How can Britain keep the lights on without subsidising fossil fuels?

London nightBritain has an extraordinarily reliable power system. The lights flicker so rarely that it is easy to forget that the power system is actually a finely tuned and, in some ways, fragile machine, which breaks if electricity demand and supply are not in balance. Perturbations, such as the up-tick in demand after the FA Cup final, or the sudden outage of a coal plant, must be steadied within seconds.

This demands a flexible and nimble grid. But policy thinking is stuck in a past in which coal and gas generators ramped up and down to meet predictable swings in demand.

Today, things look different. Renewables are winning the race to provide the cheapest kilowatt hour of power, making flexibility increasingly important as more variable forms of power join the grid. And it’s not just renewables: a board member of the California system operator recently noted that nuclear is becoming a challenge for the grid because it is so inflexible.

The cult of big solutions has taken over
There is no single solution to the flexibility challenge, but there are better and worse options. Traditional options are mostly too polluting for the long run, but the new generation of zero carbon flexibility technologies, like battery storage, aren’t yet cheap enough or capable enough to solve the problem on their own.

Instead of solving the problem, policy is reinforcing it. The capacity mechanism, in particular, is very inefficient. It was set up to award contracts to the cheapest source of capacity, but it doesn’t ask power stations to be able to ramp up and down quickly or to be available at very short notice. Most fundamentally, it does nothing to encourage the low carbon flexibility necessary to decarbonise both the UK and the world.

Instead, the cult of big solutions has taken over. The government has raised the amount of capacity it will buy in an attempt to procure new large gas plants (CCGTs). But because it hasn’t changed the auction rules, many more cheap and dirty diesels are likely to be purchased before the auction buys a single CCGT. A recent estimate suggests December’s auction could spend £800 million on diesels alone.

Our own estimates show that the total bill will rise by an additional £1.35 billion in 2016’s auction, which is two and half times more than 2015. If ministers know they want CCGTs, it would be cheaper to just buy them outright: a large CCGT only costs £800 million.

Even this wouldn’t be a smart choice. CCGTs won’t be able to run very often after 2030 without carbon capture and storage (CCS), which looks much less likely since the CCS commercialisation programme was cancelled last year. So the current approach creates a difficult choice: keep running to cover their costs and pollute too much, or strand gas plants in the 2030s to keep within carbon budgets.

Let’s retrofit the capacity market to include flexibility
In our latest report, Smart investment: valuing flexibility in the UK electricity market, we recommend retrofitting the capacity market so it delivers both resource and flexibility adequacy. This reform would avoid the current system’s basic flaw: it pays investors to build power stations that policy will turn into stranded assets in a decade or so. More fundamental reform is needed to fix all the power system’s problems, but our reforms would at least improve the imperfect system that we’ve got. At a time when all eyes in government are on Brexit, incremental change might be all we get.

The real goal of any reform should not be just to save consumers’ money, though this is important. The flexibility challenge facing the UK is faced by modernising power systems all over the world. The UK is in the lucky position of having to solve these problems early. Being a leader has its upside: as Greg Clark, the new secretary of state at BEIS, oversees an upgrade to the UK’s electricity infrastructure, he will want to consider how to take advantage of the UK’s skills in data analytics, new business models and contractual systems, to pioneer approaches that, one day, could be exported to our international competitors.

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