A lack of competition in the UK’s electricity transmission and distribution networks is preventing the energy transition from advancing at the pace it must. Here’s how Spencer Thompson, CEO at Eclipse Power suggests we remove the bottleneck.
Upgrading electricity grids is essential for the energy transition. Built in the 1950s and 60s, the UK’s grid has grown steadily – but not dramatically – over the decades. Since the transition from centralised electricity generated using fossil fuels towards distributed energy assets using renewable generation and energy storage got underway, its growth has sky-rocketed to such an extent that it is struggling to keep up. The inevitable knock-on effect is a massive queue of the connections that are essential to power the transition, and no apparent way through the impasse.
The transition from fossil fuels means that instead of connecting large power stations to the grid we are now connecting solar, wind, hydrogen and battery storage, electric vehicle (EV) charging hubs and electrifying hundreds of thousands of industrial, commercial and domestic assets.
Inevitably, expansion at this scale presents a range of challenges. The biggest of which is grid congestion. Across transmission and distribution networks, there is around 700 GW of projects awaiting grid connection in the UK. An unprecedented amount which is only likely to grow.
Transmission operators expect to see under a quarter of projects being connected. Ofgem, government and ESO forecasts point to the UK needing 200 GW of capacity to support the energy transition. That means only a fraction of the 700 GW pipeline of projects will actually connect.
There are also challenges around the transmission of power from where it’s generated to where it’s needed. Solar, wind and hydro renewable generation plants are seldom close to where the energy is consumed – our towns, cities and industrial areas.
Any energy transition project connections involve planning permission, equipment and funding.
Obtaining planning consent and connection permissions call for skill, experience and innovative thinking. There are plenty of people who don’t want infrastructure in their backyards and the net zero energy transition story doesn’t always land with local authorities. What’s more, projects above 100 MW need national planning approvals from the Secretary of State. Whether at a local or national level, planning can present a significant risk that delays energy transition projects.
Encouraging investment can unlock opportunity
The transition is huge and will span 30 years or more. It presents attractive opportunities to invest in infrastructure that will deliver sustainable returns on assets for a 20-40-year period.
While 2050 net zero targets have helped stimulate private and global investment in infrastructure development, they will only do so when the revenue model is right. Even with the right kind of adjustments, there are still grid congestion, transmission and planning issues to overcome.
Addressing these challenges needs better and faster ways to connect to the grid and, crucially, designing revenue models that are attractive for investors.
Innovative thinking drives action
The fundamental thing we need to overcome these challenges is more innovation across technology, the regulatory environment and business models. The good news is that this innovation is happening today, and it is enabling investment opportunities in grid infrastructure and smart grids.
The traditional business model is predicated on giving a Capex subsidy to customers connecting to the grid. Rising costs and timelines to connect to the grid can encourage additional renewable investor revenue models to move projects from borderline investment to a healthy investment that can move on to construction.
An Independent Distribution Network Operator (IDNO) can pay an asset value to a customer who joins its network. When an IDNO owns and manages the customer’s electricity network the IRR improves to a significant level of 7-10%. Elevating the IRR can move a stalling project back into the ‘green’, which means it’s not holding up the grid connection queue anymore.
We are also seeing more ‘gigawatt’ investors interested in mixed developments that combine technologies like solar and wind, battery storage, green hydrogen generation, EV charging hubs, even data centres. In fact, any asset that can enable self-consumption of energy generated on-site. Co-locating these assets enables customers to maximise their revenue streams while easing demands on the grid connection. Because this kind of grid connection reduces grid infrastructure, it can make the connection process faster and cheaper.
Technology gets smarter
To realise value in a mixed technology microgrid project, a developer or investor will secure land parcels close to a national grid connection or Distribution Network Operator (DNO) substation and build a high voltage (HV) network. By making the network smart – for example, by incorporating load management and asset control – they can realise more value by trading flexibility in their network in the capacity and ancillary markets.
Smart technology is also the key to really utilising all the capacity in the network as efficiently as possible. Optimising the use of existing network capacity reduces the need to develop more capacity. For example, storing energy to meet demand at peak times means there is less need to build new generators.
Smart grids have been talked about for a long time. Now we are seeing technology companies evolve the smart grid concept to enable investment funds and asset owners to participate in new energy markets around the world. Energy flexibility platforms like Kraken Flex offered by Octopus Group, enable distributed energy resources to be connected and controlled to automate dispatches for real-time trading, ancillary markets and intelligent customer tariffs.
Innovating transmission
There is also increasing innovation within the transmission sector. While generators are encouraged to connect their assets closer to demand centres like the South-East, planning inevitably gets in the way because of the distance between London and the wind farms in the North Sea and Scotland. To get around these onshore restrictions, developers are increasingly looking to offshore submarine cable interconnectors. Interconnectors from Glasgow to Liverpool, the new Viking link between Lincolnshire and Denmark, and planned interconnectors from Edinburgh to the Humber and others to Ireland and the Netherlands make the prospect of an offshore transmission network a reality.
The dynamic for change
However, as yet the three regional monopolies that control the GB transmission market aren’t structured to deliver the agility and innovation that the energy transition needs. Innovation in transmission networks is crying out for more competition to drive regulatory and industry change. This would enable customers to connect to the network faster and more efficiently. We are seeing the distribution market lead the way in this regard. It has been well and truly shaken up by awarding licenses to a handful of IDNOs alongside traditional regional Distribution Network Operators. This could potentially be a route for the transmission sector to remove bottlenecks and release the full potential for achieving the energy transition. It will take a more creative and innovative approach to regulation, materials and funding, but isn’t that what provides the dynamic for change? And change is what we need in this market to make net zero a reality.
Visit eclipsepower.co.uk to find out more.