10 Energy Things I Like and Don’t Like – 2nd April 2024
The opinions presented here are my own and do not reflect the views of Energy Systems Catapult or of any organisation that works with the Catapult.
This post - an homage to the American sportswriter Zach Lowe - took February off, so we’ve got even more than usual to cover in this month’s bumper edition. Without further ado, let’s get into it.
1. If you don't stand for something, you’ll fall for anything
With 2024 being an election year and the Net Zero transition being used as a political dividing line, we’re guaranteed some fireworks in the energy field. Fine.
What’s especially unhelpful - for people wanting to decarbonise their homes, for companies investing in supply chains, and for investors who want to green their portfolios – is the dithering and back-and-forth on matters that were once deemed flagship policies. Both major parties are guilty of this.
Labour – the presumed next government – has significantly scaled down what started off as a promise to spend £28 billion a year on a ‘green investment fund’. The latest figure stands at £4.7 billion/year; who knows how long that pledge would hold. Details on what the £28 billions would be spent on where always vague, so it’s hard to say what (if anything) is lost – as renowned economist Mariana Mazzucato says, it’s not how much government spends but how it uses that spending to crowd-in private expenditure.
We do know that investment on improving energy efficiency in homes will be less than a quarter of what was previously announced, and with it the insulation target was cut by half. This seems like a missed opportunity – we know that the commercial case of insulation only holds under implausibly high assumptions about future energy prices. So public expenditure could have been particularly valuable at bridging the commercial viability chasm, not to mention improving people’s wellbeing and taking some of the winter pressure off the NHS.
Not to be undone, the (probably outgoing) Conservative government nearly caved in to intense pressure and gaming from boiler manufacturers after the ‘Clean Heat Market Mechanism’ (a misnomer, but we’ll let that go on this occasion) to encourage uptake of heat pumps became policy. Someone eventually grew a hint of a backbone, and the introduction of the mechanism was simply postponed by a year. It will still make barely a dent in the government’s ambition of having 600,000 heat pumps installed annually by 2028 (roughly ten times the current installation rate).
All of the above makes for a very negative way to start my first post in two months, so let’s find a positive: announced alongside the Clean Heat Market Mechanism postponement, and to much less fanfare is the eminently sensible decision not to mandate new boilers to be “hydrogen-ready” unless the government decides that hydrogen should have a substantial role in domestic heating. A decision is expected in 2026, but has already been telegraphed by the Minister for Energy Efficiency Lord Callanan with a kind of decisiveness that we could only wish from our major political parties.
2. Wasting words on lower cases and capitals[1]
EMR, REMA, CfD, the CM, the BM, LMP, GPP, ESO/FSO/NESO… British electricity markets are a particularly unappetising acronym minestrone. It always seemed to me like the Review of Electricity Markets Arrangements – which was launched to create a market system that was fit for the Net Zero transition so, ostensibly, should aim to support innovation and new entry – scored an own goal when it gave itself the acronym ‘REMA’. In doing so it created another barrier for understanding / engagement by those who do not spend their every day combing through the industry’s voluminous rulebook.
And so it is, nearly two years after it was first muted, that the second consultation under the REMA programme offers little insight into what its authors see as the ideal role of electricity markets in the transition and what role is best reserved for the state. In the >1,000 pages of consultation and supporting materials there are plenty of ideas – inevitably, some, like moving to shorter settlement periods and rejecting the proposal to split electricity markets – are a definite positive; others are less so. But the overwhelming feeling is that we’ve a long way still to go.
The same, and more, could be said for the retail energy market which has been characterised by a crushing lack of vision, ambition and urgency from policymakers. This has been reinforced by the latest positions from the Department for Energy Security and Net Zero, and from Ofgem – neither of which appears linked to the options short-listed under REMA in any meaningful way. If we keep trying to fit together pieces of different puzzles, we’re bound to end up with a confused picture.
3. The Young Foundation calls for a local approach to Net Zero
A report from The Young Foundation – a charity focused on social innovation – makes the case for locally-led decarbonisation and for people-centric policy-making. Both are very welcome suggestions! Without these, the report warns that the Net Zero transition risks exacerbating social inequalities:
"The report concludes that achieving a just and inclusive net zero targets requires a radically different policy approach. This must move away from ‘top down’ measures and siloed government departments, towards an integrated system, balancing decarbonisation and fairness outcomes through participation with local communities."
4. Build it and they will come
The long-awaited “transitional” Centralised Strategic Network Pan – National Grid Electricity System Operator’s view of the transmission investments that are necessary to deliver a zero carbon electricity system by 2035 under current market conditions – is finally out and makes for a sobering read.
Most of the attention been placed on the £58 billion estimated bill for new transmission projects (that, of course, is a high-level forecast, not the result of detailed planning and procurement processes, so is likely to be an underestimate). Much of this relies on peppering the North Sea with “bootstrap” cables, to circumvent the planning process for onshore build.
More frightening are the assumptions about the accompanying energy infrastructure that needs to be built to deliver the 2035 target: quadrupling of offshore wind and storage capacities; more than trebling of solar capacity; and more than doubling of onshore wind and interconnector capacities. That’s a delivery challenge that no amount of annual CfD allocations can meet.
5. Ofgem, closing the stable door
Ofgem’s legal duties are being changed to specify its role in supporting delivery of the Net Zero target and in promoting economic growth. Ofgem has also expended the criteria it uses to assess whether new electricity interconnectors should be eligible for a ‘cap and floor’ support mechanism – despite no previous applicant failing to pass the standard cost-benefit analysis. You’d have been forgiven for assuming that Ofgem was ready to sign off on any investment that had a “needed for Net Zero” labelled slapped on it.
So it was a pleasant surprise to see Ofgem hold its nerve and reject six out of seven applications to its latest cap and floor round, as well as rejecting one of two proposed “multi-purpose interconnectors”. The reason for rejecting most applications is that they are forecast to increase constraint costs, given the uniform national price in the wholesale electricity market.
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Inevitably, some developers will move the interconnector’s landing point and/or present new evidence that will lead Ofgem to ultimately approve more of the proposed interconnectors. But it’s good to see Ofgem setting a high bar when the circumstances suggested it had all the reasons to do exactly the opposite.
6. Xlinks, bringing the LOLz
There are good reasons to be wary of Xlinks – the proposed interconnector between Britain and some yet-to-be-built low carbon assets in Morocco:
But you have to admire the Xlinks developers’ commitment to the comedy bit. The latest bit of posturing / attention-seeking was to put out the idea that the project might connect in Germany instead. Someone should tell France, Italy and Switzerland, who presumably are just dying to accommodate infrastructure that would not benefit them in any way.
7. The pretzel logic of a Balancing Reserve
Ofgem approved a request by National Grid ESO to introduce a day-ahead "Balancing Reserve" market. The idea appears to be that getting units to commit to being available to provide balancing services would reduce the cost of the ESO balancing the system in real-time.
The supporting analysis claims >£200m in expected savings per annum, but also notes that wholesale market costs are likely to increase, as the mechanism would be most attractive to the marginal generators. Other concerns that spiring to mind are that this would reduce liquidity in the wholesale markets as less capacity is traded, and that – absent a locational signal in the Balancing Reserve, there's no guarantee that the contracted units would be the ones that need to be dispatched in real time (e.g. on the “right side” of the BR6 boundary between the English and Scottish transmission networks).
If I can think of these problems, so can the ESO team. So we’ll have to wait and see how things play out in practice and whether the mechanism evolves over time.
8. Aira, bringing sexy (back?) to heat pumps
Airs is a Swedish company whose unique selling point is offering “heat as a service” using heat pumps. The company is backed by a number of Nordic venture capital firms and seems to be on a mission to do for heat pumps what the iPhone and Tesla Model S did for smart phones and electric vehicles, respectively. It recently launched a smart heat pump – all sleek lines, dark shadows and allusions to secrets of Scandi elegance.
Of greater interest are the consumer centric features: a 15-year guarantee that consumers will achieve their target comfort levels, a monthly repayment plan and machine learning to optimise (flex?) heat pump use.
This kind of offering clearly targets one segment of the market and isn’t going to suit all consumers – but that’s perfectly fine. As with the iPhone, Model S and other innovations, someone needs to step in to the space between “early adopters” and “early majority”. If they do it well, it opens the floodgates for accessing the wider consumer base.
9. Everyone gets a Contract for Difference!
The German government has announced that it will provide “contracts for difference” to encourage industrial decarbonisation. The logic here seems a little suspect: contracts for difference work best when there is a standardised product (e.g. MWh of wind-generated power) and a well-established price baseline against which the cost of that product can be compared (e.g. the day-ahead wholesale electricity price). The former allows for competitive allocation of CfD, and the latter forms the basis on which the costs of the CfD are calculated.
Neither of these things hold in the case of industrial decarbonisation. By and large, the cost of both current and decarbonised industrial processes are very specific to the technologies involved, as well as the sites and scales. That introduces a huge amount of judgement into the definition of the baseline, which then affects what projects are preferred in the CfD auction. This feels like lifting-and-shifting a policy, with insufficient regard for context or suitability.
10. The grid problem, Dutch version
The Regulatory Assistance Project published an illuminating summary of the challenges developers are increasingly finding in connecting to the grid in the Netherlands. What strikes you are the similarities to Britian in the causes: subsidies that promoted technology uptake with little regard for system impacts, large new sources of demand (data centres) not being incentivised to locate where the system can best accommodate them and, of course, the challenges of building out network capacity at scale and pace. The similarities also extend to many of the proposed solutions: more focus on strategic coordination, speeding up the planning process, and exploring the possibility of more accurate price signals through network tariffs. Let’s hope the two countries share learnings.
11. Bonus: Japanese offshore wind zones
Japan is a noted laggard in both rolling out renewable energy – specifically wind and solar – and in its rather unambitious targets. So it encouraging to see progress in legislating for development of offshore wind in ‘exclusive economic zones’ beyond the country’s territorial waters. These would, presumably, mainly host floating turbines so likely will be lower down the pecking order than exploring sites nearer to shore for fixed-bottom installations. But it’s a positive sign of ambition, and enables developers to get going now.
[1] That’s a Public Enemy reference and a Brand New reference in the first two items – we’re rounding into form quickly!
Systems Engineering Consultant - A professional, systems architect and chartered engineer with experience across aerospace and rail. Collaborates to develop concepts into realistic deliverable propositions.
9moThanks Ben, insightful as always.