The full potential of reducing electricity demand is still far from being realised in the UK, despite being a low cost, low pollution and health improving way to reduce reliance on imported fossil energy.
The UK has considerable scope to turn megawatts into ‘negawatts’. Very conservative government figures suggest that almost 39TWh could be reduced, amounting to ten per cent of the country’s predicted total electricity demand for 2030.
This could lower consumer energy bills by reducing the need for new, costly generation capacity and its associated infrastructure. Our new report, Kickstarting the negawatts market, published today, shows that negawatts could result in a peak load reduction of 6.4GW, equivalent to the capacity of eight 800MW gas power stations. This would achieve a £3.9 billion cut in capital costs in 2030.
US examples show negawatts are a reliable way to cut peak demand
As well as lowering bills, fulfilling this potential will decrease the UK’s exposure to volatile energy prices, contribute to reducing greenhouse gas emissions and, importantly for the expected electricity supply crunch, lower peak demand.
It is this last property of negawatts that has caught the eye of the Department of Energy and Climate Change. It established yesterday a two year, £20 million pilot to see how and whether electricity demand reduction (EDR) measures can participate in the new capacity market. This is designed to ensure that sufficient capacity is available at peak demand periods and will reward market participants simply for being on tap.
Using examples of US capacity markets which include negawatts, our report demonstrates that negawatts are arguably the most reliable means to shave off peak demand. They’ve reduced the cost of achieving the requisite capacity and prevented unnecessary investment in grid upgrades. Their success has relied on the collection of good data about how much demand has been reduced which has enabled better infrastructure planning. To realise this crucial economic benefit of negawatts, to bring down supply side investment in the UK, the data collected needs to be sufficiently robust to allow decisions to be made with confidence.
Negawatts need to compete fairly in the capacity market
For negawatts to compete effectively against supply side measures, it is important that there are no unfair imbalances in the rules for supply and demand side in the capacity market. So the EDR pilot should not be setting unhelpful precedents. Capacity payments are made simply for a service being prepared to help meet peak demand; restrictions on negawatts but not for electricity generators, such as ruling out negawatts projects with short payback periods, would be a market distortion. The success of the US capacity markets is partly down to the lack of any similar restrictions.
The US markets have been driven by strong energy savings obligations, and the fact that other revenue streams, including from New England’s own emissions trading scheme, have helped to support negawatts’ rapid deployment.
The pilot’s not recognising the other benefits of negawatts
In this context, it‘s unfortunate that the UK has decided to exclude any negawatts project already receiving support from elsewhere in the pilot. The EDR pilot’s capacity payment is intended solely to reward participants able to meet peak demand, so the other clear benefits of negawatts, like better health and reduced emissions, are going to be undervalued in the pilot and would need to be supported by other sources.
The pilot scheme is using an auction to decide participation, to replicate the experience of the capacity market. While this will provide information on the price bidding in and perhaps some indication of demand, using this purely market based approach runs the risk that the pilot will not achieve sufficient breadth of projects to test the system. We’ve recommended that the prequalification process ensures a good mix of actors, by setting auction criteria not solely based on least cost, but also project diversity.
Will the payments be enough to support deep retrofits?
Another risk of the pilot’s short duration of two years is that payments will be insufficient to tip the balance towards those schemes that make desirable deeper energy efficiency retrofits more affordable. This could again reduce the potential diversity of projects bidding to join. The government should be giving clear guarantees to investors that, although the pilot will only run for two years, there will be some sort of guaranteed support for negawatts beyond this period that pilot projects will also be eligible for.
With energy security and consumer bills so high on the political agenda, serious investment in negawatts is a must, as an easy way to keep the lights on, bring costs down and tackle climate change.