Progress towards the creation of a smarter and more flexible energy system is “too slow and too patchy”, a number of industry associations have warned in a new report.
The initial confidence in the Smart Systems and Flexibility Plan published by the government and Ofgem in 2017 has since “faltered”. Failure to speed things up over the first half of this decade risks costing consumers £9 billion by 2050.
The joint report was produced by Energy UK, the Association for Decentralised Energy (ADE) and BEAMA with support from RenewableUK and the Association for Renewable Energy and Clean Technology.
“The companies supplying this flexibility stand ready to deliver: aggregators and energy suppliers are developing new consumer offerings; the energy efficiency supply chain can provide the thermal inertia needed for heat flexibility; the finance sector is looking for low carbon investments to support,” wrote ADE deputy director Joanna Wade in the opening comments.
“These elements of the jigsaw are in place, but there are still missing pieces. The familiar narrative of a smart flexible energy system of the future does not tally with the current reality for businesses in these sectors, who find it difficult at times to make the business case for flexibility stack up. Policy needs to step up and fill in the gaps.”
She continued: “The Smart Systems and Flexibility Plan was rightly acknowledged as a significant step forward when it was published. But progress since then has been too slow and too patchy. We now need to go further: we must start asking the questions that net zero poses for flexibility and for the energy system more general, and we must urgently set out a policy programme of reforms that answer these questions.”
BEAMA chief executive Howard Porter agreed that confidence in the plan “is being lost” and warned that its members need “clear, decision action” to justify investment in the low-carbon supply chain. A lack of ambition and unclear timescales are leaving the market in “a state of flux”.
He said the government will need to take “bold action” if it is to fulfil its net-zero commitment, including “ambitious reform of the retail market and a rebalancing of subsidies and tax to incentivize low carbon fuels.”
“Fundamentally, what is missing is clear revenue streams for all participants in a flexibility market, most importantly for the domestic customer who needs to be adequately incentivized to adopt new low carbon solutions,” he concluded.
Among the issues raised in the report was Ofgem’s willingness to allow networks companies to sell balancing and ancillary services in competition with other providers – specifically voltage reduction on their networks.
The regulator recently permitted Electricity North West to continue doing so over the RIIO ED2 price control, saying this was preferable to including the costs of the service within its spending allowance and requiring it to provide it for free. As nobody else can provide this type of service, the alternative was prohibiting it entirely.
The report said this service “immediately undercut the market for flexibility”, with distribution network operators (DNOs) accounting for 44 per cent of accepted bids for Firm Frequency Response between April and September of 2018 – the highest approval rate for any type of actor.
“Development of these assets to provide the service was through publicly-funded research and development, and much of the investment risk for the assets is now being taken on by the consumer,” it added.
It expressed fears that the use of voltage reduction and other network manipulation technologies for day-to-day balancing could impact the ability of customers to adjust their usage or generation to participate in flexibility markets.
And it additionally noted that voltage reduction is already used by the electricity system operator (ESO) as an emergency action: “As the amount of voltage reduction available in an emergency is reduced, resorting to full interruption would, theoretically, become more likely.”
“This is resulting in an unnecessary increase in risk, exacerbated by the type of markets flexible network asset technologies will curtail. Impacting the market by continuing to hold a dominant position, as seen in existing bids, will reduce the amount of flexibility available to the system.”
Similar concerns were raised earlier this week by Sembcorp Energy UK director of strategy, policy and regulation Cathy McClay at an event held by Energy UK in London. The former head of future networks for National Grid ESO said one of her biggest fears whilst in the position was that services like this would “undercut the market and everyone would leave.”
The report welcomed the progress made by DNOs is creating markets for the management of network constraints, as well as the commitment by the Energy Networks Association to provide transparency over how they decide between reinforcing their networks and procuring flexibility services.
But it said this must be accompanied by “a clear set of criteria from Ofgem concerning what constitutes the most cost-efficient investment and a standardised approach to valuing flexibility across different time periods.”
It also called for greater homogenisation across the range of developing markets and services for flexibility at the distribution level, saying there remains a risk of divergence: “We would welcome Ofgem showing the same historic leadership in this area as has been seen in other areas, delivering a single vision that industry can get behind to ensure a coordinated whole system outcomes from these activities.”
The report made several recommendations, firstly that regulated networks be barred from participating in balancing and ancillary services markets “to restore market confidence”.
The government and Ofgem should also publish a second iteration of the Smart Systems and Flexibility Plan giving updates on existing actions and adding new ones. The plan should include the steps needed to achieve each action, clear timescales and priorities, and metrics to measure their success.
The Smart Systems and Flexibility Plan was informed by joint research published by Carbon Connect and Imperial College London in 2016 which found that the creation of a smarter, more flexible energy system could lower overall costs by between £17 billion and £40 billion.
The industry report said unless progress is accelerated the UK risks finding itself in the “slow start” scenario explored by the researchers in which £9 billion of these savings would be lost.