectors changing and accelerating very quickly is not completely unfeasible, but it is certainly very challenging.”
Whether that challenge is surmountable remains to be seen.
