Matt set out a “brief history” of the UK market, and unintended consequences in our previous note (http://chargesync.com/news/the-uk-energy-market-a-brief-history/). My name is Graham Schorfield and I intend to get down to some specifics here. In summary the UK power market has had a couple of decades of intervention from Government and Regulators, to the point where it is in drastic need of help. The Labour promise to freeze prices was a disaster and, in my view, has contributed to prices remaining high in case a cap was imposed. The green agenda has caused investment in uncontrollable wind and solar, great for reducing emissions, horrible if you have to manage the system and with the costs borne by the consumer.
On the large scale system, the Government is addressing problems it sees in investment in generation, by implementing a “capacity mechanism or market”. This will pay generators to be available for any given winter, effectively contributing to their large annual costs. The implementation of a capacity market is an inevitability due to the subsidies being paid to renewables and nuclear (leaving thermal plant unable to compete without subsidies), which would not be the market’s capacity of choice. As such it is a necessary development, but has had a knock on effect to capacity in the medium term, leading up to the implementation in 2018. Coal capacity is being closed in 2016, as it did not win in the capacity auction, thus taking the hint that the market doesn’t want it. In theory there should be enough capacity to keep the lights on for 2015, 2016 & 2017, with a new CCGT due to commission in 2016. However, the press are already talking about the lights going out this winter. This is becoming an annual event, maybe one day it will come true….
The high level is fine from a policy making point of view, but I believe more could be done at the user end of the market. Innovation is happening throughout the home as consumers become more tech savvy. One of the key longer term aims to facilitate more accurate billing, and greater competition is the Smart meter roll out. At the moment we believe this is being driven by the wrong people (The suppliers or “Big6”). There are innovations going on with embedded generation, large scale battery testing etc, are the Distribution Network Operators (DNO) and National Grid. There is an incentive for a DNO to improve controllability of load (because they save on having to reinforce the network), but a disincentive for a supplier to improve customer engagement (so they don’t switch).
In order to facilitate innovation at the customer end, the market needs to expand its view of “the market”. It should be possible to commercialise volumes of energy that are created outside of the box, i.e. within individual homes, especially with the immediacy of the internet. There is a way to do this in the current market, but it is expensive and involves setting up a Supply business as well as creating the technological solutions. Most markets don’t need innovators to do the whole supply chain in order to benefit from their innovation. The UK Power market needs to separate out the creative solutions from the fixed elements of demand, and facilitate the allocation of this to the correct parties. However, the people who can make this change have had it in their gift for many years, but are either fearful of change, or do not have an incentive to do so.
Smart meter roll out is currently with the wrong people.
1) Switch the smart meter roll out from the suppliers to the Distribution businesses
Suppliers blame “buy ahead” or portfolio management for high prices when the wholesale price is falling, which has again come up through the recent Competition and Markets Authority referral. Other countries (e.g. Norway) have many more suppliers than the UK, and have innovation that allows domestic customers to have a “spot price” contract – effectively removing the buy ahead problem (see 1&2 links below). This led to the wholesale cost for spot customers being 15% lower than other customers (about 7% off the end bill). The problem in the UK is that meters are read once a year (at best) and so sophisticated tariffs are difficult to offer.
2) Day Ahead (DA) indexed tariffs needed
3) Half Hourly (HH) metered should be settle-able
4) Redefine the market to include “behind” the domestic meter
Improvements should be left to innovators, but facilitated by regulators and government. At the moment the government through DECC, Ofgem and Elexon sit on high deciding on market issues. They should become facilitators of change driven by the innovators, but not by how big (6) the innovators are. Too many of my discussions with these bodies have been framed around explaining why solutions can’t happen ….
5) Make the regulators/policy makers more answerable to customers
Given cost projections batteries, should be a good part of the solution, but at the moment are limited in their ability to realise the full value created. With the market centred around the “Big6”, batteries installed today, would share the value created across all suppliers. Perversely the owner of the battery would see a higher bill because the battery is not 100% efficient so annual energy take would increase.
In my view, in this day and age of internet and “instant gratification”, the power market is decades behind delivering the value (and greenhouse gas emissions savings) that can be unlocked. The market needs to be fit for purpose now, not in 2020. The technology is in place, the costs are competitive. Lets change the market for the better and unlock significant savings for end customers.