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Innovation: Waiting for Ofgem?

Posted By Dr Gordon Edge, 15 February 2016
Updated: 16 February 2016

Another day, another event about innovation. The latest was Ofgem’s “Innovation in a transforming energy system” event, in which the energy regulator set out its approach to technical and business innovation. This follows on from the various network innovation funding streams that Ofgem has presided over, and the consultation last year on ‘Non-Traditional Business Models’ (NTBMs, for those who like acronyms). While Ofgem should take some credit for trying to get on the front foot, it seems held back from taking a strong lead. If we are forced to wait on Ofgem taking on that role, however, I fear that, like Vladimir and Estragon ever hoping for the arrival of Godot, we shall be waiting a long time.

The room was full for Ofgem’s exposition of what it is doing in the area, followed by presentations from InnovateUK (snazzy, though somewhat lightweight) and the Financial Conduct Authority. The latter provided some interesting read-across from another regulatory body, and seemed to have some good lessons in terms of getting down on the innovators’ level and giving them time- and situation-appropriate advice on what would and wouldn’t work from a regulatory perspective. But overall there was a sense of Ofgem wanting to play the game by saying ‘the door is open – come on in’, but not actively striving to make innovation happen.

To an extent, this is a function of being on the edge of a predicted market transformation. While there are lots of exciting technological developments here or clearly coming soon, the environment to allow them to be adopted and flourish is only now starting to be developed. For there to be real progress here, then Ofgem and Government have to follow through quickly on the agenda to move to principles-based supply regulation (which would make the taking on of a supply licence much less onerous), having half-hour settlement for all consumers, and driving the uptake of smart meters and smart grid solutions alongside the move from DNOs to DSOs (Distribution Network Operators to Distribution System Operators). All these are only just starting to happen, and will take some years to deliver and bed down.

As an aside, it is interesting to note the submission by Ovo Energy to the NTBM consultation, which raises the issues of retail regulation and half-hourly settlement as priorities: the author? One Guy Newey, who is now… Amber Rudd’s Special Adviser. And now we seem to be getting action on these issues, including having the latter in the new Energy Bill now before Parliament for pre-legislative scrutiny.

So we seem to be being told to both hurry up and to be patient. We’re hurrying to get the new technologies and business models in place to support market-led development of mature renewables, but waiting for all these enabling regulatory and policy changes to happen. This is a delicate balance. If the two parts don’t advance together, then the businesses investing in innovation will fail because of a lack of viable business models.

What is needed is a pacesetter to force the pace and promote real-life demonstrations of pairing up local generation with local demand, using new technologies such as storage and demand-side response to provide local area balancing. At the Ofgem event, Judith Ward from Sustainability First hit the nail on the head, saying that to tackle specifically the issue of developing ‘energy ecosystems’ in cities, real-life pilots would have to pushed through, tackling the layer upon layer of barriers that lie in the way of making this a reality. This is just as applicable in rural areas, in fact more so, as this is where local, distributed renewable resources could have the ability to cover an area’s entire needs.

I’m not seeing such a scheme being talked about, let alone being planned anywhere in particular, various municipal supply initiatives notwithstanding. I’m waiting. But I’m not holding my breath.

Tags:  energy  Innovation  Ofgem 

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What the Papers Say about our future energy market

Posted By Maf Smith, 15 February 2016
Updated: 18 February 2016
It’s been a busy media weekend for renewables. First up, Emily Gosden dug behind the exchange between Energy Minister Andrea Leadsom and Peter Lilley MP at DECC Questions on Thursday 11th February.

Peter Lilley asked the Minister about work on a no subsidy contract for difference, and asked if this will reflect the value of the electricity. For him the value of the electricity depends on the time that it is produced, where it is produced and how reliably it is produced and he is sceptical of the ability of renewable electricity to deliver.

In reply the Minister said “On the subsidy-free CfD, he is also right that we must take into account all the various costs. We are looking at the matter very closely. I am not making any promises here, but, alongside other subsidies and other CfDs, we are looking carefully at the proposition.”

Emily Gosden’s incisive Telegraph article looked at this issue in detail. What is interesting for me is how some are mistakenly thinking this is a debate about future support for wind. But it isn’t – it’s about how to make sure our energy market works properly to deliver a reliable, diverse supply at lowest cost.

My brief appearance in the article was to highlight that an energy market which excludes technologies like wind or solar would be anti-competitive. And if you look at the different views in the article you can see there is a lot of common ground hidden behind the contrasts.

The UK’s energy challenge is how to keep the lights on at lowest cost, while keeping within carbon reduction commitments. This means moving away from dirty coal toward low carbon options like renewables, CCS and nuclear.

One problem Government has is that wholesale energy price is a weak price indicator not strong enough to encourage new investment. It is effective as a “dispatch signal” in the day ahead and hour ahead markets; making sure that the lowest price options are used first each day. But it cannot work as a long term price signal to encourage the construction of any new power plants. Anyone who insists that only new power plants which can build at this wholesale cost is wishing on the UK an era of power station blackouts and instability. Instead Government is using an auction system to provide longer term price certainty for new power plants in a way that minimises cost to the consumer.

Everyone in this debate agrees that subsidies must end. They would like to see markets strengthened rather than undermined, so that competition forces innovation and reduces cost better than it is doing now. And they would like to see the market recognise the full costs of that energy system. Where the parties differ is that renewable generators want to see the cost of carbon, and the full system costs of different energy types both factored in. Others though only want to talk about the latter.

We can see that there is a lot of agreement on the principles, but disagreement on how to embed these into the market in practice.

The last five years have seen some significant changes in the energy market with auctions introduced to contract for new generation and subsidy programmes such as the Renewables Obligation all now scheduled for closure. This shift is necessary, but not complete. Innovation is transforming how we use energy, and there is no going back to a time when we simply relied on big power stations providing power via big energy utilities.

And this shift is what Danny Fortson lays out in his excellent piece about the future of energy utilities. It’s quite a coup to get two Big Six CEOs saying that the model needs to change, and they echo the views of National Grid CEO Steve Holliday who said last year that “The idea of large power stations for baseload is outdated.”

Both Emily Gosden and Danny Fortson are sketching out the fast evolution of our future energy market and the debate we need to have about this. Advocates of renewable energy want to see their technologies able to compete, and are confident they can deliver on cost and performance. They will do this because renewables costs are falling and new innovations are coming to market which better price in different system benefits and costs. They are also making energy generators and users more responsive to price signals. The question then is: why stand in the way of greater competition?

We already use the Capacity Market to ensure capacity adequacy and Contract for Difference auctions to provide low carbon power. Some further tweaks to these will make sure we can deliver lowest cost power free of any subsidy.

Commentators like Policy Exchange and the Conservative Environment Network are clear that onshore wind and solar are already cheaper than new gas plant. If we make sure that new gas plant pays its way and is not subsidised, then there is no reason not to continue these capacity and power auctions. Leadership from Government means action to ensure a stable power market: we can then be confident that consumers have the lowest cost route to a secure and low carbon source of power. This is something everyone wants.

Tags:  CfD  DECC  electricity  government  markets 

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Time for Government to Think Big on Small Renewables

Posted By Maf Smith, 02 February 2016
Updated: 15 March 2016

Today, Baroness Featherstone, the new Liberal Democrat Energy spokesperson, will attempt to keep alive the support programme which makes small scale renewable projects happen.

The process is quite arcane, but the debate that lies behind it is critical for the future direction of small scale renewables, so bear with me, and perhaps also marvel at the way the House of Lords works. Baroness Featherstone has tabled a “Humble Address” which seeks to annul the Government “Feed-in Tariffs (Amendment) (No.3) Order 2015”. A Labour motion to debate the Order in the Commons looks unlikely to succeed and so today’s debate is likely to be the only effective Parliamentary scrutiny this legislation will receive. Its impact, however, will be felt by households, communities and rural businesses across the country.

This Order, which the Government introduced as a statutory instrument just before Christmas 2015, will radically change how the small scale renewable energy market works. Government has decided to drastically cut levels of support given to schemes, and to introduce caps on spending. The reaction from the wider public was significant. Energy policy is normally arcane and hard to follow. Energy only usually gets seen as a political issue when people debate energy costs. But Government has seen that people also want to know where their energy comes from, and were appalled that in future it would be harder for householders, schools, farmers, communities and small businesses to install their own renewable energy equipment. In fact people were so appalled that over 60,000 of them wrote to the Government about it as part of its consultation on the changes.

All those people wanted to see Government think again, and we did win some important concessions introduced into the Feed-in Tariff scheme. And of course some of what has been proposed is absolutely necessary – all those who make use of the scheme know that costs have to be managed better and we should only support renewable technologies at a level that is affordable.

What is a tragedy in all this is the fact that Government is introducing major changes to a popular scheme without putting any thinking into the longer term role of small scale renewables, or what comes after the Feed-in Tariff. Its approach is more all or nothing and betrays a lack of imagination or creative thinking. The consultation had no views on the merits of the scheme or how to support continued growth of small scale generation in the absence of subsidy. The statutory instrument has been lodged in Parliament without any thinking or debate about how we best support ordinary people and businesses to meet their own energy needs.

Instead we have a process which has been little more than an accountancy exercise. The need for Government to manage the costs of the Feed-in Tariff has blinded them to thinking about alternative ways to support small scale renewables, or to thinking about what the longer term plan is.

But for the Conservative Party this shift to decentralised energy, and to more people having power over their own energy generation, was exactly what they stood for in opposition. Fast forward to 2016 though and there seems no pride in the fact that over 10% of farmers now have their own wind turbine and are better equipped to manage food and energy price shocks. Thanks to renewables these farmers are more resilient; their businesses are healthier and the overall rural economy is healthier.

Thanks to the Feed-in Tariff, the UK built a vibrant small scale manufacturing industry. Up to the end of 2014 UK manufacturers exported one turbine for every one they sold at home, and we led the world in this area. Now though that UK market is disappearing and these small manufacturers are either going out of business or looking very carefully at how they better supply to other markets.

So now we have a sector in decline. But there is no discussion about this. In its decision about changes made to the Feed-in Tariff there was no long term view about how the companies behind this small scale revolution can be encouraged to get off subsidy. Government did not consider the use of tax incentives or innovation funding to encourage businesses to generate their own energy. Nor did they look at the mountain of red tape that makes it so expensive for anyone to install their own renewable energy equipment, and plays some part in making subsidies necessary in the first place.

So it is good that we have a motion tabled and the chance for the House of Lords to debate this issue. Lynne Featherstone’s motion may not succeed, but hopefully she will succeed in raising Government’s ambition, and forcing a debate about whether the UK is still serious about decentralising how energy is generated and used, and putting power back into the hands of the families, schools, farmers and small businesses across the UK.

But whatever happens in the debate, what we do know is that we need a long term plan and a renewed political consensus about how we make sure that keeping the lights on, cutting our dependence on fuel imports and tackling climate change is the responsibility of everyone and needs to happen in big and small ways.

 



Feed-in Tariffs (Amendment) (No. 3) Order 2015 Baroness Featherstone to move that a Humble Address be presented to Her Majesty praying that the Order, laid before the House on 18 December 2015, be annulled (SI 2015/2045). 20th Report from the Secondary Legislation Scrutiny Committee.

 

Tags:  Feed-in-Tariff  government  Liberal Democrats 

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Get barriers out of the way and we can build the electricity system of the future

Posted By Dr Gordon Edge, 20 January 2016
Updated: 15 March 2016

Giving evidence in a marathon two and a half hour session on low-carbon networks in front of the Commons Energy and Climate Change committee last week, I was reminded of a quote from one of my favourite authors, William Gibson: “The future is already here — it's just not very evenly distributed.” All the elements that we need to assemble a responsive, flexible, low-carbon power network are to hand; what is really needed is to roll them out, gaining experience on how the pieces work, individually and collectively, and consequently making them business as usual. Sure, reductions in cost of key elements like storage are going to be necessary, but we shouldn’t be waiting for those to happen before taking action to ensure the commercial arrangements are right to incentivise cost-effective applications of the key technologies. The legal and regulatory changes necessary are likely to be time-limiting steps for the low-carbon and distributed energy revolution that we need so desperately.

Firstly, there is the rapidly rising deployment of the variable renewables of wind and solar. It’s becoming a cliché to point out that these are now directly competitive with the cheapest new fossil-fuelled electricity. It is reasonable to point out that these technologies bring system challenges, though it is important not to overplay these. If we were to use “traditional” tools for managing these, primarily new peaking capacity and a lot of new wires, then the cost would likely be very high, so it is important that we bring on cost-effective alternatives. It is also vital that we open up the market for ancillary services so that where renewables are able to provide these economically, they can be rewarded appropriately. Wind turbines can provide frequency response, voltage control and reactive power, and National Grid is going to need more of all of these and other services besides. Ancillary services are going to be a much larger part of the cost of providing power to consumers, and it is important that as many participants as possible are incentivised to play in the markets for their provision to ensure that the cost is minimised.

Even more importantly, though, we are seeing huge activity in the areas of storage and demand side response, but their contribution to the system is currently being stymied by rules and regulations designed for an earlier era, and slowness in the roll-out of market arrangements that would allow the full potential of smart meters to be exploited. Nonsensical regulatory treatment that sees storage being charged twice for network services as it both receives and sends power out to the system clearly needs to be reformed. The spread of half-hourly metering to all classes of consumer would also allow full time-of-use tariffing and the ability to ensure response of demand to system signals.

Having been around this industry for over a decade, however, I know that even logical changes that everyone agrees must be implemented take a long time to work through the process, and if there is any contention then it is even slower. We must prioritise the regulatory changes needed for storage and DSR so that business models can be constructed around these exciting new technologies, and that as they mature they can be rolled out at the highest speed possible.

One thing that will have to be acknowledged is that a significant opportunity to get on the front foot with the smart grid was missed in the RIIO-ED1 distribution price control review. This process set business plans for the Distribution Network Operators that put off their transition to being Distribution System Operators until the next price control period, which does not start until 2023. The DNOs also massively underestimated the deployment of distributed generation in their planning, and thus the RIIO-ED1 settlements do not provide for sufficient investment in capacity to provide connections to such generators. Some form of reopener of the RIIO-ED1 settlements would obviate the purpose of having long-term price controls and so we may have to wait until the planned Mid-Period Review in 2019 to see any substantive action. This will slow progress in deploying smart technologies just when we need to accelerate.

In conclusion, it can be seen that unnecessary legal, regulatory and policy barriers are the major issue in getting that future network well distributed in the UK. Dealing with these won’t cost money but will require significant will on the part of policy makers and industry to see through the required changes in a timely way. I know that there is considerable excitement across the sector at the prospect of radical technological change leading to a new and more efficient system, with consumers at the heart. If we can channel that excitement the UK can get ahead of the curve and achieve a network fit for the 21st century, with huge opportunities to export expertise and solutions as others follow in our wake. Let’s get to work.

Tags:  DNO  DSR  legal  regulation  RIIO-ED1 

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Where next for People Power?

Posted By Maf Smith, 16 December 2015
Updated: 15 March 2016

Sometime before Christmas, and probably this week, the UK renewables industry expects our Government to publish the results of the Feed-in Tariff Review. The signs are not promising.

At the end of August Government launched its review and sought responses to its proposals to radically change the Feed-in Tariff, which I blogged about here.

Industry and the wider public responded, and in two months Government received some 55,000 responses. In the last 6 weeks a small group of officials in DECC will have been through them all.

There are apparently “only” a few hundred substantive responses. That is still a lot of detail for Government to consider. And while the other 54,500 odd may have been generated by wider public campaigns, I hope that the Government has taken note. This stuff is popular.

A cynic might say, of course it's popular, who doesn’t like subsidy? But they’d be missing the point. People simply want to see more renewable energy in use in our homes, on our farms, on our factory and office roofs and car parks. People get it, they like it, they want more of it. Asked recently by the National Infrastructure Commission what type of infrastructure they saw as most important the public said simply: investment in renewables. Conservative, Labour and Lib Dem voters all listed renewables as the type of infrastructure we should be investing more in.

I hope that the consultation has at least alerted Government to the fact that UK voters from all walks of life see renewable energy as important.

These same people would also agree that Government is right to worry about energy bills. And these same people know that renewables can add to our bills. But it’s not the case that the public doesn’t know what it wants. What the public wants is for Government to show leadership and to square the circle; supporting renewable energy but finding ways to make it cheaper and getting it on a sustainable path where it doesn’t require subsidy.

Unfortunately though, the Feed-in Tariff review did not set out a plan to move industry off subsidy. Its tone was that “there is no money”, “enough is enough” and “please close the door behind you”. There was no positive vision to be found anywhere in its 62 pages.

And so ready was Government to paint industry as little better than a group of subsidy junkies, they failed to notice that within the UK renewables sector is a group which is up for a difficult conversation. That could have been started by Government using the Review to say “look, we’ve spent what funding we had available. This is a great success, but in the current climate something has to give. Here are our thoughts for how we change the Feed-in Tariff scheme and some options for how we can support you in the future without giving you a subsidy”.

Our hope is that the significant public response, and the creative, mature way in which many have replied, has given Government cause to reflect. So despite the lateness of the hour, and despite getting off to a bad start in the original review, there is still time for Government to conclude this Feed-in Tariff review in a meaningful way. How? Well here are some things we will be looking for when Government publishes its response.

  1. Government must come clean and admit that while it is right that costs have been falling, the cost assessment made was very poor, and supporting some renewable technologies still requires a level of support.
  2. Government can be clear that the future has to be a subsidy free one. Renewable experts agree, but need help to get there. However, there should be an acknowledgement that there are wider benefits to small scale renewables, including helping communities and rural businesses manage energy costs, opening up the market to a diverse mix of generation and supply, and drawing people in to doing their bit to tackle climate change. These are worth supporting and this can be done without subsidy.
  3. Government should re-profile what funding is available to provide a sustainable glide path of funding for these subsidised technologies that is spread over the next two (rather than four) years. Doing this means using any available money more usefully.

Building on this, the most important thing we need from Government is that any statement on the Feed-in Tariff is not the beginning of the end for renewables, but the beginning of an open conversation about what next.

What industry needs is an opportunity to work with Government, with an open discussion about options to back small scale renewable energy without subsidy. If Government moves fast this could be done before the March budget. How good would it be to have a Chancellor use his next budget to set out how Government is supporting people, farms and businesses in being able to install renewable energy, manage costs and do their bit, without adding more money onto customer bills?

A response like this would be good politics. It would be Government leading on protecting consumers, while working with industry to identify solutions, and giving the public both things they want.

Alternatively, the Government could decide that it simply wants to phase out the Feed-in Tariff and avoid any discussion about what comes afterwards. In doing this it could talk up the money it is saving consumers. But it could not credibly claim to have a low carbon plan. The frustrating thing is that within many of the 55,000 responses, there is a credible plan that offers both these things. Let’s just hope that that’s the plan which captured their attention, as it deserves to be the blueprint for the way ahead.

Tags:  DECC  Feed-in Tariff  government  subsidy 

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