6.17 Core to meeting these challenges will be the development of a smarter distribution network. In addition, the Government will need to consider the overall framework through which supply and demand is balanced. We will need to understand what changes might be
required to the system framework and the incentives within it to ensure secure system balancing. This will include the role we expect different sources of flexibility to play in the future, in particular DSR, storage and interconnection. We will set out our electricity systems policy next year.
6.18 The Government has begun work through the Smart Grids Forum, a cross-industry group that it leads with Ofgem, to consider how future network challenges can be addressed. This will complement the ongoing Low Carbon Networks Fund trials. In the future, the Strategy and Policy Statement, as detailed in the conclusions of the Ofgem Review95, will provide an important mechanism for Government to set out any strategic policy trade-offs that it considers need to be made to develop the future network and deliver the flexibility we need.
Smarter distribution network development
6.19 A bigger, smarter distribution network will need to be developed. The Government can help by providing some clarity about what might be expected from networks in the future.
6.20 There is uncertainty over the speed, scale and nature of developments in networks that will be required, particularly in response to greater electrification of heat and transport and increasing distributed generation.
Without guidance from the Government, there is a risk that uncertainty over the rate of change could lead to insufficient or inappropriate investment, resulting in the network being unable to deal with future challenges. Therefore, the Government will lead work through the Smart Grids Forum, along with Ofgem, to develop a set of shared scenarios and assumptions to act as a guideline for network companies and the regulator in making decisions about future network investment. This will focus on trajectories for the take-up of electrified transport and heating as well as distributed generation, and is planned for publication in early 2012.
95 http://www.decc.gov.uk/en/content/cms/meeting_energy/markets/regulation/regulation.aspx
6.21 In addition Ofgem will be leading work, with the Government’s help, to develop a framework for understanding and evaluating the value drivers for smart grid solutions. This will also aim to identify the factors that influence these drivers and how these change over time. The framework should facilitate discussion between Ofgem and network companies in the business planning process. A final report is planned in spring 2012.
Box 12: Distributed Energy
Alongside the Electricity Market Reform, there is a parallel challenge to unlock the potential of distributed energy.
Distributed generation is electricity generation that is directly connected to a local distribution network, rather than to the high-voltage electricity transmission system. Because distributed generation often involves the simultaneous generation of useable heat, it is often referred to as distributed energy.
At the domestic scale, distributed energy commonly takes the form of individual building-scale installations such as micro wind and solar
photovoltaics96, which can generate electricity for local consumption. In some cases such technologies are also able to export any excess electricity to the distribution network, potentially creating revenue for the owner. Domestic-scale distributed energy technologies that generate heat include heat pumps and micro-Combined Heat and Power (CHP). These options currently
require electricity and gas respectively to operate, but are more efficient than traditional electricity and gas heating, thus helping to reduce demand.
Domestic properties can also benefit from community or direct-scale distributed energy, where properties are connected to local electricity networks or district heating schemes. The viability of such district systems, particularly in the case of heat, is often dependent on the density of demand and the proximity of low-level demand to ‘anchor loads’ like hospitals or commercial/industrial users.
The economies of scale and efficiencies of the larger installations in commercial and industrial sectors means they can provide additional
benefits over domestic installations. This is particularly true of combined heat and power schemes, which generate useable heat consumed locally, either through district heating schemes or for industrial use. This greater scale can also open up a range of additional options, such as waste to energy plants.
While these options can have high upfront capital costs, particularly where heat distribution infrastructure is required, larger organisations are usually better placed to take a longer term view of their energy needs, allowing them to consider pay-back periods in excess of those that may be acceptable to individual consumers.
96
Box 12: Distributed Energy (continued)
Used in the right ways and as part of an evidence-based approach to energy planning, distributed energy technologies have the potential to complement both each other and the wider centralised energy system. They can also be an important tool in engaging consumers in their energy use. In particular, we recognise that integrated, local-level distributed energy systems could be an important step towards a more coordinated approach that includes, for example, transport and waste.
Distributed energy and local generation could have a much greater role to play in the future energy system and the Government recognises the need to put in place the conditions to unlock its potential. In the context of this White Paper, distributed energy provides a number of potential benefits:
• distributed energy can harness a wide range of smaller-scale renewable and low-carbon energy sources, so contributing to the decarbonisation of electricity and security of supply;
• as it is local, it lends itself to community involvement and investment, and it can also reduce the need for transmission network reinforcement, since the electricity produced by distributed electricity generation is normally consumed locally; and
• distributed energy can act, especially when combined with community-scale heat storage, as an alternative to heat being generated from electricity, and therefore help manage demand on the electricity system.
There is also potential for this heat storage to be charged by excess electricity generation resulting in further opportunities for demand side response (DSR).
To ensure proposals in this document and changes taking place across the sector deliver in practice on our ambition, we will convene a Government Industry Contact Group on Distributed Energy. The group will be chaired by Ministers, and will involve a small number of key industry representatives.
How does distributed energy fit within the context of the Electricity Market Reform?
The Government recognises the need to facilitate action at the distributed scale and, following feedback from the Electricity Market Reform
consultation, our proposals have been developed with consideration of all scales of generation. These include the following:
• both types of Feed-in Tariff (FiT) and the Capacity Mechanism will
encourage distributed generation in different ways (see Chapter 2 and 3);
and
• Ofgem is taking action to improve market liquidity, which should help smaller players access the market. As described in Chapter 5, the Government will act where necessary to introduce reforms where the structural barriers to market entry are not addressed through the actions taken by Ofgem.
System flexibility
6.22 As well as ensuring appropriate network investment, there will be a need for increased flexibility. Increasing the flexibility of the electricity system will be important both to deal with increasing amounts of
intermittent and inflexible generation and to manage constraints on the network. Changes to the way the network is operated, and growth in solutions such as DSR, storage and interconnection will be needed.
These flexible solutions will be vital in ensuring we have an electricity system that maximises the use of our low-carbon generation and network assets.
6.23 The Capacity Mechanism will play an important role in ensuring resource adequacy and will be designed to enable flexible solutions, in particular DSR. Chapter 3 and Annex C explore how the Capacity Mechanism could encourage demand side solutions.
6.24 There are also technology-specific barriers which potentially require Government intervention. We will consider the issues and set out our conclusions as part of the development of our electricity systems policy next year. The following sections look at the issues and potential for action on DSR, storage and interconnection.
Demand side response
6.25 DSR helps balance supply and demand in the context of significant amounts of intermittent and inflexible generation, in particular by shifting demand from periods where supply is limited to periods where it is more plentiful. As outlined in the Electricity Market Reform consultation document97, the Government acknowledges the potential for more responsive demand as one of the most cost-effective ways to manage future balancing challenges. Up to 2020, it appears that most potential for DSR comes from the commercial and industrial sectors. However, beyond 2020, increasing electrification of heat and transport means the domestic sector could also play more of a role.
6.26 Smart Meters will engage consumers in their electricity use by allowing them to better control their electricity consumption, ultimately leading to demand reductions. The mass roll-out of smart and advanced meters, which we expect to complete in 2019, is an important first step for DSR in the domestic and commercial sectors. As well as stimulating energy efficiency, smart meters will facilitate innovation in the supply of electricity, including the introduction of new Time of Use Tariffs, and potential for more dynamic shifting of demand. For example, this could involve charging a plug-in vehicle or switching on a washing machine when electricity prices drop below a certain level.
6.27 As well as rolling out Smart Meters, we will need to ensure that energy suppliers and other providers of services are more broadly enabled and encouraged to engage consumers in DSR. This is likely to be important
sectors, but will be increasingly important in the domestic sector as electrification occurs. In particular, it will be important that the settlement system98 rewards suppliers that shift demand. The regulator and
industry have already commenced work to drive forward some of the necessary changes so that the system is ready to enable DSR. Over the coming months the Government will need to consider whether it has a role in this process.
6.28 It is currently not clear how consumers will respond to greater incentives to shift demand. Positive engagement of consumers at all scales,
from individuals and district heating schemes to heavy industry, will be necessary to maximise DSR potential. The Government will need to make sure that the broader policy framework supports the development of appropriate consumer offers and incentives to participate in demand response, while also ensuring consumer protection.
6.29 Data from Smart Meters will be important to managing the network in an efficient way. The Government is working with stakeholders to examine the level of data required for these purposes. We also need to ensure that there is a mechanism through which network operators are able to influence demand to manage constraints on the network and maintain security of supply.
Storage
6.30 Storage can provide benefits to the electricity system by storing electricity in a different form when it is in surplus, and providing
additional resource when there is a shortage. Storage also has strong potential in system and network operation. However, high capital costs, combined with uncertainty over future revenues and inexperience in the market, mean that commercial deployment of electricity storage may be limited in the short term.
6.31 There is a considerable global research and development effort into storage technology, which may lead to reduction in costs over time.
It will also be important for the Government, alongside industry, to develop understanding of the role storage should play in the future electricity system, particularly with regard to network and system
operation. Further, the Government will need to ensure that the broader framework is appropriate to realise the full benefits of storage as part of a low-carbon electricity system. At the same time, we will continue to support research and development in storage technology.
98 ‘Settlement’ is the process which ensures that suppliers pay for the electricity used by their customers, and that generators are paid for what they produced.
Box 13: Government activity on research and development into storage
• The Government funded two electricity storage projects through the Low Carbon Investment Fund to trial and demonstrate the contribution storage can make in managing distribution networks in the context of decarbonisation.
• The Energy Technologies Institute99 has launched a competition for the design, build and demonstration of a large-scale electrical energy storage technology. The winner will be announced before the end of this year.
• The Government has over £200 million100 of innovation funding for low-carbon technologies over four years from April 2011. Electricity
storage is being considered as part of our planning for innovation support.
• There are also opportunities to demonstrate and trial energy storage technologies through Ofgem’s £500 million Low Carbon Networks Fund101. For instance CE Electric is trialling energy storage in its Customer-led Network Revolution project.
Interconnection, Offshore Transmission, and Supergrid99100101
6.32 Interconnection provides a link between two different electricity markets.
Diversity in demand and generation results in differences in price between different markets. For example, when the wind blows heavily on the continent, prices may drop. Interconnectors would then deliver cheaper electricity into the GB market. The benefit of interconnection in allowing efficient use of available generation will increase with greater levels of inflexible and intermittent generation. As well as offering potential for cost-effective integration of renewables, interconnection also contributes to security of supply and provides greater competition, reducing costs to consumers.
6.33 Interconnection in the GB market has traditionally been built on a merchant basis under which investors, rather than consumers, take on the risk of investment, but are able to capture the financial rewards. This is in contrast to many other EU countries where interconnection is part of the regulated asset base. This difference in regulatory regimes has created challenges in the development of some projects. In addition, those developing interconnectors under the merchant approach have had to apply for an exemption from the relevant requirements of
European legislation, introducing a level of uncertainty in the regulatory process. In light of this, several investors have signalled that they are unwilling to build interconnection under the merchant approach.
6.34 In response to these challenges, Ofgem is consulting, along with CREG (the Belgian regulator), on a proposed regulated interconnector investment regime based on a cap and collar approach, using project NEMO (proposed interconnection between GB and Belgium) as a pilot
project. Under the cap and collar approach, returns above the ‘cap’
would be redistributed to users of the electricity network.Conversely interconnection owners will be refunded by the system if returns are below the ‘collar’ and a project fails to deliver expected benefits.
6.35 Ofgem’s cap and collar regime appears to have broad support from industry, and there has been a significant upsurge in proposals for new interconnectors since plans have been announced. Currently GB has 3.5 GW of interconnection, but if most current proposals were realised we could have 8-10 GW by the 2020s. Though interconnection is not a direct substitute for domestic capacity, 8-10 GW would be equivalent to around 10 per cent of installed capacity. As well as the regulatory regime for interconnection, there are broader questions around how to coordinate the development of interconnection with the offshore transmission network to:
●
● ensure effective trading with other countries;
●
● ensure effective exploitation of the renewable resources we have; and
●
● maximise the benefits of offshore transmission and interconnection.
6.36 The Government and the regulator are engaged in a number of initiatives with domestic stakeholders and neighbouring countries to consider these issues.102103104
Box 14: Government and regulator initiatives
a) The Offshore Transmission Coordination Project (OTCP)102, led by Ofgem and the Government, is considering the need for further measures to allow the potential for coordination within and between different
generation zones and with interconnectors.
b) The North Seas Countries’ Offshore Grid Initiative will consider different configurations for interconnection and offshore transmission, associated regulatory, technical and planning barriers, and the need for better coordination with EU partners. The work done under the OTCP will be an important input to the Government’s approach in this initiative.
c) The All Islands Approach103 will develop an approach to energy resources across the British Islands and Ireland. This will facilitate the cost-effective exploitation of the renewable energy resources available, and increase integration of our markets and improve security of supply.
d) The French-UK-Ireland (FUI) Region regulators forum104, is
investigating options for cost-effective market integration, taking account of the different market designs in each Member State, how the maximum benefits of greater market integration can be captured in each case, and how compliance with relevant EU legislation might best be achieved.
102 http://www.decc.gov.uk/en/content/cms/meeting_energy/network/offshore_dev/offshore_dev.aspx 103 http://www.decc.gov.uk/en/content/cms/news/pn11_050/pn11_050.aspx
104 http://www.energy-regulators.eu/portal/page/portal/EER_HOME/EER_ACTIVITIES/EER_INITIATIVES/ERI/
France-UK-Ireland
6.37 Our analysis, which includes the contribution of current and expected interconnection, indicates that de-rated capacity margins fall below 10 per cent towards the end of the decade, and potentially below five per cent in more than one year, meaning that a Capacity Mechanism is needed. We expect that interconnection will continue to make an important contribution to security of supply, alongside domestic capacity.
See Chapter 3 and Annex C for further details of how a Capacity Mechanism could integrate with interconnection.
6.38 In the longer term, further integration of electricity markets, for example via a European Supergrid (a grid which operates across countries and links low-carbon generation with centres of demand), is likely to require a much deeper level of coordination between countries. The processes outlined above are a first step in considering how we might approach the development of a European Supergrid in an objective, evidence-based manner.
Electricity systems policy
6.39 The Government will develop its electricity systems policy next year, focusing on challenges around balancing and system flexibility. We will look at the future management of the electricity system and will set out different options for responding to the changing demands that will be made of the electricity network as a whole. The policy will also address the role that flexible solutions such as DSR, storage and interconnection will need to play, as part of the development of a smarter grid, to
maximise the efficiency of generation and network assets while ensuring security of supply.
Next Steps
6.40 The shared scenarios and assumptions developed through the Smart Grid Forum and set out early next year will act as a guideline for networks companies and Ofgem in planning the next round of distribution network investment.
6.41 The development of a framework for understanding and evaluating
6.41 The development of a framework for understanding and evaluating