There’s some great blogs around on energy and market changes at the moment. I particularly liked this one from Kathryn (link) which I think identifies a lot of the issues in the market today.
From my point of view the key challenges to open the market to innovation are:
1) Large incumbents, governments, and legislative agencies are incentivised not to change. Security of supply is paramount. You scratch my back, I’ll scratch yours, we wouldn’t want to upset the apple cart would we….
2) Security of supply means subsidy schemes or capacity mechanisms to guarantee security. Subsidy schemes can create issues in the market by:
a. Backing the wrong horse, in which case we waste a lot of money building the wrong kind of technology (see peak shaving batteries in Germany for example where batteries are discharged across the whole peak). Is it right to give incentives to battery capacity? Or location? Or injection/withdrawal rates? Are you sure your subsidy is bringing the best mix to the market?
b. Removing value from the market which would have meant the market finding the right solutions itself. An example here is a capacity market which pays old plant to stay on the system, never allowing prices to reach a level where new investments are profitable (you move value from short run marginal cost, to fixed costs).
c. Creating perverse investment incentives for investors. Anywhere you have a subsidy regime you will often see guaranteed 20% returns for 10 years. Everyone knows that risk and reward doesn’t work like that. But why would investors invest in real risky innovation if guarantees exist, possibly for doing the wrong thing?
d. As a footnote to this section I just wanted to reminisce that Capacity Payments were originally introduced into the pool system to prevent capacity owners hoarding capacity, or closing plant, to create artificially high prices. This was because there were only a few players in the market, and they could (together) game the system, and did. Now we’re in a competitive environment high prices are necessary to create incentives to build new plant. In the current market today high prices are not created by collusive forces in the market, but by the balance of supply and demand. In this environment we create a circular effect whereby our capacity payments reduces prices, and hence make plant uneconomic. In the end if you want security of supply the answer is to build plant (that you know you want) and auction it out to the highest bidder…. Otherwise capacity payments will tend towards supporting fully the cost of new build
3) Pedestrian pace of change. Management by committee, too many bureaucrats, and headless departments. Somebody needs to be made responsible for driving the right kind of change, in Government, in the regulator, in National Grid and fast….. With ownership comes change and innovation, without lies the tragedy of the commons.
4) The middle man. Suppliers currently own all the value created behind the meter. There needs to be a transparent methodology for extracting the value which suppliers did not create from their accounts. To promote innovation moves should be made to facilitate access to this value for all. At the moment most suppliers will charge for this access. The only thing more painful than paying a supplier for the right to access benefits which aren’t theirs is having to negotiate with them in the first place….
5) And finally the market itself. A while ago we wrote (here) about how the power market had evolved in the UK to support large plant operation, and allow generator dispatch to meet demand. The world has changed, and to incentivise change at the maximum rate it needs to reduce the cost of entry for monetisation of demand response. Why shouldn’t you (as an individual) get paid directly for acting to modulate your demand to reduce costs? Why shouldn’t you receive the benefits of your installed battery capacity directly, rather than having to ask nicely for it from a third party? Only when this issue is solved will we see a proliferation of cost/carbon/energy saving activity.
The irony is that the technical part of the challenge is relatively complete. Anyhow, lists of problems don’t really help. What of the solutions?
1) Set up an independent group with power to drive change in the energy market via government. This committee should have clear objectives to drive experimental change fast. Experiments should be allowed to take place without significant oversight (simply with a sign off for safety, or minimum detriment to the system). These experiments would allow innovation to take place quickly, without having to mobilise and align all parties with vested interests in the network. The Independent committee should be able to experiment with the market, as well as what is allowed on the system. This would allow monetisation of the experimental set ups at an early stage.
2) Subsidy should be experiment specific and limited in size to getting things off the ground. Once limited subsidy (in the form of project funding) is complete the project should stand on its own without further public money.
3) See 1) An independent committee could provide a rapid and effective way of driving change.
4) The experimental unit needs to be able to create a market which allows for extraction of benefits created by embedded power generation, or demand reduction, or whatever you want to call it. See 5)
5) Finally, on the market front we need to drive towards a market which offers all points on the grid a virtual price. This price would be composed of the power price (at the notional balancing point), net of system charges avoided on the grid, transmission losses avoided on the grid, and anything else that needs to be included. Some folks say that this will result in changes in the charging regime for DNOs and grid. This may be true, but as long as the charging regime is reflective of the incremental costs- and if they’re not then the charging regimes would be anticompetitive – then the same results should out. The new market would provide an administered nodal price for each connection point, and even behind the meter generation, or demand reduction. These prices would be half hourly, and anyone who can meter their profile could participate, even on a household scale, even behind the meter. Formation of this new market is where we need to get to to drive real change.
For me, with the exception of 5) the market change, I see quick wins. Market change is a long run thing, and a market with the level of detail I’m describing is going to be complex to administer. But if we don’t grasp the nettle and aim for this, seeing the benefits of this complexity (namely giving the right signals in the market for the right changes to take place) then we will construct a half-way house legislature which allows the status quo to resist change for longer still. And that is in nobody’s interest in the long (or short) run.