A penny here and a penny there

Listening to a recording of a recent briefing on the Capacity Market and the coming winter after the event was an is an interesting experience.

It was the kind of informal chat all we energy geeks engage in, but it illustrated two things for me: just how hard it is to really use the demand side; and the importance of considering overall affordability for customers.

I should say that my discussion below is entirely unfair – the participants weren’t being asked about affordability or all-round energy policy and they were talking about issues in isolation. But I will pick on it, because it is the kind of outcome I often hear in industry meetings.

Here’s how it went.

First a few points on the Capacity Market and the importance of making it a level playing field for ‘proper’ demand side response – ie, turning down demand rather than installing a diesel generator and using it during peak price periods.  General – sometimes emphatic – agreement.

Then a discussion of the recent blackout and the question of whether NGESO should contract for more reserve, in case of another such combination of factors. That suggestion has been raised elsewhere in technical responses to the event. Potential cost? Maybe £20 a year for bill-payers. It gets some murmurs of agreement.

Then the discussion slips to gas supplies over the coming winter. Ought we to invest in more gas storage? That would require underwriting it at a cost of about £20 a year for bill payers. Again, murmurs of agreement.

Hold on a minute.

We’ve just added £40 a year to bills, for the benefit of investment funds (currently major, although certainly not exclusive, battery investors) and fossil fuel supply companies – just in case.

Let us examine that just in case.

On extra reserve, we’re contracting it to cover a finite period while small generators are adjusting their parameters so they don’t disconnect at the first sign of turbulence. Even Ofgem’s slow rollout programme is expected to deliver most of that, now it has started, over the next couple of years, so how much do we want to pay for that extra security in the interim? We certainly don’t want to sign long term contracts for an issue that will look very different in a couple of years.

Longer term this issue will still have to be addressed again, as local generation grows (albeit better equipped with ride-through) but that requires proper consideration.

As for gas, how much would prices have to spike (to attract extra supplies through the interconnector and our under-used LNG terminals) and for how long, to make that look like a good deal?

Maybe both will be needed – I’m not saying they won’t. But most importantly perhaps, if either of those measures are required why did no-one mention using the demand-side option?

As an alternative to extra battery backup it would be cheaper and more reliable. And as an alternative to more gas storage it could be delivered as more efficient interruptible gas contracts, or – please god – investing the cash in energy efficiency so that the annual gas use goes down permanently (and so do gas bills for those least able to pay them).

But the demand side is never as present in the mind as adding new assets. It tends to get forgotten, just when it should be the first option.

Like energy efficiency, it is the favourite solution, that is seldom used as a real alternative to investing in hardware.

As for affordability, it shows the importance of recent attempts to consider how price hikes mount up across consumer necessities.

Gas and electricity networks are working through their price controls now, following on from water companies. They will be accounting to the regulator for every penny added to the bill – and so they should. But industry and government often see things in silos, and while accounting to the penny here, they can simultaneously decide that bill payers can bear ten or a hundred times the cost elsewhere – never really adding up the effect on the entire bill, let alone adding up consumers’ bills for better energy, water, telecoms etc.

And £20 here and there may not mean much to policymakers, but there are many billpayers for whom it does.