Early Competition: Saving the Grid Energy Transition Costs

The energy transition will require grid reinforcement to accommodate our transition to using renewable energy. Non-grid solutions, such as National Grid’s Early Competition Plan, have the potential to provide enormous savings (well over 50%), and save the majority of the grid costs of the energy transition.

BEIS, Ofgem and National Grid are right to investigate ways of achieving this, and the Early Competition Plan shows great promise. Its main shortfalls are short-term thinking and a lack of joined-up whole-system approach.

Excessive Costs of the Current System

National Grid’s (NG) Network Options Analysis 2021 proposed ~£16bn grid reinforcement to accommodate ~17GW new offshore wind by 2025, almost £1bn/GW. This ignored that NG would also have to source balancing and stability services elsewhere, and connect those services, and manage the complexities and the disturbances between the source of the problem (the wind farms’ grid connections) and the solution (the balancing and stability service providers’ grid connections).

Storelectric estimates the total cost to be around £1.25m/GW capital costs alone. Based on previous reports, annual maintenance costs are ~5% of that, and management costs are also ~5%, so (even before considering the costs of the balancing and stability contracts) annual costs would reach ~£125k/GW.

Proactive Grid Development

It is worth recalling that the grid was only built because of whole-system, long-term thinking. For that reason, it was developed and extended based on forecast rather than current needs. This has been caricatured politically as “gold-plating the grid”, with a focus over the last decades on increasing utilisation. But in reality,

  • Building the grid in a measured and rational programme ahead of need is as much as two-thirds cheaper than building it reactively against need, as discovered in Australia; the Electricity Networks Association can cite excellent examples from South Australia and elsewhere, to support this statement.
  • Even if such demand did not materialise at the expected time, it has materialised since, so the benefits of investing in such more rational and measured ways greatly outweigh the small number of years for which a given part of the grid was under-utilised.
  • And the current method means that now there are large and unknowable numbers of projects that are just not being proposed because of the cost of reinforcing the grid to accommodate them, slowing down the energy transition and reducing the quality of the entire system.

Early Competition: Inviting Non-Grid Proposals to Solve Grid Issues

The National Grid defines early competition as ‘a competitive process to select a bidder, a solution, or a specific need on GB’s electricity transmission system’ that begins ‘prior to the detailed design, surveying and consenting phases of solution development.’

Early competition and very early competition are two ways of inviting non-grid proposals to solve grid issues. For example, storage may alleviate grid constraints more cheaply and efficiently than reinforcing the grid; inertial plants which can also do other functions in parallel may provide inertia and stability services more affordably and sustainably than building dedicated synchronous condensers.

The basic ideas behind early competition are very sound, though some of the proposals, by failing to tackle some regulatory shibboleths, will prevent the best and most cost-effective solutions being brought forward, making the grid unnecessarily costly for consumers in the medium and longer terms, and rendering it less reliable and resilient.

For it to work in practice will need the following elements:

  1. Anyone can propose projects for early competition.
  2. Long lead times must be allowable: many technologies are prevented by the short lead times allowed for in contracts.
  3. Many proposals cannot deliver grid benefits without also delivering contractual outputs; life-of-plant contracts should be granted for these.
    • For example, inertial storage cannot deliver constraint management or curtailment reduction without delivering inertia. It therefore needs to be remunerated for that inertia. See the salami slicing link above for further details as to the economic, contractual etc. consequences.
    • If the contracts were shorter than life-of-plant, then if the plant were to fail to win a follow-on contract, it cannot remove itself from the grid. In examples such as connecting more wind farms to grids because they’re connected through storage, the storage cannot suddenly remove itself from the connection: firstly, very expensive work would need to be undertaken to by-pass it, and secondly, the grid would need reinforcing greatly to take the raw in-feed energy from the wind farm. Both aspects would cost the grid millions, possibly billions for the reinforcement. This would be an excellent illustration of the sayings “spoiling a ship for a ha’p’orth of tar” or “the battle was lost, all for the want of a horseshoe nail”.

Going a Stage Further: Very Early Competition

For the network to be most cost-effective for consumers in the short, medium and especially longer terms, the following provisions are needed:

  1. Any business should be able to propose any project that will benefit grid one-off and ongoing costs, regardless of whether constraints or other issues are highlighted in National Grid’s (or the DNO’s) reports.
    • Depending on the proposal, if it were to be tendered publicly, then all incentive for project developers to spend time, money and effort in identifying such projects would be unremunerated and discouraged from doing so, ultimately a huge opportunity cost for the grid and hence consumer.
  2. Offers / enforceable letters of intent should be made pre-planning, and firmed up as projects develop through their stages; but should be quantitative at an early stage in order to attract private finance.
    • Such offers should be withdrawn if the project is deemed not to be progressing sufficiently.
    • Some changes in the financial values should be changeable:
      • Contract values in a letter of intent may be re-evaluated pre-construction, as the design evolves;
      • If the plant does not deliver all the capabilities, relevant reductions are made in the remuneration;
      • If taken out of service earlier, relevant refunds relating to NPVs of capital benefits;
      • If life-extended once in service, contracts (but not one-off benefits?) should be extended;
      • If upgraded, new contracts for the differential performance should be entered into.
  3. The grid should remunerate any such proposal, without tendering to others, 50% of one-off and ongoing savings, and provide life-of-plant contracts for necessarily-integral services at 80% of market rates.
    • The 50% sharing ensures benefits for all.
    • The 80% of market rates reflects the reduction in commercial risk from (a) not tendering competitively and (b) life-of-plant contracts; it cannot be lower because the contracts are delivered by buying electricity in order to re-sell it again, and the cost of electricity is roughly 80% of a storage plant’s operational costs. Indeed, the figure may have to be increased somewhat, if the plant is unable to trade sufficient other (commercially bid) contracts concurrently in order to make a profit.
    • Only “necessarily-integral” services are contracted in this way, as the benefits to the grid cannot be achieved without also delivering these services; other services provided by the plant are contracted commercially, in the normal way.
    • The consumer benefits by the savings (of which the grid operator may take a percentage to align its incentives too).
    • This does not offend against “competition everywhere” because all are able to make such proposals.
    • Nor does it “pick winners” because each project’s remuneration would be against its own performance; better projects will receive more, and worse less.
    • This delivers Ofgem’s fundamental purpose of delivering a reliable grid / energy supply for best value to consumers.

Early Competition is good, but so is very early competition: both should be done. Very early competition:

  • Looks at longer-term needs;
  • Enables all technologies to be proposed, not just those favoured by NG;
  • Identifies more opportunities for system benefits than does Early Competition, because numerous developers with diverse solutions and approaches will consider more varied options.

Roles in Very Early Competition

Very early competition is likely to be proposed by a project developer. It should be evaluated on its own merits: the developer is offering to build a project that benefits the grid. The basis of evaluation should be to compare system costs (capital, ongoing [e.g. maintenance, management, control] and contractual [which would involve the System Operator]) with a view to sharing the capital and ongoing benefits 50-50 between grid/consumer and developer/operator, and a 20% discount on contract prices. The capital benefits sharing would defray some of the project’s capital costs, and the revenues from benefits sharing of ongoing and contractual costs would provide a firm, long-term foundation to the revenue stack; all this would make many more projects commercially viable, and therefore undertaken and benefitting the consumer with lower overall system prices, and a more reliable and resilient grid.

These should be analysed to see if they should or should not be tendered competitively.

  • Should: identified by the grid operator; stand-alone; identified by another party who has not invested a lot of effort and/or cash into the proposal.
  • Should not: identified by another party who has invested a lot of effort and/or cash into the proposal; proposals for combined developments (e.g. renewable generation connecting to the grid through storage). As discussed above, this is not anti-competitive as all developers can make proposals and all technologies / projects are considered and remunerated on their own merits.

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