Investing in energy

From the ESRC blog...

Jim Watson is Director of the UK Energy Research Centre (UKERC).

In this piece he asks what the government can do to encourage further investment in innovation to make the UK’s energy system more flexible.

The UK energy system is changing fast. Coal, the fuel that powered the industrial revolution, is in rapid decline and low carbon technologies now generate over 50% of the UK’s power. Energy demand has fallen since the mid 2000s, driven by energy efficiency improvements and economic restructuring.

These trends mean that the UK has comfortably met its statutory targets for reducing greenhouse gas emissions so far. However, meeting carbon targets from the early 2020s will require much policy action. For example, there is very little certainty for investors in low carbon power technologies such as offshore wind beyond 2020. There are also significant gaps in energy efficiency policy, where new incentives to replace the failed Green Deal are required. The government’s Clean Growth Strategy will need to address these gaps.

Energy and climate change policy had a low profile during the 2017 General Election campaign. Despite the urgent need for further policy action to drive the transition to carbon energy, the only significant debate was how to implement a cap on energy prices. The Conservatives, Labour and the SNP all proposed price caps in their manifestos. What often got lost in the debate about price caps is that consumer bills have actually fallen. Analysis by the Committee on Climate Change showed that average annual household bills for electricity and gas fell by £115 between 2008 and 2016. This is because any rises in prices were offset by improvements in energy efficiency.

Since the election, two related elements of the government’s energy strategy have become clearer.

First, the Helm review was commissioned to identify options for minimising the cost of energy. There was some concern that such a quick review, which reported within two months (in October 2017), would simply focus on short-term measures to reduce policy costs. But the terms of reference for the review emphasised that any recommendations must be made in the context of the UK’s carbon targets, and the need to maintain energy security.

The terms of reference for the Helm review (PDF) also specified a systems approach. This creates the potential for innovation to deliver lower bills for consumers. Such innovation could include support for cost reductions in individual generation technologies (eg, through further contract auctions), plus innovation to make the electricity system smarter and more flexible. It is also important to take into account the large scope for cost effective energy efficiency measures so that consumers don’t need to use as much energy for the same service.

Second, there are more details on how the shift towards a smarter, more flexible electricity system could be achieved. Whilst the government’s plan to phase out petrol and diesel vehicles by 2040 grabbed the headlines, this was one of a series of announcements designed to accelerate this shift. Much needed regulatory reforms have been proposed to make the electricity system more flexible. While it remains to be seen whether these will be enough, recent UK Energy Research Centre research has shown that such flexibility is critically important if the costs of integrating intermittent renewable technologies into the grid are to be minimised.

In addition, funding for a new £250 million Faraday Challenge on energy storage has been announced as part of the Industrial Strategy. A key aim is to support a national electric vehicle industry, including attracting a leading global battery company to the UK. A positive feature of the Challenge is that it is not just focused on basic R&D, but also includes activities on commercialisation. Such an approach could address the age-old UK problem of having a world-leading science base, but a poorer track record of commercialising products.

As with the integration of a greater share of renewables, the impact of a shift to electric cars on the electricity system could be modest if  implementation is accompanied by much more flexibility. There is very likely to be an increase in peak electricity demand, and significant investment will be required in some electricity distribution networks too. But contrary to some newspaper headlines about a very large impact on peak demand, recent National Grid scenarios show that shifting 90% of vehicles to electricity could increase peak demand by 6GW: only a 10% increase from the current position.

Overall, the government’s focus on the role of innovation and regulatory reforms to meet energy policy objectives is welcome. But turning ambitions into practice will require much more political attention and policy action. Amid the uncertainty of the Brexit process, the transition to low carbon energy offers the prospect of significant benefits – both to consumers and to UK plc.

Find the full blog post here.

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