GWPF: UK Electricity Reform Stalls

• Dr John Constable: GWPF Energy Editor

The UK’s new secretary of state for Business, Greg Clark, has just given his first public speech on energy. It suggests, unfortunately, that he is not yet sufficiently confident of his brief to resist the views of his civil servants. Indeed, this speech could easily have been written for Ed Miliband, or Chris Huhne, or Ed Davey, and suggests that the rent-seeking green interests in the electricity sector are re-injecting themselves into the national bloodstream through an interventionist industrial strategy. This will result in overcapitalisation and reductions in productivity.

It is now a year since Amber Rudd, then Secretary of State at the Department of Energy and Climate  (DECC) gave her “reset” speech. I was in Japan at the time, and showed the text to an impressed but disbelieving colleague from the University of Tokyo. “This is an ENERGY policy”, he said, as if anything from a British politician would obviously focus on climate change and little else besides.

Since then, the promise of some parts of Rudd’s speech have been realised, certain subsidies have been closed to new entrants, others trimmed, and DECC itself has been abolished, with the responsibilities transferred to the Department of Business, Enterprise and Industrial Strategy (BEIS), now led by Greg Clark. But is the UK any closer to a pragmatic policy that will deliver corrections to the disabling market distortions, long-term subsidy entitlements, and malinvestment of the last fifteen years? Does the British government now have the makings of an Energy policy?

Briefly, no. A keynote speech on the 11^th of November by Mr Clark to a conference of the energy industry trade lobby, Energy UK, suggests that government is still finding it all but impossible to face the music. When politicians project excited visions of dramatic innovation (the word appears fifteen times in Mr Clark’s speech) they are usually hoping that all current difficulties will evaporate in the “white heat” of technology. Government is off the hook, there is no need to admit failure, and firm corrective policy action becomes, phew, needless.

But this is a grave mistake. By refusing to deal with the defective outcomes of policy at their roots, government will only succeed in calling forth expensive, rent-seeking “solutions” to problems that should not have been created in the first place. If anyone doubts this, confirmation can be found in a recent study by the London think-tank Policy Exchange, Power 2.0: building a greener, cheaper, electricity system, in which the authors urge 1. Market regulations to favour demand-side aggregators (companies offering to sell electricity increases and reductions in consumer demand to the system operator as a grid balancing tool), and 2. Regulations for penalties on conventional rapid response generators to “level the playing field” so that electricity storage can compete.

Demand aggregation companies such as Open Energi, one of the funders of the study, would benefit from such measures. So would the gigantic McAlpine offshoot and wind and energy storage developer, Renewable Energy Systems, who were involved in reviewing Policy Exchange’s work. Would the consumer also be better off? The study, perhaps unsurprisingly, says that they would, to the extent of ‘saving’ £8 billion a year against the rapidly escalating costs of current policies. That seems optimistic and arguable, and at best is only shaving thin slices off the cost of folly, and there is no doubt at all that much greater real savings could be made by not expanding the UK’s already problematically large fleets of subsidised, market destroying solar and wind, and by making those renewable generators that already exist pay for the system difficulties they cause, an idea in fact raised last year in Amber Rudd’s speech but not yet carried in to practice.

Unfortunately, Mr Clark does not seem to understand this last point as well as his predecessor, and while granting that handling the variability of solar and wind is difficult, he brushes concerns aside:

Many of the fears about their impact were overblown. It was said our power system could not cope with a significant percentage of our power coming from renewables. The doubters have been proven wrong. We now get 14% of our electricity from intermittent sources and our electricity supply remains the most reliable in Europe.

This is a disingenuous caricature. No grid engineer ever said the system couldn’t cope; they said that the cost of copingwould extremely high. And this has certainly proved to be true. Balancing Services Use of System (BSUoS) costs have more than quadrupled since 2001/2, when renewables growth started in earnest, and now top £1 billion a year, a large fraction of which is caused by wind power. For instance, consumers paid £90m in 2015, and £66m so far this year, to compensate wind farms, mostly in Scotland, for lost income when their energy could not be delivered to consumers due a grid constraint. To that cost, of paying wind farms to stop on one side of a bottleneck, must be added the more obscure but certainly real cost of expensively buying on conventional generation at very short notice to bring the market back into balance on the other side of the grid constraint.

To avoid these sorts of problems the UK is reinforcing its internal grid. But this is not cheap. The Western Link subsea interconnector from Scotland to Wales will cost about £1bn to build, and will imply a standing charge on the consumer of approximately £50m to £100m a year (5% to 10% of the CapEx) for the life of the asset, say thirty years. It might actually be more cost effective to continue to pay subsidised wind farms to stop generating, undesirable though that is.

Mr Clark must know all about these problems, but in a hand-waving betrayal of the consumer, he then goes on to urge that regulators should seek a solution by “design[ing] a system” to “take advantages of the innovations in storage, demand-side response, interconnection and IT to create a truly smart energy system”. The pseudo-cavalry described by Policy Exchange are being lined up to ride over the horizon and rescue the situation.

Mr Clark has particularly high expectations for the “smart meter roll-out”, in both gas and electricity, which he describes as “one of the most exciting and significant infrastructure challenges the Government is overseeing.” It is certainly one of the most expensive, costing, according to the government’s own Impact Assessment about £11 billion for both gas and electricity meters, or over £200 per household, all met from bills. Is it good value for money? The Impact Assessment  estimates £17bn of benefits, making it appear net positive, but, as Mr Clark incautiously observes in his speech, only some £6 billion of that sum will be of direct benefit to the consumers, much less than the direct cost of £11bn for the installations paid for more or less upfront by consumers. Embarrassingly, the rest of the supposed £17bn in benefits is in the form of reduced costs to electricity supply companies (£8.2bn), network and generation benefits (£1.9bn) and carbon benefits (£1.21bn), which will only reach consumers after a considerable time lag if at all.

In any case, many doubt the realism of these estimates. As the recent House of Commons Science and Technology committee report on the matter notes, other countries “have concluded that smart metering is not worthwhile” (p. 11).

Engineers have long suspected as much, for there is nothing inherently “smart” in increasing the quantity of capital equipment in an electricity network. Far from making the system the “most productive in the world”, as Mr Clark claims, more capital holdings will all but certainly reduce productivity, and certainly so at a time of falling demand.

Contrary to the rhetorical implications of the “smart grid” propaganda, the conventional system of the recent past was far from stupid. It generated and delivered a secure supply of electricity with a minimum of capital plant, most of it intensively utilised. The costly intelligence of the system was concentrated in a small number of control rooms, and the entire grid responded to fluctuations in consumer demand using almost no household equipment apart from the switches on the wall and a simple and long-lived meter for billing.

Mr Clark’s vision, in contrast, is of a major increase in capital equipment through the system, with much distributed generation and energy storage and an active, intelligent controller in every house. In essence that is where the electricity industry started. Private houses had their own generators, lead-acid batteries in a shed, and the owner turned the system on and off when required. But such systems were inefficient, suffered from low productivity, and were consequently so costly that only the rich could afford them. The smart controller was the butler. Unsurprisingly, and for economic reasons that still apply, the sector moved towards progressively more centralised systems so that electricity could become affordable for all.

In this sense Mr Clark’s multi-year plan for an intricate mesh of “mini power stations”, storage, electric vehicles and flexible demand, all co-ordinated by multiple IT systems to provide grid support, is a retrograde step. Intelligent complexity is costly, costly to create, costly to operate, and extremely costly to maintain. It does not occur spontaneously in any system, organic or economic, unless it confers real net benefit. We used to be told that some of the ‘terrible lizards’, the Stegosaurus for example, had secondary brains, “butt brains”, to control their distant rear ends. Mr Clark’s speech-writers would probably call this the “Smart Pelvis”. But it now turns out that the multiple brain hypothesis was simply wrong, and that evolution by natural selection had been prudently economic with resources. There is a lesson there. Government is taking an enormous risk in attempting to create by fiat and regulatory coercion an electricity system on a model that the dinosaurs were spared.

That said, better meters, demand aggregation, even storage, might play a useful part in a future electricity system, so long as the scale, pace of deployment and operational character of these added layers of complexity are optimised in and by the consumer interest. If, as at present, they are forcibly deployed to save ministerial face, the result will be another orgy of rent-seeking and still more extravagant costs.