5 January 2018

Transcription

1 The Institution of Engineering and Technology Michael Faraday House Six Hills Way, Stevenage Hertfordshire, SG1 2AY T: +44 (0) F: +44 (0) January 2018 Cost of Energy Review Team Department for Business, Energy and Industrial Strategy 6 th Floor, Spur, 1 Victoria Street London, SW1H 0ET Dear Sir/Madam, The IET s response to the call for evidence from the Department for Business, Energy and Industrial Strategy regarding Dieter Helm s cost of energy review. In response to your call for evidence, we would like to submit our comments and views on the matters that the government should take into account in considering how to reduce the cost of energy long term. The Institution of Engineering and Technology is Europe s largest professional engineering and technology organisation. The members represent a wide range of expertise, from technical experts to business leaders, encompassing a wealth of professional experience and knowledge. The response has been compiled on behalf of the IET Board of Trustees by the IET s Energy Policy Panel. The policy panel includes a diverse range of experts that provide independent and unbiased advice for government and parliamentary stakeholders. The IET would like to express a strong interest in the field and any further work in this area. If the organisation can be of any further assistance please do not hesitate to contact me. Yours faithfully, Dr Joanna Cox Head of Strategic Engagement and Partnerships 1

2 IET Helm Review response Introduction We see Professor Helm s review of energy (electricity) prices as a good first step in holding an informed debate leading to a new long term, integrated UK energy policy (heat, transport and electricity). The IET has convened expertise from across the energy industry and has been working on these issues for the last five years. This led to the Handling a Shock to the System report in December 2013 which in turn led to the Future Power System Architecture programme (FPSA) on which we are working in partnership with the Energy Systems Catapult and a broad group of sector stakeholders. The IET s key messages can be summarised as follows. 1. The report adds to the body of evidence that accepts that the current market structure is no longer fit for purpose and is leading to higher consumer costs. 2. However, the report neglects a number of areas where we believe the real challenges for the energy sector to lie. These are highlighted in the body of our response and the IET would welcome the opportunity to elaborate on these in more detail. 3. The solution to UK energy policy is not about designing another A to B roadmap, but rather a carefully thought through transition process to deliver a transparent, inclusive, agile, iterative learning and robust market structure. The IET believe the Future Power System Architecture (FPSA) project is currently the only solution which addresses the challenge in this manner. Significant detailed work has been done by the FPSA programme on many of the issues raised in Professor Helm s report. They are complex so we will not attempt to summarise them in this consultation response but we believe the debate and the future of UK energy policy will benefit by building on the detail published in FPSA's findings. The IET provides an impartial platform for debate and has demonstrated its ability to convene its members and the wider industry to collaborate on energy issues. We are keen to continue to work with government on the development of an energy policy that meets the needs of today and the future. Key issues for energy policy The terms of reference limited the Helm review to electricity. This made it manageable but we would emphasise the complex relationships between electricity and other forms of energy. For the UK to have a successful energy policy it needs to be holistic and consider all aspects. 2

3 What is not addressed in Helm's findings is how to move from where we are today to the end state described in the report. This unfortunately means that the report neglects key issues and their uncertainties and impacts. This is a major omission and could limit the credibility of the report's proposals and findings. The proposed new and changed organisations, institutions and market participants create more challenges rather than less. The IET believes that the ideas proposed here add to the debate but do not go very far in delivering an orderly transition that investors and other key stakeholders will understand. Alongside the general issues highlighted in the following section, there are specific comments on the findings in the report in an Appendix at the back of this response, based on the assumption that the government has been able to deliver a transition plan that would deliver the new market structure outlined by Professor Helm. 1. The energy transition needs to be actively managed A global revolution is happening in energy. Energy users, empowered by new technologies and business models, are leading change like never before. However good our previous structures and policies were they will not survive this energy transition. Much of the innovation driving the transition involves organisations that are involved in what happens below the meter within homes and businesses. Many more are likely to become involved once electricity retailers introduce time-of-use or variable tariffs on the back of smart metering. Some of these may be regulated businesses that provide services, such as demand response, to the grid. Others may have no formal relationship with the electricity industry but may simply analyse publicly available trends in weather forecasts and energy usage to predict when their clients should switch on their EV battery charger or run down their battery storage to minimise their electricity bill. Communication with their clients energy management systems would be via the internet with no physical connection to any regulated assets. The electricity system and its current regulators would not recognise these types of business but they have to potential to cause load swings greater than the system is presently designed to accept. A system of systems approach needs to include not only those businesses and systems formally registered with the industry regulator but also those that are likely to develop independently. Britain is at the forefront of this transition. The IET s FPSA international study confirmed that the challenges faced by the GB electricity sector are similar to those faced in the other countries reviewed. However, none of them face all of them to a similar extent. This indicates that the scale of the change anticipated on the GB system is greater and potentially poses a greater coordination and integration challenge. They also create an opportunity to grow new clean industries to support future prosperity provided appropriate and timely enabling action is taken. The significant scale of the challenge for GB is highlighted by the FPSA analysis that has identified 35 key functions, both technical and commercial, required of the power system - two thirds that currently exist and need enhancing and a third that need to be new. The drivers of these new challenges are already evident in the UK. 3

4 The UK has mature energy markets and our power sector has decarbonised faster over last 4 years than any other country. Much of this has been through the switch from coal to gas and the growth of renewables. The UK has done the relatively easy part as regards generation sources, and new policy is required to deliver further changes that are necessary and to forge a coordinated system for the future. Energy systems are complex and what used to be regarded as separate subjects are ever more strongly linked. Decentralisation is resulting in an ever-greater 'systems of systems' and the increasing dependence on data and automation requires a coherent approach to data accessibility, interoperability, and cyber security. Energy investments are long term and getting the policy wrong either puts up costs or puts off vital investment. It can also drive the potential industrial benefits overseas. Policy makers and industry need to take a holistic approach and actively manage the energy transition. We need more agile regulation and industry change processes that can keep pace with technology developments and emerging trends in customer preferences and industry participants. That calls for the right enabling frameworks and governance. We have presented new concepts for achieving this agility in the FPSA programme and current work is bringing forward proposals for practical evaluation. 2. Energy will always be political Energy is an important and strategic subject so will always be political. However, partisan politics do not help energy issues. Political instinct is not up to the complexity of the job and reacting in haste to headlines must be avoided if good long term outcomes are to be secured for customers. Energy is a long term business, with decisions often spanning many terms of parliament. The two traditional alternative political solutions - central planning and a free market will be tested heavily in today s reality, let alone into the future. There is a false choice between these extremes and as a result something much more nuanced is required. State controlled central planning will never be sufficient to analyse and optimise so many changing factors in a complex 'system of systems'. Changing ownership won t change the key issues. Around the world, the old vertically integrated utility model is fading and is long gone from the UK. Many of the new business models cross traditional boundaries and involve multiple stakeholders. It is far from clear which parts of the industry could be renationalised and how this might help. On the other extreme, leaving it to the market simply locks in existing bias. There is no natural market for electricity. The wholesale kwh market does not reflect the different value of electricity in different places, with differing degrees of firmness or flexibility or carbon intensity or the interaction of electricity with other energy vectors. Setting the right path here is critically important for establishing efficient outcomes through times of continual change. The transition of the UK s energy system will be best served through the 4

5 use of competitive processes where practicable, with key technical issues framed within jointly developed and evolving technical and commercial architectures. Other sectors, such as mobile phones, demonstrate this combination of competitive behaviours combined with co-ordinated architectural frameworks. The industry parties cooperate closely on evolving technical requirements such as interoperability standards and data protocols, and in ensuring seamless inter-company billing through the roaming houses. 3. There is no perfect market The aspiration underpinning UK energy policy since privatisation has been to let market forces deliver the most efficient outcomes. This has merit where the market place is stable and incremental changes can be optimised through market behaviours. However it struggles to deliver an overall cohesive architecture in times of transformational change, such as being faced now with new technologies, new services, new participants, and new geographic considerations. The previous thinking was that if we could just design the right market it would deliver the right answer. However, any electricity market is an artificial creation. It will have inherent biases which favour some technologies over others. Leaving it to the market will not find the best answer. The market will deliver what it is programmed to do, whether intended or not. Even if a theoretical market could be designed to perfectly balance the many variables it would not survive the rate of change we face today and for years to come. It would quickly start to deliver a perverse outcome. The GB market has proved inadequate to signal both short term dispatch of and long term investment in generation. As Professor Helm rightly points out governments have added new market levers until government now effectively controls all parts of the electricity market. The Helm Review asserts that It should be a central aim of government to radically simplify the interventions, and to get government back out of many of its current detailed roles. Simplification and use of competition where possible are important principles for energy policy. But, competition is only a means to an end. Having a market should not be regarded as an end in itself and, as we have described above, should not be regarded as a simplistic 'markets versus central planning' choice. The outcomes of energy policy are multiple competitive costs of energy for consumers, resilience at the point of use, decarbonisation, enablement of consumer choice and an enabling platform for prosperity through clean growth. 4. Governments will intervene the best do it in a predictable way Governments (in every country) will intervene in energy systems. Energy is too strategically important not to do so and government is ultimately responsible. Historically, Governments that insist they will not intervene, end up making larger interventions at a later stage, i.e. when issues become too critical to ignore. The governments that manage this successfully make clear the direction of travel for their energy policy and can then intervene in a predictable way. 5

6 Energy policy should therefore recognise that government will inevitably need to play an active role and aim to signal clearly the direction and intent of policy. In this way all actors in the industry know what to expect and can invest in line with the policy. A mutual trust between parties is essential to managing evolving change. Government can build investor confidence by speaking and acting consistently, by working with the industry and by explaining decisions in the long term. How policy is developed and communicated is as important as what the policy is. Investors will believe in sound policy and will be cautious of a future reversal of one that is based on politics. The UK s 2008 Climate Change Act is a good example of such a long term confidence building measure. It had, and retains, all party support. It provides a long term direction and a structure for advising future governments. The idea behind the National infrastructure Commission is also an opportunity to look beyond one parliament. However the NIC will only fulfil this remit if it is able to handle complexity and carry the government of the day with it. It is important that the NIC engages well with the energy industry to go beyond superficial analysis. 5. Technology neutrality can close off options Energy technologies and business models are changing rapidly. The wide range of potential futures can cause paralysis. Governments need to put some stakes in the ground, around which industry can come together. Doing nothing is not neutral and can lock in future costs or closes off options. The policy choice of incentivising intermittent renewable sources led to major transmission and distribution network impacts and requirements for all energy end use (transport, heat, etc) to be included in the whole system to manage it for the first time in the industry s history. The technology choices cannot therefore be taken in isolation to one another. Neither can there be certainty about which will be societally acceptable or commercially affordable. The key to minimising electorate costs for energy choices, and maximising certainty for investors and entrepreneurs, is to provide sufficient optionality and adaptability built into the market structures, commercial contracting, physical (technical) architecture to allow society s needs to be met as they evolve. To do this requires whole system analysis and independence from lobbying in regard to specific technology choices. These skills are not currently established in government or regulators. The need for coherence of these different facets is a key requirement to ensure that security, resilience and economic benefits are served by the system for the community, and not by the community for the system. 6

7 Some of these issues are best supported by developing and evolving a jointly agreed architecture for the system. The concept of system architecture is widely adopted in other sectors (eg IT, aerospace, and communications) and is discussed in detail in the FPSA work. There are several timely decisions that government must make. These include some technology choices. Governments are understandably reluctant to pick winners but further delay in some choices will create losers. The UK will lose future energy options and the fledgling UK supply chain will lose out to other countries. Any technology choices need to be justified with a suitable rationale. Failure to do so can have damaging political and industrial consequences as seen with the history of Carbon Capture and Storage (CCS) in the UK. That said, choices cannot wait endlessly for analysis, a good example being the government s vision for offshore wind and collaboration with the industry over several years has delivered cost reduction and UK jobs. Some of the key topics that require discussion in this parliament include: Significant further action on energy efficiency across the economy. This is cost effective and reduces the scale of the rest of the energy challenge How to enable that cost-efficient demand participation is maximised, to reduce peak supply requirements and to bring more cost-effective system services Whether to build new large gas fuelled generation. As coal is switched off some form of efficient despatch-able power for non-windy periods will be required. The UK capacity market is really a peak capacity market and has so far delivered peaking plant. If the January and February 2018 auctions do not deliver new large gas plant a strategic decision will need to be made on what we should invest in to deliver power in the mid 2020s. Whether to build new nuclear beyond Hinkley C. This has an impact on what else is needed in the mix. The use and application of energy storage, at a variety of scales from domestic to gridconnected, and how this will be regulated Licensing changes to enable local solutions including district heating and peer to peer energy trading enabled by new technologies. The commitment to continued deployment of offshore wind, solar and possibly onshore wind where politically acceptable. Avoid accidental hiatus which damages supply chains and slows investment in cost reduction. How to regulate networks. Professor Helm points out that the pace of technology does not suit the 8 year regulatory cycle. Fixing for 8 years would lock in technology assumptions and make it difficult to react to developments. Infrastructure and standards for electric vehicles that build customer confidence and enable deployment. The overall governance of the electricity system, to increase agility and flexibility, and to ensure the system is considered as a whole, including the parts of it within consumers premises, where most of the innovation is currently happening. This is a core part of the ongoing FPSA work. 7

8 A moving forward of the decarbonisation of heat For many other innovations demonstration projects will be the best way to assess potential. Government and regulator should continue to support trials, sand boxes and other ways of testing ideas in real situations. 6. The special challenge of heat In the case of decarbonisation of domestic heat there is a limited set of options. The scale of the challenge to replace 23.5 million natural gas boilers, is such that it would be a low regrets pathway to start to deploy each of the options at scale. Each option would build a UK supply chain and demonstrate its ability to reduce cost with deployment. Then when suitability and public acceptance are known there will still be many millions of homes to deliver to. It is clear that all the technologies will be needed somewhere and some point and the eventual balance between them does not need to be decided before we start deployment is started. Delay in starting deployment does not bring clarity to the technology choice but loses industrial benefits and releases more CO2. Although it does seem likely that there will be a shift towards electricity for space heating in some circumstances this will not be sufficient to replace gas for heating. The challenges here are particularly complex and need urgent attention. 7. National policy for local solutions A significant amount of the new ideas in energy are local and require collaboration from separate organisations. The role for central government is therefore to set expectations that local solutions will be welcome and expected and avoid regulatory silos that get in the way. 8. Digitalisation is an enabler The revolution in communications and data content is the real driver of technological change in the energy sector. To consider voice and data communications simply as an overlay to the energy system is to completely miss the opportunity that the revolution in this industry presents, ranging from the impact on the Clean Growth Strategy to Industrial Strategy implications. Both the communications media (copper, fibre, wireless, etc.) and the data they carry are key and need to be addressed as an integral part of the whole systems analysis explained above. For example, Ofcom is responsible for spectrum allocation, which is a finite resource that is expected to drive the Smart revolution for consumers and Network companies alike. 8

9 Unfortunately, energy utilities are not recognised users of spectrum in the World Radio Congress therefore their voice and requirements are not well represented. Ofgem however appears to believe that these resources are a given and that Smart can be rolled out across the country, with little impediment from resource constraints such as spectrum allocation. Unfortunately, Defence, Broadcasting, Marine, Aviation, Road transport, and many, many others have an eye on using the exact same wireless resources in the new 5G networks. The IET is trying to ensure an equitable approach in this area but it is not well understood in the whole system analysis, on either the impacts or opportunities, that this single aspect could have on the whole Smart Grid or Smart City revolutions. This single example of spectrum is one of many whole system impacts. Data accessibility, interoperability, data curation, etc., are further examples of key aspects that are not considered by the Helm review. Digitalisation needs to be a core part of the governance, architecture and commercial cohesion strategy. This will not happen if these and similar issues are treated in individual silos. Conclusion To summarise, the IET welcomes the report as a good first step towards holding a more indepth and informed debate leading to a new long term, integrated UK energy policy (heat, transport and electricity). Whilst the report adds to the body of evidence that accepts that the current market structure is no longer fit for purpose, we feel that the report neglects a number of areas where the real challenges for the energy sector lie. In particular, a greater focus on an integrated whole systems approach is required, with decisive leadership required to ensure a successful transition can be achieved. The solution to UK energy policy is not about designing another A to B roadmap, but rather a carefully thought through transition process to deliver a transparent, inclusive, agile, iterative learning and robust market structure. The IET believe the Future Power System Architecture (FPSA) project is currently the only solution which addresses the challenge in this manner. 9

10 Appendix The following are specific comments on the findings in the report, based on the assumption that the government has been able to deliver a transition plan that would deliver the new market structure outlined by Helm. Finding 1 The price of energy. With the benefit of hindsight UK electricity prices are higher than they could have been. The review identifies several reasons for this. How this might have been different is harder to identify. Policy needs to be forward looking and not try only to fix the perceived errors of the past when the circumstances have moved on. The time period chosen (since late 2014) maximises the apparent change in fuel prices vs. electricity prices. Whilst this highlights an important issue it does not also reflect earlier benefits to customers from competition over a longer period. It is often asserted that the UK has higher prices than some other countries. Local taxation, subsidies and transfers between classes of customers make it far from clear that this is the case. We are aware of work on this by Michael Grubb and Paul Drummond of the Institute for Sustainable Resources, UCL due to be published in January. Finding 3 We agree the general aim to reduce and simplify government intervention but as we explain above government is unlikely ever to withdraw completely so it is better to think about how best to intervene for long term benefit. Finding 5 & 6 - Carbon pricing with border adjustments helps and should be a clear aim. However it will be politically challenging to deliver, making it unlikely for many years. During which time perverse investment signals will remain. We therefore need other policy levers unless and until adequate CO 2 pricing is in place for all. Finding 7 Professor Helm s proposal for equivalent firm power auctions is interesting. Our concern is that in practice it would require every generator of every type to negotiate many bilateral contracts each to cover its own potential lack of availability. Those offering contracts to others would in turn need to back off their own liability. Nuclear and gas generators would need contracts to cover their own outages, which would be of a similar complexity to those for renewable generation. This seems unnecessarily complex and contrary to the stated aims of simplifying the system referred to throughout the rest of the report. This could more simply be done through a market. Limited availability of long term contracts may also favour incumbent players as has been a criticism of the market for PPAs. Finding 10 Network regulation. As stated above we agree that 8 year periods are too long to deal with innovation and there will need to be a more agile form of regulation Finding 11 Future role for ISO and regional IDOs. The IET supports the concept of the establishment of a National System Operator (NSO) and also Regional System Operators (RSOs). 10

11 Finding 16 Reporting the capacity margin to parliament. National Grid already publishes annual capacity margin reports which may be quoted in parliament. The concept of a capacity margin will become increasingly hard to define with higher penetrations of renewable capacity. Any reporting to parliament should include measures to ensure supply and demand for electricity can be balanced but capacity margin may be unhelpful as a single measure. Exec Summary para 14 - Decarbonisation trajectory. We would like to highlight this part of Professor Helm s report as it is likely to become a political battleground. We are concerned that there will be false argument over whether the UK should have a front loaded, back loaded or linear decarbonisation trajectory to meet the 2050 target. We believe these are meaningless terms. Decarbonising different sectors of the economy in different timeframes will have differing costs. Much of the pathway to 80% relies on technologies that don t yet exist or are untried. It is not clear what a linear trajectory means. Some sectors will take many years to decarbonise. We know from all other areas of technology that cost reduction is more a function of deployment than of time. Delaying starting will not make action cheaper. It just delays cost reduction from learning-by-doing. As a learned society which recognises the science of climate change we note that it is the total amount of greenhouse gas released that will determine the degree of climate change. The UK s 2050 target was ambitious when adopted and is still an important foundation of policy. Scientific evidence also says it will not be enough and the eventual target has to be net neutral. The Committee on Climate Change has a legal duty to advise on a cost effective trajectory to 80% reduction in CO 2. If there is any flexibility available to the UK in what we do when, then there is both a moral and scientific need to minimise total CO 2. We should start early and go as fast as we can reasonably afford. 11