A 21st Century Electricity System

Introduction

The current regulatory and contractual framework is designed around a 20^th century industry (baseload coal and nuclear, dispatchable gas, all other bits are add-ons). It is totally unfit to be called a 21^st century electricity system, as it: 

• Is dominated by non-energy costs, which are escalating exponentially; 
• Is delivering an increasingly unstable, fragile and failure-prone system; 
• Relies on imports for both actual demand and supply margin; and 
• Needs market distorting special financial instruments for any infrastructure-scale investment, which in turn greatly reduces the scope and roles of the markets for energy and the various services. 

A 21^st century electricity system and regulatory and contractual framework must be designed around renewables and storage (with or without nuclear) supported by distributed generation and storage, interconnectors and Demand Side Response. It must also: 

• Control and preferably prevent further growth in the overall cost of energy; 
• Deliver an affordable, reliable and resilient energy system; 
• Provide for its own generation needs; and 
• Integrate capital investment and system renewal into the usual contracting structure (thereby avoiding the market distortion). 

Exponentially Increasing Non-Energy Costs

The cost of electricity is diverging increasingly from the price of energy: already around 75-80% of commercial customers’ bills consists of levies and system charges, with only 20-25% being for the electricity consumed. In a well-designed system, these percentages should be the other way round, as they were some decades ago. This way, if in designing a 21^st century electricity system the headline energy prices increase, the cost of electricity to customers would not necessarily be affected.

An Affordable, Reliable and Resilient Grid

The electricity transition is, in essence, very simple: replacing power stations with intermittent generation. Put another way, it is replacing dispatchable (variable on demand) and baseload generation with intermittent, and synchronous (naturally inertial) with asynchronous. Therefore it needs both energy balancing and all the stability, reliability, resilience, power quality and even Black Start capabilities – and the simpler, the better.

Energy Security

Since 2019, the UK has relied on imports for actual demand during “times of system stress” (i.e. high demand and/or low renewable generation), and to maintain the supply margin, which is a 10-15% reserve in case of faults and failures in the system. At least three of our neighbouring countries already do the same, and nearly all the rest will do so by 2040.  

Those times of system stress (e.g. after sunset on a windless winter evening) frequently occur concurrently across much of the continent. So, if all are importing during these times, who is exporting?  

Can we envisage any of our neighbouring grid operators telling their government that a blackout was because they were exporting the energy they needed? So, when push comes to shove, we’ll be cut off – as we were during the energy crisis following Russia’s invasion of Ukraine. We cannot depend on interconnectors for imports and energy security. 

Incentivising Clean Energy

Above all we need an energy system where clean energy is incentivised, without subsidy or price premium. This can be done by superimposing cleanliness-related contract length. 

To do so, the base contract lengths need to be extended so that imperfectly clean technologies can also have sufficient contract duration to enable investment. Thus, for a 100% clean or renewable technology, the contract lengths would be between 20 years and 10 years.  

For a diesel or coal fired power station, contract lengths would be half that of the clean technology, e.g. between 10 years and 5 years.  

Maximum contract durations for technologies with medium levels of cleanliness would be somewhere in between. So, a new build with half the emissions of a coal fired power station could have a contract of up to 15 years, and a refurbishment up to 7.5 years.  

For stand-alone storage, the calculation would account for two factors: cleanliness and efficiency. To be considered on a level playing field with generation, both “inefficiency” and “dirtiness” should be factored down by 50% and then added to obtain the “undesirability factor” which is then subtracted from 100%.  

Thus a 60% efficient (i.e. 40% inefficient) storage system that creates 20% of the emissions of a coal/diesel fired plant would be factored down by 20% for inefficiency + 10% for dirtiness, total 30% undesirability, for a contract length equivalent to a 70% clean plant, resulting in maximum contract lengths of 17 years for new and 8.5 years for refurbishment. The justification for this factoring down is that storage provides a balancing service that maximises the efficiency of the whole system and does so more effectively as the proportion of renewable energy in the system grows. Thus, efficiency is incentivised, as well as cleanliness. 

Incentivising Dispatchability

Dispatchability could be incentivised similarly to cleanliness of batteries, in that a non-dispatchability factor could be added to the dirtiness factor. There could be (say) a 10% reduction for long term predictable variability (e.g. tidal lagoons and tidal flow turbines, 4 generation slots per day), 20% for only short-term predictable variability (e.g. wind and solar generation). There could be an intermediate step for medium term variability such as wave power at 15% factor, if deemed appropriate. 

Where dispatchability is increased by co-location, near-location or contracting with storage, then generation and storage patterns and efficiencies should be modelled to identify the forecast true output and dispatchability figures, and the dispatchability factor scaled accordingly. Where such storage is of limited capacity (e.g. less than the nameplate capacity of the generation) or limited duration (e.g. fewer than 5 hours at nameplate capacity of the storage), then the storage only partially creates dispatchability. In such cases, the storage would not be evaluated separately as stand-alone storage. One could conceive of a storage facility contracting a proportion of its capacity to a dispatchable generator and the remainder as stand-alone, in which case a compound figure could be calculated.

Non-Financially Incentivising Innovation and New Technologies

New technologies from innovative start-ups are actively prevented from developing their plant as contracts are only considered following grant of planning permission, which itself follows the study and reservation of grid connections. Therefore for a large plant, millions of pounds (which an innovative start-up does not have) are needed before the contractual cover is offered. However, investors expect this cover before putting in their money, which start-ups need for the grid connection and planning applications. It’s a Catch-22.

A second Catch-22 is that many investors won’t invest without a reasonable expectation of long term contractual underpinning of revenues, which cannot be granted unless the technology is developed.

Breaking these Barriers 

A simple way to break through these barriers and to incentivise innovation and new technologies without money would be by early official memoranda of understanding (MOU) and letters of intent. Progress should also be monitored to ensure that the system operator (SO) understands the project’s impact, likelihood and timing as it develops. With these, potential financial backers would almost certainly open their purse strings. 

• For a proposal to build a first-of-a-kind plant, a letter of intent from the SO stating that provided certain conditions are met, it is the intention of the SO to grant a 15-year contract at the rates applicable at the time. 
• For such a proposal, a MOU from the Network Operator saying a grid connection (specified) would be available within a specified cost and timescale, unless other applications were received. This helps shorten timescales and liberate funds because currently grid connections can only be applied for following grant of planning permission which, for a transmission grid connected scheme, will cost ~£2m and take ~2-3 years. The prospect of an affordable grid connection will help liberate the private funding for the design and planning process.  
• Permitting grid connection applications to be applied for prior to grant of planning would considerably reduce the up-front risks and timescales of any project. 
• For an earlier stage innovation, if it would create a technology useful to the SO, then a less binding memorandum of understanding from the SO that if the technology achieves specified milestones (demonstration on paper of technical and commercial viability), then the above letters of intent will be forthcoming. This will provide the support to the project that will show to early stage funders that the technology has a commercial future if it can be developed as claimed.

Ownership of Plant

Additionally, we should permit system operators to invest in new generation and storage technologies and to own the consequent plant for a limited period, e.g. 5 or 10 years (possibly depending on size of plant or investment) between commissioning and sale. The proportion of the plant they can own could depend on the proportion of innovation in the plant. Any IP should have to be licensed to all who wish, but with royalty revenues accruing to the system operator as per normal commercial R&D investment. 

Financially Incentivising Innovation and New Technologies

To encourage new technologies, ROCs and CfDs should be replaced with a price supplement (pence per kW) for early stage installations of new technologies. For example, add to all revenues 50p/kW for a first-of-a-kind plant, diminishing linearly to zero for the sixth of a kind. If the differences from other plant types are smaller, then this premium can be reduced accordingly, but should still remain in order to incentivise innovation. 

This will encourage the building of first-of-a-kind plants in Britain. This incentive could be made contingent on (or proportional to) the development, engineering and manufacturing of the technology being located in Britain – which would incentivise innovative foreign companies to move in. 

Additional issues arise in that: 

• Financiers will not invest large sums in first-of-a-kind plants of new technologies, citing “technology risk” which they define as a first-of-a-kind of anything regardless of the level of actual technical risk. Therefore there needs to be some incentivisation, whether financial or contractual, for such plants, which will be perceived by the financial services sector as sufficient to defray such risks. 
• First-of-a-kind plants are always more expensive than n^th-of-a-kind ones due to lower familiarity of designs, permitting, supply chains etc. Again, financial and/or contractual incentives will be needed to defray such costs. 

Solutions

Create a branch of the NIA / NIC investment fund to be administered centrally by Ofgem to incentivise R&D which would benefit the electricity system as a whole but not the grid operators individually due to regulatory or commercial constraints. It should be administered to favour UK-based R&D, manufacturing etc., maybe with the proportion of costs covered being proportionate to the UK-based work (excluding installation – which is a gateway factor) as a percentage of the whole. 

Other incentives for the development and introduction of new technologies should be considered, not only at the innovation stage but at the pilot and first grid connected plant stages where there is a dismal shortfall in both money and non-financial support to flex the contractual and regulatory regimes (even if only on a one-off basis to test the benefits to the grid) to enable and encourage them. 

Conditional contracts would greatly assist fund raising. They could be phrased along the lines of: “if this plant can be built and deliver these services at these prices, then it is the intention of the System Operator to enter into a contract at the higher of these prices and the market prices applying at the time.” 

Time to Start of Delivery

Building new plants in new locations requires grid connection. Such grid connection can entail significant grid reinforcement. However the reinforcement can take 5-10 years to plan and implement, which exceeds the longest possible time allowable under the RIIO framework. Contracts for new build need to permit suitable delays to start of delivery of the multi-year contracts, in order to enable new construction. 

Some discretion may be given to the System Operator as to whether or not a plant is wanted to be connected to that part of the grid. And the issue is moot for plants that use existing grid connections provided those existing connections retain their access capacity. 

Grid Access

Ensure that all generation, whether UK or overseas, pays the same grid access and usage charges. 

Treat storage as a grid service, not as generation or consumption – or, at worst, allow storage to pay for charges after netting generation against consumption, which would incentivise efficiency. 

Instigate a methodology for ensuring that grid reinforcement costs also capture the benefits of reinforcement deferral arising from some investments (e.g. generation on a particular side of a bottleneck) and sharing those benefits with the investor, e.g. 2/3 to the investor and 1/3 to the grid operator. Some of these benefits may be reflected by one-off payments, others by annual payments: in order to maximise the incentive to build such plant, and to reflect the timing of the benefits to the grid operator, they should be paid in advance; any adjustments can be made the following year to reflect actual usage and/or performance. 

Grid Definition of Storage

Create a grid definition of storage modelled on that for interconnectors. This will permit and regulate: 

• Contracting for services which are delivered off peak from storage that is replenished when market price differentials are not as high as between delivering at peak and replenishing at trough prices; 

• Contracting for storage services per se; 

• Ownership and investment into storage systems – maybe for only a fixed period, say 5 or 10 years from start of operation to deadline to sell the plant. 

It will also eliminate: 

• Over-charging for grid connections and reinforcement, indeed creating a mechanism for payments to developers to reflect a large part (2/3?) of the savings from grid upgrade deferral; 

• Double charging for grid access for both charging and discharging; 

• Having to pay market premia (profits, mark-ups etc.) for both buying and selling electricity. 

Whole-Operation Contracting

Consideration should be given to whether System Operators (SOs) should be permitted to contract with a given storage provider or installation for “all services”. They should certainly contract, in a linked way, for all services that cannot reasonably be delivered without each other; adding other cost-effective services would be the outcome of the matrix tender evaluation process. Such contracting is very beneficial because the number of services offered by storage far exceeds that offered by generation, and such a contract would maximise the ability of the SO to use each service from storage in the most cost-effective manner. The main issues to be considered are whether and to what extent this would make the SO into a storage system operator, and whether or not such a change would be desirable. 

Not only CAES (Compressed Air Energy Storage), but all large-scale long-duration synchronous electricity storage technologies can offer: 

1. Various embedded benefits; 

2. Firm Frequency Response (Secondary, and possibly some primary); 

3. Fast Reserve; 

4. Short Term Operating Reserve (STOR) 

5. Supplementary Balancing Reserve 

6. Reactive Power MVAr 

7. Demand TurnUp 

8. Wholesale Peak 

9. Wholesale Off-Peak 

10. Balancing Mechanism 

11. Capacity Mechanism 

12. Black Start (unique to Storelectric: without reserving operational capacity) 

While batteries cannot offer the long generation durations required by STOR and the Balancing Mechanism, they can offer Enhanced Frequency Response and Firm Frequency Response (primary). 

There are various models and precedents for such contracts, including CATOs and OFTOs. 

Another benefit is that SOs require such services during off-peak times as well as peak times. If required at off-peak times, then the storage would have to re-charge at higher prices while generating its revenues at lower prices, making it unprofitable. Such whole-operation contracts would enable the provision of these services at off-peak times to be profitable for the storage provider.