To sort out the energy policy mess, the next government has to stop top-down thinking, dismantle the silos, forget about picking technology ‘winners’ and harness the power of British industry. Crucially, it must stop using the wrong set of numbers when it comes to energy efficiency. That’s the view of Tim Rotheray, director of what is now known as the Association for Decentralised Energy.
It used to be called the CHP Association. But people no longer think about specific technologies, they want energy solutions. That’s a lesson policymakers could learn.
Siloed, central thinking has created a monster, says Rotheray. “There is an overarching problem when you start thinking centrally. In energy we generally split into three different areas: emissions, security and cost. That has created a mass of policies and it won’t work if there are lots of silos.”
The Contracts for Difference (CfD), for example, “might work really well if you just do generation. But if you are a user with generation and demand and that demand is for electricity and heat and transport, and you have multiple sites – some large, some small – all of a sudden you have an alphabetti spaghetti of policy,” Rotheray notes.
“You can access the Feed-in Tariff (FiT), the Renewable Heat Incentive (RHI), Greenhouse Gas reporting; ESOS, Climate Change Levy (CCL); the Carbon Reduction Commitment (CRC); some sites might be in the EU ETS…” Rotheray takes a breath. “And none of it is designed from the user perspective. You can understand why each different part of the policy has arisen, but it is mind bendingly complex.”
So there is a policy gap? “Yes, but I don’t think we need to make more policies. We just need to turn the whole thing around and say: ‘I am an end user. What would I want to do and what would government policy want to make me do. Now how can we bring those two things together?’”
For example, he says, “we might say that GHG reporting and emissions trading and CCAs, the CCL and the CRC are all trying to do the same thing. So how can we make those policies work better and make it easier for the end user?”
Hasn’t government tried to do that with so-called ‘red tape challenges’? “True, but often those challenges were ‘how can we make the CRC easier’ [rather than thinking about the policy goal]. That is still a siloed approach and I’m not sure that’s the right way to do it.”
Rotheray thinks government should instead have a ‘real business challenge’ whenever it starts thinking about firing off a new policy. “You almost need a theoretical business, quite a complex one, to try participating in any new policy or incentive.”
The additionality mistake
Demand side reduction and response is a case in point, Rotheray says. Which brings him to another policy fail: Additionality. That is, if you qualify for one incentive, you can’t claim another. Rotheray understands why the additionality rule was created: no government would want to throw money at solutions that didn’t need it. “But it has created a perverse situation where we are paying a premium for our energy policy.”
Recent demand reduction forays by the Department of Energy & Climate Change are the perfect example of additionality gone rogue, he suggests.
Decc last month handed out initial contracts via its inaugural demand reduction pilot. The average price ended up at £229/kW. That compares to £19.40/kW in the first capacity market auction held in December.
“The market then says ‘demand side is expensive because look how cheap capacity was on the supply side’. That could be your conclusion, but it would be the wrong conclusion,” says Rotheray.
“The reason [it was so expensive] was that anyone who had a Climate Change Agreement was excluded on the basis of additionality – they have an incentive to do something via the CCA, therefore they can’t participate. So we [Decc and therefore the bill payer] bought other forms of electricity saving instead. We paid £229 a kilowatt and automatically excluded a whole load of good value opportunity. Which doesn’t sound like best value for the consumer.”
Government has to think beyond such structural anomalies, says Rotheray, and work towards a consumer value guarantee. “Otherwise you are excluding lower cost options and making the cost of decarbonisation higher. We can’t do that. It is not a reasonable thing to do.”
Capacity crunching and demanding response
Ironically, Rotheray says, the additionality rule appears absent from the capacity auction. “Think of all the coal and gas plant awarded capacity contracts. How many of them would have shut down if the capacity market hadn’t existed? Probably very few, if any.”
The problem with the capacity market mechanism is that the department appears to have interpreted it as ‘how do we keep power stations operating and how do we get power stations built’, says Rotheray. “It should have been ‘how do we keep the lights on at lowest cost?’. Because of that it is designed around power stations.”
The fact that less than one per cent of the total capacity procured in the December auction was allocated to DSR confirms his theory. The problem, says Rotheray, comes back to central thinking – and central thinking with muddled assumptions stops businesses taking part.
Rotheray thinks the capacity market design is inherently flawed, because it assumes a stress event in theory can occur for an infinite period of time, and will not change.
“Of course that is wrong, because electricity demand rises and falls over the day, so 4-8pm is more stressful than midday. But it ignores that and assumes stress is stress. It also assumes you can just keep buying fuel and keep running. That is power station thinking.”
That makes it difficult for DSR providers to take part: they can respond for hours at a time, but not indefinitely. “The capacity mechanism enduring arrangements take no account of that at all. Unless you can provide power 24/7, you are not valuable. That’s the problem.”
Decc needs to define what success looks like, says Rotheray. And it needs to put itself in the shoes of businesses if it wants to take advantage of potentially lower cost solutions such as demand response. “Understand what users want, and then think about how to access their value in a way that works for them. Not saying ‘here is what we want and if you can’t do it in its entirety we are not interested’, which is how the system works at the minute.”
Decc is currently tendering research work to determine how much demand response is available in the UK. Estimates of 20GW have been mooted to the Lords inquiry into electricity resilience. Rotheray says that the true level will only be found if government works with industry rather than dictating terms.
“If you think of a hotel chain, it might be comfortable with responding at guest changeover times, between 12pm and 3pm. That is not hugely helpful to the system. But it allows them to get comfortable and maybe then go on to do it at peak times. But if you expect the energy user to think and act like a power station, you will come up with the wrong answer.”
CFD versus FiT
It all comes back to understanding the user before making the policy. Rotheray says the centrally-designed nature of Contracts for Difference makes the same mistake, by assuming participants play in the wholesale power market.
“How many people at 5-10MW trade through the wholesale market. Not that many. From our experience, a lot of people with CHP plants prefer not to play in it because it is very complicated. So that [CfD] market is not accessible to small players, and a lot of people are avoiding it.”
That point was recently put to Energy Minister Matthew Hancock by the Energy & Climate Change Select Committee. Hancock’s response was that the Feed-in Tariff was a better route for smaller generators.
But Rotheray says it is not black and white. He thinks that given the challenges local generation create at distribution level, a hybrid system which exposes them to those challenges but not the gamut of an electricity market designed for big players, is more appropriate.
“If you choose the FiT you can have a fixed price for your exports. So a fixed feed-in tariff which completely ignores the market. That is why it has been so successful, because it enables people to completely bypass all market risks.”
But on the other hand, the CfD revolves around complete market exposure. “So you have one thing designed for centralised generation and a complicated market, and another which is completely de-risked,” says Rotheray. “I would have thought there is a happy medium somewhere in there. That’s what is missing.”
Whoever wins the election, Rotheray says the issues around additionality and designing a user-based energy policy should be priorities. But before any of that, they have to get their sums right on energy efficiency. Rotheray says government will always fudge the numbers if it sticks to final energy demand over primary energy savings.
“We measure things at the final point of use. But if you look at the energy system, 84% of the energy is lost before its final use. And we focus on the final 16%. What we need to focus on is the system energy savings. If you use final energy demand as your comparator, which government always does, you come out with the wrong answer.”
Additionality, de-centralised thinking and primary energy savings could give the next administration another trilemma. But tackling them will deliver better value energy policy, says Rotheray. “And that is the nub of it: cost effectiveness.”
UK firms with CHP facilities could be paid to stop exporting power
National grid urges big firms to offer demand side response, may pay more
European Commission’s power play means easier funding for energy efficiency
Decc remains confident of beating Tempus Energy’s legal challenge over demand side
CFD appeals may cost unsuccessful generators, Decc warns
Energy minister dismisses big company bias claims in CFD and capacity auctions
Another fine mess: Energy policy’s perverse outcomes mean ‘new Energy Act in 2017‘
This article was first published in the February/March print edition of Water, Energy & Environment.
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Some very sound points. Gobsmacking that we stick with final energy demand.