UK energy regulation fails consumers

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV.COM Ltd.

Sara Bell, CEO of Tempus Energy

Sara Bell, CEO of Tempus Energy [Tempus Energy]

An engrained, institutional bias in favour of building new energy production assets to boost supply means that cost-effective ‘no build’ technologies for managing – and reducing – demand on the consumer side have been ignored, writes Sara Bell.

Sara Bell is Chief Executive Officer of Tempus Energy

A polar vortex that blasted the US with Arctic air in early January 2014 brought the coldest temperatures the country had seen in two decades. At the same time, peak demand for electricity to heat buildings soared by a massive 35,000MW – 25% higher than is typical in January and setting new winter peak demand records.

Several power stations failed and the US would have faced crippling power outages had the network operators been without an innovative grid balancing technology at their disposal: demand response. Rather than meeting energy demand the traditional way with more generation, customers who were pulling power off the grid, that didn’t actually need it, delayed their use of energy.  Everyone who needed energy had access to it, but simply by managing capacity, the lights stayed on for thousands of people. This shows how powerful demand flexibility is and how much energy it can release at times of stress.

Think of the energy system like a car engine.  An F1 car constantly adjusts performance to be able to arrive in the pit stop at the optimum time. Government and generators are proposing bolting on lots of extra bits to the motor, but that makes it expensive and slows it down. Fine tuning the energy system to operate in the consumption sweet spot solves the issue more efficiently.

In the US, 10-12% of power is now provided by demand response. While the technology is indispensable in emergency demand scenarios such as the polar vortex, it is also a critical component in bringing down the cost of energy; instead of just injecting more energy into the system via costly and polluting power stations, you can better manage existing capacity.

There is no reason the UK cannot emulate the US’ success in using demand-side response in order to ensure a fair deal for consumers, both in emergency and day-to-day scenarios. Managing risks to the electricity system has a major impact on bills that customers receive; energy costs are made up not just of the commodity cost of each kilowatt unit used, but include transmission charges, distribution charges, imbalance charges, and capacity charges. Real-time management of these risks through demand response drives down costs for customers.

Demand response has already proved its worth in the UK. Back in February 2012, seven UK power generators failed to start up due to the cold, yet again, customers kept the lights on.

Our electricity market will reach critically low levels of energy capacity by 2017/2018 and now we need demand response more than ever. But UK utilities and policy makers are actively side-lining innovative technologies in their proposed solution, the Capacity Market, to the detriment of UK bill payers.

The UK Capacity Market

The Capacity Market was originally set up to encourage capacity measures that keep the lights on at the lowest possible cost; a format which again we know has been used very successfully in the US. 

To comply with European competition policy, the UK’s Capacity Market must embrace the principles of technology neutrality and competitive bidding to ensure generation adequacy at the lowest possible cost for consumers. Yet this is precisely what the proposed auction system fails to do.

An engrained, institutional bias in favour of building new assets to boost supply means that cost-effective ‘no build’ technologies for managing demand have been ignored.  This will push up electricity bills needlessly and commit consumers to paying for capacity that we may not need if we invest properly in building demand-flexibility, for those who want to use it.

The UK has announced its intention to auction a total of 53.3 GW of capacity for the first delivery year in 2018/19, of which 50.8 GW is slated for auctions in December 2014. The balance will be auctioned one year ahead of delivery in 2017. New generators will be eligible for a 15-year capacity agreements. Demand response providers will only be eligible for one-year capacity agreements. The government has created a system that only works if you’re in the business of building power stations.

The one year contract length is not a viable proposition to customers who would, for a longer revenue stream, be able to invest in flexible technology that would save money and energy in the long term, whilst making our system more secure. Instead, the lack of commitment to energy innovation on the government’s part will stymie investment and therefore the advancement of a smart industry that could fundamentally transform our energy economy, to make it work for customers rather than energy giants.

An energy system in transition

A legal case has today been submitted to the European Court on the grounds that the UK government’s Capacity Market does not comply with competition law and does not offer a level playing field.  The UK energy market has never valued the customer as its core priority.  This comes down to the way it is structured: suppliers own power stations in their wider corporate group so are incentivised to sell energy to customers at the highest possible price.

At its core, this legal challenge is about stopping a flawed business model that fails consumers. It is about levelling the playing field so that technologies can compete fairly with each other. Commercial utilities that benefit from the status quo are driving national and pan-European policy based on fear. This policy distorts the marketplace.

Some energy customers can be flexible in their energy use. We should use that flexibility to restructure the risk to the system, as doing so brings the costs down for all of us. The alternative just creates supply by default and then expects customers to pick up the bill.

We must halt that business model and show support for more cost-effective ways to deliver the energy that consumers need.  A responsive demand-side keeps costs down, helps to decarbonise our energy system and ensure power isn’t wasted by enabling the integration of intermittent renewables.

Customers currently have little control in the face of large-scale utilities that are failing to represent their interests, yet fundamentally the industry exists because of customers. We need a system that works for them.

 

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