This time last year, the energy sector was a highly uncertain place. The UK government had announced tens of billions of pounds in financial support for people and businesses and it was unclear how high energy prices would go. National Grid was concerned about the potential for rolling blackouts and the spectre of energy supplier failures lingered.
Twelve months on, after a frenetic period of political musical chairs and financial turmoil, the UK government has reset energy policy and is beginning to provide the necessary long-term confidence for investment. The Energy Act 2023 passed through Parliament, establishing the Future Systems Operator and enabling reforms such as Energy Smart Appliances. We have seen the reemergence of a dedicated energy department in the form of the Department for Energy Security and Net Zero. Additional funding to 2027/28 has been found for low carbon heating through the extended and expanded Boiler Upgrade Scheme. The Future Homes Standard consultation has escaped pre-election hold-ups and should mean all new builds have low energy bills and electric heating by at least 2027. The government has all but confirmed that hydrogen will have a limited role in heating. And COP28 mentioned moving away from fossil fuels for the first time.
Beyond the world of policy, we have seen rapid solar deployment at domestic level and beyond, with UK solar capacity increasing from 14.3GW to 15.1GW. The costs of solar panels have come down markedly and, with elevated energy prices, people can see a speedy return. Banks and building societies are offering incentives to improve homes such as zero interest loans or free Energy Performance Certificates. Start-ups such as Furbnow are helping to make home retrofit easier and Greenworkx are helping to train up the next generation of assessors and installers.
However, there remains fragility within the UK energy sector. Supply chains for a range of crucial components and materials remain tight. Energy prices remain historically high for businesses and people, curbing manufacturing and limiting people’s living standards. Companies, particularly privately held ones, face much higher borrowing costs as interest rates have risen. The price of fossil fuels remains volatile as producers and traders try to forecast demand when many countries are walking a tightrope between inflation and recession. Geopolitics currently looks eastwards to Russia-Ukraine and the Middle East but during 2024 the focus will shift to the west, particularly to the occupant of the White House and the productivity of US shale fields.
So, at this time of fragility, what developments can give optimism for 2024?
The evolving role of the state.
In January 2023, I wrote for Utility Week that “one of the most formidable challenges ahead for utilities is coordinating change”, noting an expanding role for central government, regulators and local authorities. The UK government has since committed to developing a spatial plan for electricity and set out deep reforms to the planning regime for electricity infrastructure.
This reflects a growing realisation that achieving net zero requires a redefined role for the state. For the last 30 years, energy policy has involved civil servants and politicians devising frameworks such as competition policy, price controls and regulation to incentivise or constrain the private sector. The aim has been to drive down costs and increase innovation. While this may have worked when the focus was on doing the same thing more efficiently, it is unlikely to work for the net zero transition.
To deliver the speed and scale of change required for net zero means the state setting long-term goals and developing an industrial policy that makes more active choices. This includes choices about competing technologies and infrastructure. The state at local and national level may have more of a role coordinating private actors to deliver those goals. This is a reversion to the norm. During the 20th century, the state had a major role in establishing the National Grid in 1920s, building the supergrid in the 1950s and switching from town gas to natural gas in the 1960s and 1970s.
We are already seeing this shift towards more active coordination and involvement in delivery. The Electricity System Operator (ESO) is morphing from a private company into a public body, the FSO is being established, the government is developing a spatial plan of the network, while the opposition Labour party proposes to create GB Energy. This more active and long-term role for the state is needed across energy infrastructure. Prime examples are upgrading distribution and transmission infrastructure and supporting 25 million homes to change their heating systems.
As well as building a new, smart electricity system, the state will have a major role to play in decommissioning and repurposing parts of the gas network. This process started with the uncertainty mechanisms in the RIIO-ED2 price control for Distribution Network Operators and will continue with the RIIO-3 price controls for the gas networks. Expect to hear more about depreciation rates for regulated asset values and uncertainty mechanisms during 2024.
The new regulatory framework may be more relaxed about issues that would have troubled regulators and competition authorities over the last few decades. While we have seen the reemergence of the “Big 6” in energy supply, there is much less regulatory appetite to encourage new entrants after the supplier failures of 2021 / 2022. We may see tacit acceptance from competition authorities of new monopolies, particularly in software for energy and flexibility. Indeed, given the global challenge of decarbonisation, we may see the UK adopt a very European approach of advocating national champions such as British Gas and Octopus Energy on the world stage.
Valuing and automating flexibility.
The emerging energy system is going to rely on demand side flexibility much more than people have grown accustomed to. Even in just its second year of operation, the Demand Flexibility Service has developed quickly. In January 2023, I wrote for Utility Week that “the real magic occurs when people agree to automated changes to their heating or electric vehicle charging schedules. Demand side flexibility will quickly progress beyond people changing when they eat their dinner or manually turning off appliances.”
Less than 12 months later, I’ve experienced this firsthand in the Demand Flexibility Service (DFS). Start-up Axle Energy are working with battery manufacturer GivEnergy to automate and optimise home batteries offering flexibility to the grid. The technology and software have worked seamlessly so far. I receive an email telling me that National Grid are looking to make use of flexibility for an hour later that day and Axle take care of the rest. In future years, companies will offer the same automation to those with thermal batteries, heat pumps and EV chargers wired to offer vehicle-to-grid.
There is a risk that the regulatory framework fails to keep pace with technology. Energy suppliers are increasingly encouraging people to consume electricity at night through time-of-use tariffs but the DFS events normally occur during peak periods. Should time-of-use energy tariffs or direct payments from the system operator drive people’s decision-making? Electric batteries are considered a generation technology by the regulatory framework. Does this mean regulating companies like Axle that operate batteries through aggregation as energy suppliers or generators or something else?
As some people can afford to buy flexible assets and others cannot, we will need to consider the ethics of flexibility without slowing down the transition. Flexibility lowers energy bills and carbon emissions for everyone by making the best use of renewables and by keeping coal and gas generation off the system. And people who own flexibility assets should benefit from the energy system valuing that flexibility. Yet there is something uncomfortable during a cost-of-living crisis about generating more than £50 from the operation of a battery for a few hours. This year at least, we’re donating what we receive from participating in the DFS to the Fuel Bank Foundation.
To help answer these kinds of questions and promote a coordinated approach to flexibility, the energy sector would benefit from a flexibility champion. There are various strands of policy work looking at flexibility, including the Review of Electricity Market Arrangements (REMA), market-wide half-hourly settlement, the Home Energy Model and reform of Energy Performance Certificates. Who will take on the role that Nick Winser CBE accomplished so well for unblocking electricity network queues?
Decarbonising buildings through low carbon electric heating.
Decarbonising existing buildings is much more complex than ensuring new homes are low carbon. Every home connected to the gas grid today is a future home to retrofit. The Future Homes Standard will mean new builds are retrofit-proof and “low carbon-ready” for when the power system is fully decarbonised in the 2030s. Based on the initial proposals, it is likely that new homes will continue to be built to 2022 standards through to 2027. We can expect an argument in 2024 as to whether this is a sufficiently ambitious transition or whether house builders can move more quickly.
Trials show that heat pumps can work in every type of UK home, including those of traditional solid wall construction. This is not the same as saying that heat pumps will be the best option in every home. There are a limited number of low carbon alternatives to heat pumps and heat networks. Highly flexible heat batteries are one option that make the most of low carbon electricity and have the advantage of not requiring outdoor space. Governments will need to work out which heating systems reduce carbon emissions and include them in schemes such as the Boiler Upgrade Scheme, perhaps replacing biomass boilers.
The other big area of focus for 2024 is on engineers. Installing heat pumps in new builds and existing homes at the same time as upgrading the electricity grid will mean training up thousands of engineers. For heating, these engineers will need to understand heating systems, energy efficiency and flexibility. Energy companies are currently poaching engineers from each other to meet demand. This is likely to bid up wages and make the heating sector a very attractive career prospect for those leaving school and looking for a career change. This should mean heat pump installs start to increase and the Boiler Upgrade Scheme breaks the 1,000 applications per week barrier during 2024.
Be more kind.
There will be winners and losers in the energy sector during 2024 and beyond. That is how energy and industrial transitions work. Healthy debate based on data is to be encouraged. If someone is not arguing in good faith and find themselves criticising individuals rather than evidence, they should use the New Year to reflect on their approach. The common goal is reducing carbon emissions.
And remember that for many people the cost-of-living crisis is worse in 2023 than it was in 2022 as savings have been depleted and government support reduced. So, take care of each other, donate to charities such as National Energy Action or the Fuel Bank Foundation when you can. And be more kind.