12 interviews of Christmas: George Day, ES Catapult

Happy Christmas to all our readers. To celebrate the start of 2020 we present 12 interviews previously only available to our subscribers.

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The ‘net zero’ emissions target is a challenge but it provides clarity, says George Day, ES Catapult’s head of markets, policy and regulation. But clarity is being lost around the value of EMR measures. In an interview in the July 2019 issue of New Power Report spoke to Janet Wood about Catapult’s work on both issues

george-b&w2 Energy Systems Catapult has been spending a lot of time looking at whole energy systems, optimising power supplies and a mix of technologies that will decarbonise the whole economy. George Day, Catapult’s head of markets, policy and regulation, is delivering that work. When I meet him to discuss it, the group has just released a report on delivering decarbonisation and green growth across the economy, and he has delivery on his mind.

Day says there are many ways to model the future and “it’s fine in the model, but how could you make something that looks even vaguely like that happen in the real world?” In response to that question, Energy Systems Catapult has been looking at the economic drivers and the economic price signals that are in play at the moment in the UK economy. What is clear, he says, is that among the UK’s various subsidies and economic measures “there is quite an uneven and incomplete picture”.

In the new report, Catapult looked at how to deliver decarbonisation and green growth across the economy. Among the problems highlighted are under-pricing of emissions. Day says some big sectors “just don’t have the economic incentives to do anything [about decarbonisation]”. We are in the EU ETS but that ignores some important sectors and we have a variety of measures specifically for decarbonising power, he says. “How does it all stack up and how does it fit together?”

Catapult started on this piece of work long before net zero came along. What net zero has done is clarify things, says Day. “Net zero has a wonderful simplicity about it, because we have to decarbonise everything. There are no excuses. You have to look at every sector and find out how we are going to get the carbon out of it and if we can’t get it out then we have to ask how [that sector] are going to pay for offsetting.”

The report offered five potential policy responses. One is a carbon tax across the whole economy. “The economist in me loves it but frankly it doesn’t seem to work that well in the real world, because it is really politically challenging to get it at high enough level,” says Day.

Instead, he has a sector by sector approach. “If you look at where decarbonisation is really happening a lot of it is being delivered by other policies like sectoral policies or clean energy standards. There is a mix of policy instruments available. The challenge is how you fit it together so you get a balanced set of drivers across the economy that will drive emissions reduction and do it over a 20 or 30-year timeframe,” he says.

“What we talk about in this report is developing a pathway towards an economy-wide framework. That may not mean that you have one instrument that cuts across the whole economy – it may be different standards or instruments in different sectors.”

That will not matter, Day says, so long as eventually they are linked and can trade.

“For example, we are beginning to develop the idea in heat that there is a carbon standard that applies to the whole of the heat market. That could come with a tradable instrument, so if you are beating the standard you could earn credits to sell to people who are not meeting the standards. It gives the market more flexibility and in theory you could make that carbon credit tradable outside the sector and across the whole economy.”

One option considered was a carbon version of VAT – a carbon tax at the point of consumption – but it was seen as a non-starter “because of the information you would need to carbon-rate every single value-added step in the economy”.

In addition, Day says there is an underlying issue: the state of the art in measuring, monitoring and verifying carbon emissions associated with different activities. Although monitoring and measuring is required for schemes including the ET ETS and the Renewable Heat Incentive, “they are not very joined up”.

“If you want to get to a stage in 10 years or however long where you have a more consistent economy-wide system of carbon accounting you need a much more consistent measuring and monitoring process,” he says. That is the case even within the power sector but more widely “the empirical understanding of things like land-use and agricultural practices is not that great”.

Decarbonising heat is one huge issue that is now gradually being picked at by policymakers. “That is a massive gap at the moment. It is not priced at all. Burning gas in our homes is basically subsidised,” says Dale. That is because it attracts a low rate of VAT. So does electricity – but unlike gas, electricity also bears the cost of support programmes like the Contracts for Difference and Capacity Market.

“We are tilting the playing field in favour of gas (versus electricity) for heating, which is the opposite of what we want to do,” he says.

Catapult’s solution may be “a market framework on heat decarbonisation, based around the idea of a carbon standard for heat”. The measure needs more work – it could be carbon intensity per kW, or a metric such as the carbon emitted per household across a supplier’s portfolio – but “it would drive a carbon imperative into the market” and level the playing field, says Day.

The government has for years been trying to find a parallel to the Renewables Obligation that places the responsibility for heat decarbonisation on suppliers. That has proved difficult. Day says there is some discussion about placing an obligation on the networks instead but in his view “the supplier is the one that has the interface with the consumer”. Catapult’s work on smart systems and heat has highlighted service-type relationships, and “there is an opportunity there to create a consumer-friendly market”.

Whatever the final mechanism, all companies in the heat space, including those supplying LPG or oil to off-gas homes as well as gas suppliers, “are going to have to supply to buy credits to offset the carbon intensity of continuing to supply fossil fuel and that ratchet is going to tighten over time”.

 

Linking up

Alongside heat and transport, sectors like agriculture (land use) have also to be linked eventually, “because it helps you create an economy-wide market and framework and you get the balance of emissions reduction right”.

Day says: “We are running these energy models and trying to guess what the future mix would look like but we don’t know. We ought to maximise the opportunities for innovation.

“Land use could be a huge way of capturing emissions from the atmosphere so we should create the market drivers to do that. But in doing that we need to make sure that we are not just offshoring food production.”

Whatever happens, power consumption is set to expand. Day says the CCC’s estimate that demand will double “is as good as anybody’s”. But “if you try to electrify everything it is probably going to be more expensive than if you have a mix. So hydrogen looks potentially valuable as a complementary vector. In heat, there looks like there could be a role for more heat networks as well as heat pumps, and potentially hydrogen or green gas in terms of providing your delivery mechanism. The solution for heat doesn’t look like a one size fits all… It looks like it is more likely to be a mosaic.”

Replication helps to get technologies down the cost curve but local resource considerations will play a big role. That is why Catapult has been working on local area and energy planning. Day asks the question: “What does the mix of solutions look like at a regional or even a town level?” He says maybe you need to take zoning decisions about whether this is an electrical region or hydrogen region.

“If we went through a process of rolling out local energy planning and creating a spectrum of what the local zero carbon energy planning looks like for a location, it will help people avoid making investment mistakes,” and for consumers it will “help homeowners to prepare their property – if they know that at some point they will have to convert gas heating to something else”. That will require a package that includes building fabric upgrades.

Day has no firm answer on what size ‘energy region’ would work. Catapult has been looking at city-size, but that has encompassed cities as different as Greater Manchester and Bridgend. He says it may be that there is a certain amount of trial and error figuring out what works best. “You have to create quite a lot of competencies to do it well. Can we really realistically do it at every local authority level? Perhaps not.”

I ask how that links with Labour’s energy plans, which are region and city based but publicly owned. Day says that is a political question but it is not obvious that ownership change on its own is the main thing.

“If you are going to take decisions that are going to have an impact on peoples’ choices and freedom on what they want in their homes there has to be a democratic legitimacy about it that does sit naturally with a local authority having a role in the planning process. And the network companies perhaps having their business planning process checked to a greater extent by a local planning process of some kind. But I think there is also a role for markets in helping to shape the choices – in terms of how much it makes sense to electrify, for example.”

He adds: “There is a mix of market and planning there. I don’t think you can do all one or the other. If you do planning without some market signals you are going to make some big mistakes. If you try to have all market without some coordination you are not going to have the right infrastructure in place.”

For Day, this presents a real opportunity to upgrade “the forgotten and left behind areas”.

“If you are going to be doing a lot of work on the building fabric you have an opportunity there. You also have an opportunity to upskill the supply chain. We know we are going to have to do a million properties a year. There will be lots of work and jobs created but we need we will need a different set of skills to deliver that… It helps people start seeing there is opportunities here as well as just costs.”

 

Delivering power

Day has already said that while these longer-term decisions are being made we should keep on with existing measures – including phasing out new gas connections. But are our power market measures fit for purpose? Catapult is looking separately at electricity market design and I am speaking with Day just a few days after the Capacity Market auction for the coming winter cleared at less than £1.

He says the market is hugely complex, with many mechanisms, codes and incentives in play, and it has the state of the CM, network charging reforms, carbon pricing as it applies to electricity and the balancing mechanism and ancillary services to consider as well. He believes it is time to step back and ask how it all fits together to deliver market signals to people who are making choices about whether they invest in generation, and whether [the investment] is low carbon flexible generation or demand-side innovation or storage.

There are no conclusions yet but Day says: “We are acutely aware from an innovation point of view that relying on the centralised mechanisms that we have built – like the CfDs and the Capacity Market – the risk with those is that they don’t send signals that are sufficiently granular and accurate to deliver the investment in the innovative flexible energy system … Those centralised mechanisms have crowded out the space for innovative, flexible solutions.”

Work last year with Frontier Economics looked at the least-cost electricity mix, at specific technologies to see how valuable they are for the whole system, and the existing market arrangements. “We found that the existing arrangements don’t reflect the real value to the system of these technologies” so the market as it exists at the moment will not deliver the efficient mix of technologies,” he says.

“That leads to these questions about how we get better price signals. That’s the set of questions that we want to create more of a discussion about.” The aim is to use more market options because, Day says: “Markets are very good at dealing with complexity – putting very different technologies onto a level playing field and seeing the value they deliver it to the whole system.”

As we talk, Day has spoken about the difficulties of modelling and monitoring and disaggregation, but now that is changing. “Digitalisation potentially offers us the opportunity to have real-time accurate pricing that reflects the physics of what’s going on in the system. How can we move in that direction? Potentially on the demand side we may have much more flexibility, because if we are looking at heat demand or EV charging requirements it is more flexible in time than we have traditionally thought about electricity.”

With that flexibility accessible, “it might mean that people don’t need the Capacity Mechanism. You end up with a Capacity Mechanism because you are worried about very high price spikes. If you get a more flexible and demand side then that problem of price spikes may go away”.

I note that the Capacity Mechanism undermines the volatility that would incentivise that flexibility. Day is not advocating throwing it away – at least, not yet. “We can see the Capacity Market is important in keeping the investment going at the moment. But we need to work out how we move away from centralised measures, because there is this a risk that you end up not pricing things well enough. In the long run that will mean you get the wrong technology mix and if you’re trying to integrate 75GW of offshore wind into the system you are going to end up with something quite expensive, because you will end up with a lot of backup on the system,” he says

I ask about the price collapse in the most recent auction. Day says he has not made up his mind, and asks: “Does it mean that we don’t actually need the capacity market and it has become irrelevant, or does it mean that the capacity market has a really big problem?”

He returns to what he sees as the overriding issue: “Any investment in new capacity depends on a contract with the state now. That does not feel like a good place to be, if you want to end up with a flexible mix of technologies and a lowest cost electricity system that is tailored to the particular circumstances.

“Bear in mind that this mosaic of heat solutions also represents a mosaic of electricity approaches in different areas.”

Day says the direction of travel has to be “making pricing more granular, both in time and space, and encouraging the players in the market to take more responsibility for getting the carbon out of their portfolio for electricity and making sure they offer a service reliability – whether that is through contracting or backup capacity or whatever”.

He has other concerns about things such as the code and the complexity, but says that is “well-trodden ground.”

Fundamentally, he asks: “Why can’t we have a market that is based on contracts between buyers and sellers? If I’m a supplier and I need to buy fairly large volumes of electricity and have some longer term of visibility on that, why don’t I enter into long-term contacts for offshore wind? Why does the state have to do that?”

He says it should be down to buyers to construct a portfolio that meets their needs for low-carbon supplies, reduces balancing costs and fits their specific needs.

As for carbon, that brings us back to our earlier discussion about economy-wide options. Day says there is a case for having a local carbon intensity standard on electricity and letting the market sort it out without the need for the Capacity Mechanism or the CfDs. “You can’t do it yet because … you can’t sweep away the existing arrangements overnight,” he says, but without a strategic sense of direction “none of this will ever happen” and the state will continue as a single buyer.

He admits there will be plenty of people who are quite happy with the existing arrangements and who do not want radical change, but says the net zero target is “a game changer”.

“If you start thinking at this level about how we decarbonise the whole economy, then it is very important how you get the right mix for electricity.”

How quickly does he think the existing arrangements could be replaced? “I think it’s probably five years minimum,” he says. “But five years is not a long time.”

 

New Power Report subscription includes:

  • Weekly email Update
  • Monthly New Power Report – analysis and insight
  • Access to our online Database  - search and sort data on 2500 UK power assets 

For more details and to join our next free trial, send your name, job title, company and email address to Daniel Coyne: Daniel@energystmedia.com   

Subscribers: login to read many more interviews in our editorial archive. Here is a selection:

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Andy Kinsella, Mainstream: Renewables are taking over the world – could the UK lose its lead in offshore wind? Mainstream Renewable Power is one of a “new class of renewable energy majors”, according to the company’s group chief executive Andy Kinsella.

Mick Farr and Scott Keen, Triton Power Triton Power is grappling with the Capacity Market hiatus alongside other issues. Janet Wood talked them over with president and chief operating officer Mick Farr and commercial director Scott Keen

Maxine Frerk, Grid Edge Policy At Ofgem and Decc, Maxine Frerk was at the centre of major industry steps towards a smart system, including RIIO and the smart meter rollout. She spoke to Janet Wood about those developments now

Emma Pinchbeck, RenewableUK Renewables are now big business for energy and for UK Plc. Emma Pinchbeck looked at their long-term development with Janet Wood

GemServ’s Alex Goody Some of the hardest issues to be dealt with in energy are in software and data. Gemserv chief executive Alex Goody discusses them with Janet Wood

Mark Elmer and John Greasley, Nemo Link Nemo Link, a 1000MW interconnector between the GB and Belgian markets, is due to go into operation in the next few months.

Greg Jackson, Octopus Energy Greg Jackson brings experience of retail and of new technologies to the energy supply business.

Louise Manfredi, Leep Utilities This month Ofgem published an update on its plans for competition in expending transmission networks.

Roger Hey, Future Networks Manager, WPD DNOs are accused of being barriers to a new energy system. WPD future networks manager Roger Hey says that’s far from the case

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Lesley Rudd, Sustainable Energy Association The home is where much of the innovation in the energy industry has to take place, whether it is using new technologies or in convincing consumers to be more active energy users

Jo-Jo Hubbard, Electron Jo-Jo Hubbard spoke to Janet Wood about the threats and opportunities of blockchain, and the experience of innovation in the energy industry

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