This is the second blog in a series of publications about the environmental, economic and social value and implications of emerging local flexibility markets. This week I’ll be following the money, exploring why we need flexibility to save us money, how community and local energy organisations might be able to benefit, and offering insight into what they think about new markets being developed by Distribution Network Operators (DNOs).
The main reason our Government and Ofgem want a more flexible energy system is to save customers money – “the UK could save £17-40 bn across the electricity system from now to 2050”. Our electricity system is old, it was designed for fossil fuels and to meet our maximum electricity demand, which mean it doesn’t cope well with new clean energy technologies that have variable generation, or our changing use and behaviour. There have been big barriers to the clean energy revolution in the last few years where the electricity network is constrained, and it has become extremely costly to connect more low carbon generation. On top of this we are driving more electric vehicle (EVs) and electrifying more of our heating.
The electricity network needs help if it’s going to cope in the future and this means installing new wires and substations and increasing capacity, but all this costs a lot of money. We also need to use what we have more efficiently, installing new smart technologies, and managing and incentivising people to use energy differently to balance out supply and demand. Suppliers and National Grid (the Electricity System Operator) have been paying to balance supply and demand for years, but this has tended to focus on commercial and industrial users, the low hanging fruit. For example, getting a chain of supermarkets to turn off fridges and freezers, or turn on backup generators for short periods of time when there is a big demand for electricity between 5-7pm. This doesn’t happen with domestic customers much yet, but imagine being paid to charge your EVs when the nearby wind or solar farm is generating, or having smart controls on your electric heating to come on and use power as it’s generated. New local flexibility markets are being developed by DNOs across the UK now. If you are in a constrained area of the network you could be paid for using your electricity differently, or discharging power onto the system when needed.
This sounds great for community end local energy organisations who could generate extra money to support their business model. However, we have yet to see a single community energy organisation do this. Our recent Power to Participate publication explores why in more detail, but here are a few key reasons:
The engagement could be earlier and better, with less technical jargon, and messaging with a tangible link to low carbon generation. I’ve seen plenty of DNOs try the ‘help us avoid reinforcing the network to save everyone money’ line and it doesn’t work. Or announcing they will be procuring flexibility in an area a few months in advance, when it takes the local and community energy organisations a lot longer to explain to their members, boards and colleagues what flexibility is, let alone get sign off, build a business case and get ready to participate.
The value is too small, the process overly complex, and the risk too great to support new low carbon technology business models. The value is the main challenge, it won’t enable investment in new technologies, particularly battery storage, but could push a marginal business case over the line, it’s really an additional income stream. Estimated revenue for providing flexibility services to Scottish and Southern Electricity Networks are £300/MWh, Western Power Distribution have prices from £0.5/MWh but the payments vary depending on the location, with 1 MW of flexible power you could expect £1,000 – £8,000/yr. With 1 MW of flexible power in a UK Power Networks Constraint managed Zone (CMZ) you could expect at least £9,000/yr. The low value is why revenue stacking becomes so important but until there is greater consistency and simplicity across the whole market including the ESO markets, it will be too challenging for communities to engage without an aggregator who will of course take a cut.
The complexity is another challenge, the procurement process fraught with acronyms communities will not be familiar with requires you to register interest on a DPS, respond to a PIN followed by a PQQ with details of your FU, and some pre-qualification questionnaires require a Companies House number before they can be submitted. Many community energy groups are registered community benefit societies, so will not have a Companies House number, or be familiar with the acronyms used in procurement.
There is also the risk that comes with a lack of certainty, as the contract may not be renewed after a year or two. This short contract length, even with the ‘expectation’ that contracts would be renewed annually for up to four years, is too great a risk for community energy organisations to take. One community representative said to me that “the risk seems entirely disproportionate to the reward, learning about flexibility, let alone tendering, takes a lot of time and it doesn’t seem worth it”.
DNOs need to be transparent about how much money flexibility services are saving them in deferred reinforcement costs, and how this translates into payments being made to participants delivering flexibility. Currently, payments for flexibility are very different across different DNOs. It’s ok to make savings from flexibility but as the network will need to be reinforced anyway to connect more low carbon generation, it would be great to have assurance that the savings are being retained for this investment and not going into shareholders pockets.
I’ve spent the last two years talking to hundreds of community and local energy organisations across the UK about flexibility in our energy system, working on detailed projects exploring demand side response (DSR), and exploring the potential opportunities and value flexibility markets could bring to new local energy business models. At Regen we have been pioneering this capacity building through events and projects that help upskill communities to start engaging in the conversation. We do this because we believe a smart decarbonised energy system needs everyone to be involved, and if communities participate from the outset, they will be able to influence the design of emerging flexibility markets and benefit fairly from the value they offer.
If you’d like to fine out more, join us as a member of Regen, have a look at our recent Power to Participate publication, or any of the content from over 16 events on flexibility we’ve delivered for communities. Next week I’ll publish the final blog in this series, all about the hope and prospects for the future.