Do you remember the old lady who swallowed a fly? Her chosen remedy – to swallow a spider in hope of catching the fly – unfortunately made things worse: said spider wriggled and jiggled and tickled inside her. She dealt with this unintended consequence by swallowing a bird, which didn’t help either. Bird led to cat led to dog, goat and then cow (I don’t know how). The sad denouement came when she swallowed a horse, and died. Of course.
The British electricity system is starting to look worryingly like that poor old lady. The government, dissatisfied with what the markets are delivering, is proposing modification after modification, in the hope that one day the ‘neutral’ market will deliver the government’s ever more obvious technology preferences. It looks as if our energy policy designers have forgotten their nursery rhymes.
Unintended consequences of tweaking the system
Ofgem’s review of transmission charging – the so-called ‘embedded benefits’ regime – is the latest attempt to twiddle the energy system settings. The review was provoked by an unintended consequence of the recently established capacity mechanism. This mechanism was ostensibly designed to be technology-neutral but ministers really hoped it would result in new gas plants (CCGTs). Instead, the first two auctions have produced a fleet of highly polluting diesel generators, which are relatively cheap and easy to build. A measure targeting one aspect of the energy trilemma (security) is inadvertently undermining policies targeting another (decarbonisation).
To get rid of these regrettable diesels without straying from good, liberal market principles, the government plans to reform the embedded benefits regime. The review is being conducted under the, perhaps justifiable, pretext of creating a level playing field between transmission-connected, large scale generators (such as CCGTs) and distribution-connected, small scale generators (such as diesels). At the moment, distributed generation has a financial advantage because it doesn’t use the transmission network so avoids the associated charges.
Better options are out there
But, like the wriggly, tickly spider, this tactic risks creating its own unintended consequences. The proposed review would also catch many renewable projects in its web, because many of these are also distribution-connected. Losing the embedded benefits could pose real problems to renewables already hit by diminishing subsidies. The review is also likely to undermine the government’s goal of system security, if it imposes retrospective policy change on diesel farms that have already secured capacity market contracts.
Fortunately, there are better options. One of the biggest no-brainers would be to allow demand reduction to compete on equal terms with power plants that supply electricity. The PJM electricity market in north eastern USA also runs capacity auctions, and in its most recent one, an impressive 1.5 GW of energy reduction cleared, in addition to demand side response measures. Efficiency measures were credited with substantially reducing the overall cost of the auction. Green Alliance has written about how the UK could similarly benefit, in our report, Getting more from less.
We need an overhaul instead
Big changes are underway in energy, with new technologies from solar PV to battery storage disrupting the status quo. The transmission network charging regime does deserve attention, but there are bigger challenges to the current market set-up. The wholesale price has ceased to drive any investment in new power plants, and this will have to be addressed directly. New technology needs a new market structure, one that can address the challenges of flexibility alongside deploying new low carbon generation.
A new orthodoxy is needed, to replace an old energy orthodoxy fixated on centralised, high carbon power stations. The market framework must create space for the ‘new baseload’ of low cost, popular renewables. It ought to deploy demand reduction to improve further the system’s affordability. It should place a higher value on flexibility, provided by some fossil generation in the short term but soon moving on to take advantage of demand response and electricity storage.
And we need it soon, before DECC’s and Ofgem’s policy changes and countermeasures become too difficult for energy consumers and investors to digest.