Watts the story? (November 2024) – Ben Shafran

Comment by Ben Shafran, Head of Markets, Policy and Regulation, at Energy Systems Catapult.

I’ve hand-picked a few of the biggest energy policy stories from recent weeks and highlighted how they impact the world of Net Zero energy innovation.

A green Budget?

Energy policy did not feature much in a government Budget that otherwise generated plenty of debate.

On the one hand, the fiscal rules that bind public spending have been eased. This makes it easier for the government to invest in energy infrastructure and the supply chain through the National Wealth Fund and Great British Energy.

On the other hand, urgent policies are still on the desks of Ministers, awaiting decisions to be made. This is particularly the case for policies that would accelerate the electrification of heat – such as rebalancing the recovery of policy levies away from electricity bills; reform of Energy Performance Certificates; and the Future Homes Standard.

The main energy policy announced with the Budget is the confirmation that a Carbon Border Adjustment Mechanism (CBAM) will come into effect on 1 January 2027. This is a tax on carbon-intensive imports to the UK, which would apply to the following sectors: aluminium, cement, fertiliser, hydrogen, iron and steel. Glass and ceramics were in scope when the previous government consulted on introducing the CBAM but have been excluded by the new government on the basis that they are less carbon-intensive.

We have long advocated for a CBAM to form a central part of the policy package that would help decarbonise the economy, so are pleased to see progress on it. But the effectiveness of this – or indeed any other industrial decarbonisation policy – relies on having accurate and consistent emissions data. We’re a long way from that. We are continuing to develop our proposal for a carbon regulatory function in government and will be publishing further on the topic early next year.

Clean Power 2030

The National Energy System Operator (NESO) has published its view of what a low carbon electricity system could look like in 2030. This represents the System Operator’s formal advice to government on how to rapidly decarbonise the electricity system.

NESO adopted a pragmatic definition of a “clean power” system: that total annual clean electricity generation (in NESO’s definition this also include carbon-emitting sources such as energy from waste and combined heat and power) meets total annual electricity demand. In practice, it means that around 5% of power demand is met from unabated gas generation (down from nearly 35% currently).

NESO is clear that delivering such a transformation would require huge investment in a very short time: doubling the capacity of onshore wind generation; trebling the solar and offshore wind capacity; and quadrupling battery capacity. Alongside this, NESO identified 80 key transmission projects to increase the system’s capacity – at a cost estimated to total £60 billion. This volume of investment across a range of technologies represents an enormous delivery, operational, supply chain, and regulatory challenge.

NESO finds that if the pace of network investment does not keep up with the pace of generation build, it will become increasingly expensive to manage the system – as gas some renewable power will need to be “constrained off” the system and replaced with gas generation located closer to demand centres:

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NESO’s report focuses on what a future system would look like rather than how it could be delivered. But its recommendations for enabling policies concur with the Catapult’s long-held view that better price signals in the wholesale electricity market are essential for operating a low-carbon system.

As always with this kind of modelling exercise, there is plenty that could be debated. For example, NESO assumes a carbon price of £147/tCO2 when the actual price has never been higher than £100/tCO2 and is currently at a low of £40/tCO2. But what’s important is that there is now a definitive view of what we should be aiming for, which the sector can respond to. An official response from the government is expected before Christmas.

Selling distributed flexibility in the wholesale market

It didn’t get much attention outside of geeky industry insider circles, but 7 November 2024 marked a huge milestone for the transformation of our power system: for the first time ever, consumers are able to sell their electricity flexibility (i.e. ability to reduce energy use) in the wholesale market. They can do so now via aggregators thanks to the important but unglamorously-sounding Balancing and Settlement Code Modification P415.

Until now, flexibility could only be sold in certain locations on the electricity distribution system – determined by and directly procured by the respective Distribution Network Operator – or delivering certain types of balancing services. Often the conditions for participating in one such markets directly, or in effect, precluded participation in others.

Granting flexibility access to the wholesale market is a key step in unlocking its potential to complement renewable generation and enable a clean power system. NESO’s modelling (as per the previous item) estimates that we’ll need six times as much demand flexibility by 2030 as we currently have:

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RIIO-ED3

Ofgem has fired the starting gun on the next ‘price control’ review of electricity Distribution Network Operators (DNOs). Every five years Ofgem scrutinises investment plans by the DNOs and then sets them delivery targets, and with them an allowance of how much money they can recover from consumers. The framework is known as ‘RIIO’ – an acronym for Revenue, Incentives, Innovation & Outputs. The current regulatory period (RIIO-ED2) runs to 31st March 2028, and Ofgem is now setting out its thinking about the next period.

Ofgem could not be clearer that RIIO-ED3 is about large-scale investment in the local electricity grids, to enable the electrification of heat and transport. It sees a need for much more directive, strategically planned investment in the grids. To this effect, local offshoots of NESO will be established as Regional Energy Strategic Planners (RESPs), whose recommendations around local investment needs Ofgem plans to use as the basis for setting DNO’s allowances.

This is all quite different from the current approach and will necessarily take some time to bed in – not least because the RESPs are only expected to be operating in a “transitional” manner in time to inform DNO’s investment plans for RIIO-ED3.

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