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UK power market needs to embrace more flexible future, says new report

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A new report from Policy Exchange has called for a wholesale overhaul of the UK’s power system to create a level playing field for clean energy flexibility technologies to compete with dirtier forms, which would ultimately save consumers as much as £90 a year by 2030.

The 'Power 2.0' report claims the shift in focus since the 2000s towards more decarbonised and decentralised energy has increased the need for a smarter and more flexible power system.

However, the think tank claims that technologies like demand response and energy storage are not treated equally within the current regulatory, policy and fiscal regime. Instead, it states the current framework favours much dirtier forms of flexibility, in particular diesel engines.

For example, storage technologies continue to fall foul of double charging, effectively paying environmental levies when the storage device is charged and again when it flows to the end consumer. It also points out that demand response is held back by aggregators being prevented from participating in the wholesale electricity and balancing markets.

The report has therefore set out Policy Exchange’s proposals for a series of reforms to the power sector to rectify these issues and bring the system up to date with the recent growth of renewable energy and advances in flexibility technologies.

As well as introducing new measures to remove double charging of storage and allowing aggregators to sell demand response, the report calls for the government to clamp down on diesel generators by regulating their emissions and opening them up to carbon taxes.

It recommends that the government revises the Climate Change Levy and Carbon Price Support regimes to place a carbon tax on diesel and oil used for power generation. At current Carbon Price Support rates, this alone would impose a cost of around £18/MWh on diesel generation.

In addition to levelling the playing field between clean forms of flexibility and the dirtier technologies currently favoured, Policy Exchange has also suggested distribution network operators (DNOs) take a far more active role in managing their networks.

They should be encouraged to consider demand response and storage, procuring the services of batteries as well as other forms of storage to alleviate network constraints.

The think tank has also suggested that changes be made to the Capacity Market to ensure that it becomes the technology-neutral mechanism it was intended to be. For example, demand response providers should be given access to a three-year capacity contract on the same basis as power stations undergoing refurbishment.

The report concludes that if these changes are made to of the power market and the ancillary markets and network charging arrangements which sit around it, the savings to consumers suggested by the National Infrastructure Commission earlier this year could be achieved.

Richard Howard, head of environment and energy at Policy Exchange and author of the report, said: “Making the power system smarter will also mean it can provide cheaper and cleaner electricity. The current set of policies is encouraging a growth in dirty diesel generators – exacerbating air pollution in UK cities and towns.

“The government needs to level the playing field to encourage the use of cleaner technologies such as demand response and storage. This approach is not only greener, but could also lead to savings worth £90 per household per year by 2030.”

These improvements would also help to support the continuing growth of renewable energy capacity, which has increased tenfold since 2000 and now stands at 32GW.

The government has appeared to be receptive to the issues outlined in the report in recent months, culminating in the upcoming call for evidence expected within the next few weeks. It is expected to result in new policy intended to remove the barriers for both demand response and storage, improve the regulatory landscape for these technologies and clarify their role in the future of the UK’s power system.

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