Re-examine grid and trading rules to save £5 billion a year on system operation costs, says Policy Exchange

Maximising flexibility could reduce the cost of managing a decarbonised electricity system by £5 billion per year, Policy Exchange says in a new report, Power 2.0. That figure has been estimated by Imperial College researchers, it says, but but under current operating regulations, “Cleaner forms of flexibility such as storage and demand response are failing to live up to their potential, and losing out to dirtier forms of flexibility such as small-scale diesel and gas engines.”

Among the areas where regulation has to evolve, Policy Exchange identified ‘use of system’ charges and double-charging of electricity supply levies, which have disadvantaged options like storage or demand side response that do not fit with out-of-date asset definitions. Meanwhile the role of aggregators, who could help bring innovation into the market, has been severely restricted. “The regulatory framework for distribution networks is holding back the transition towards a smarter, more flexible power system because it does not allow for them to be active participants and system managers,” the report says.

The think tank also found that new measures intended to maintain security of supply were based around the old approach to electricity supply and put new options, like demand side response, “at a competitive disadvantage”. Where measures like the Capacity Market had incentivised new local generation it had brought forward plant that was cheap to build but polluting, notably fleets of diesel engines.

Policy Exchange wants to see new environmental standards for such plant. It also wants to see industry regulations updated to make it easier for storage and demand side response to enter the market, and for distribution network operators to take an active role in managing local networks.

The think tank made detailed recommendations on making trading on the power system more responsive.It wants a simpler market for ancillary services on the German model that allows participants to offer a variety of services.

It wants to see more parties able to participate in the so-called ‘balancing market’, in which electricity is bought and sold to make the system balance second by second. And it wants that market to be more responsive both in time – sold up to 15 minutes instead of an hour before it is required, and potentially right up to the moment of ‘dispatch’  – and in location. In the case of location, instead of the system operator averaging the price across the country, and absorbing the cost where lack of grid connections meant the cheapest type of power could not be used, the price of power would be determined in many individual areas. That system, used elsewhere, allows the market to react to local network constraints, which is cheaper than assuming there are no constraints when offering power to the system and then requiring the System Operator to manage the result.

Jorge Pikunic, managing director for Centrica’s Distributed Energy & Power business said: “Today’s report is an important step forward in making the case for a smarter power system.

“But this isn’t something the energy industry and government can deliver in isolation. Last year, demand from the industrial and services sectors was around 30% of all energy consumption and at least 25% of emissions – I believe this is where we need to start.

“…Whether they are generating it, storing it, or simply managing it more effectively, the opportunity for businesses and other large energy users to make savings is clear. As an industry, we need to work harder to help customers understand the options open to them and deliver those solutions.”

 

Download the Policy Exchange report, Power 2.0 Building a smarter, greener, cheaper electricity system

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IEA’s Manual Baritaud “Short-term market prices must reflect more accurately the physical realities of the system and that is particularly true where you have a lot of constraints – which is true in the UK. Unless you do that, system operators will have to take ‘out of market’ actions to manage constraints and imbalance.”

Flexitricity’s Alastair Martin: “Take an asset and give it many things to do –providing a service for Grid, a destressing servce for the DNO, capacity services for all consumers. …If you add in all those sources of revenue ultimately you become the lowest cost resource taken en-masse. If it’s all one trick ponies then ultimately you pay more.”

Exeter University’s Catherine Mitchell: “it was thought that if you have a bilateral market people would make alliances and do interesting things. In practice it’s been used to make it more difficult for competitors to come in and has reduced liquidity.”

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