Helm says power cut underlines need to take National Grid ESO public

Professor Dieter Helm has said that this month’s power cut should “set alarm bells” ringing for the government and highlights the need for fundamental reform of the energy system.

The author of 2017’s Cost of Energy Review said that while the blackout of 3 August was dealt with quickly and efficiently, “the key point is that (it) should never have happened in the first place”.

He added: “If power cuts can happen when just two power generators drop off, then something fundamental has gone wrong.”

Prof Helm reiterated his opinion that the National Grid energy system operator (ESO) should be nationalised and regional system operators (RSOs) should be introduced to co-ordinate the decentralised electricity systems that are emerging. He insisted that distribution system operators (DSOs) being set up by the distribution companies had conflicts of interest even deeper than those of the National Grid.

On the potential for a national system operator, he said: “This is not only in the public interest, but arguably also in National Grid’s interests too. There is little upside to its shareholders from owning the SO, and lots of risk, especially reputationally, as the recent power cut has revealed.

“National Grid finds itself in the firing line for things which really are not its business to determine. Who knows what National Grid has been telling BEIS about the security of supply issues, including the consequences of more intermittency and the dropping off of coal and soon old nuclear and gas from the systems? This should all be public, between a public authority and the government, not a private company.

“Added to this is the convenience for government to blame National Grid for when things go wrong. National Grid’s shareholders will no doubt recognise this blame incentive risk.”

He said the power cut also underlined the fragility of the system as it becomes increasingly reliant on renewables. This could be tackled, he suggested, by putting equivalent firm power (EFP) capacity auctions at the core of the renewables market. Prof Helm described this as “the capacity auction expanded to take account of the intermittency and one that integrates the renewables”, with renewables providers incentivised to invest in measures to mitigate their intermittency.

“Most of the renewables are zero marginal cost. That means that there is little long-term future in the wholesale electricity market (which is supposed to reflect marginal costs). Electricity generation is becoming a capacity provider, rather than an energy-only provider. It is more like fibre and broadband, and less and less based on the twentieth century fossil-fuel driven wholesale markets. It is increasingly absurd to pay for electricity on the basis of the marginal coal or gas plant, when so much of the costs have nothing whatsoever to do with their marginal costs.”

Professor Helm also discussed the future for nuclear as “the only large low carbon baseload contender”, saying that the government needs to commit to a funding model if it is serious about an ongoing role for nuclear. The alternatives he suggested for this were state funding or the regulated asset base (RAB) model.

Examining the lessons learn from the power cut, Prof Helm said it “revealed the exposure of the networks themselves and their resilience”.

He added: “It took out not just one part of the networks but several. This matters, as Ofgem is currently determining how much investment, and therefore resilience, the networks will be allowed to build in after the periodic reviews. More resilience means more investment and capital maintenance cost, something Ofgem will have to consider (along with how far the network companies have been doing sufficiently in the past).”

He concluded his analysis of the blackout by underlining the need for the department for business, energy and industrial strategy (BEIS) to publish its white paper, saying inaction so far has “had a price”.

“The optimistic take on recent events is that the power costs will be a wakeup call to BEIS and the government to get on with the white paper and the legislation that will be required to implement the evolutionary changes now urgently required if the economy is to continue to be able to rely on secure supplies and the innovations that are coming are to be grasped.

“The recommendations in the Cost of Energy Review are all on ministers’ desks. They just have to get on with it, or face the inevitable consequences of indecision and delay.

“That is the choice, and it matters not just for the security of supply but also to credibly march along the path to net zero to which the government is now legally committed to.”

The full text of Prof Helm’s analysis is available on his website.