Reforming networks for the energy transformation
Reforming networks for the energy transformation
For the last 30 years or so, Ofgem has largely regulated electricity and gas networks to ensure that these monopolies are efficient, reliable and don’t charge customers too much. That’s ultimately what acronyms such as “RPI-X” and “RIIO” seek to achieve. The UK electricity system is undergoing the largest transformation since at least the 1960s. Indeed, electrifying heat and transport demand while simultaneously moving to renewable generation is the most fundamental change to the electricity system in history.
Ofgem is reforming how these energy networks are regulated, proposing to introduce “Regional System Planners”, incentivise distributed flexibility and allow more investment ahead of need. This is in response to decarbonisation and an increase in distributed flexibility assets (or “consumer energy resources”) such as electric vehicles, heat pumps and smart thermal stores. These electrical products in our homes and businesses increase electricity demand, particularly during winter. Managing this peak requires a combination of reinforced distribution networks and greater use of flexibility.
There is a need to act sooner rather than later. The business plans for the ED2 price control for Distribution Network Operators (DNOs) suggest that, by the end of 2028, there could be 3 million heat pumps operating with thermal stores in Britain. There is a real risk that electrification of transport and heat demand will outstrip the capacity of at least parts of the low voltage network during the ED2 price control. The regulatory framework must ensure that the electricity system maintains more capacity and flexibility than rising demand and generation over the next two decades.
Thermal Storage UK has recently responded to three Ofgem consultations on energy network regulation and this blog provides a short summary of the responses. These reforms make for a complicated picture. So we have encouraged Ofgem to publish a schematic showing the likely interaction between flexibility assets, flexibility providers, the Future System Operator (FSO), DNOs and energy suppliers.
The importance of flexibility
Fundamentally, we agree with Ofgem that “flexibility is not optional, it is essential”. As shown below, Ofgem expects demand to at least double or possibly treble by 2050. Ofgem and the UK government recognise that flexibility or “DSR” (demand side response) can reduce peak demand. As peak electricity demand increases over the coming years, the value of flexibility in shifting that demand increases.
Heat flexibility products such as smart thermal stores and heat pumps can reduce peak demand in winter in a consistent, predictable and smart way. This lowers the cost for everyone by reducing the need for DNOs to build and maintain network infrastructure. However, the electrical heating systems being installed today often entirely focus on heat provision within the building. These heating systems are installed with very limited consideration of the potential to provide flexibility to the wider electricity system. This is a missed opportunity.
Our analysis with LCP Delta suggests that 2.4 million smart thermal stores could operate with or instead of heat pumps by 2030, providing up to 4.1GW of flexibility on the coldest day of the year. To make the most of this opportunity means ensuring people receive the financial benefits of heat flexibility. This shows the urgency and importance of Ofgem’s work on local energy governance and distributed flexibility, as well as the UK government’s work to develop standards for Energy Smart Appliances and reform Energy Performance Certificates.
The energy transformation is going to change how people live their lives. This includes better air quality and new devices in their homes and businesses. We recommend that Ofgem recalibrates their thinking on network regulation to focus as much on people as the energy system. There are hints in Ofgem’s call for input, such as the use of the pejorative term “parasitic”, that people should adapt to the demands of the electricity system. This may mean reducing focus on the perfect solution for the energy system as that optimal solution may not be feasible. For instance, people are unlikely to offer the full flexibility of products such as electric vehicles to the system, instead reserving some of the charge as a back-up in case they want to drive their car.
Encouraging investment
As with the UK government’s work on the Review of Electricity Market Arrangements (REMA), Ofgem needs to juggle reform with encouraging (or not dissuading) ongoing investment. This includes both investment by DNOs in infrastructure and investment by people and businesses in heat pumps, smart thermal stores and electric vehicles. Adopting a more strategic, whole-systems approach and incentivising these “consumer energy resources” to operate flexibly will reduce the need for some investment in network infrastructure.
We agree with Ofgem that the RIIO framework considers a wider degree of outcomes than the previous RPI-X approach. However, this broader focus comes with its own drawbacks, with business plans becoming ever longer and more detailed. The RIIO process takes around 3 years and places a high computational and knowledge management demand on both networks and Ofgem. This reduces the ability of non-experts to understand the process and have confidence in its outcomes. The lower cost and higher availability of data may help Ofgem to ensure efficient management of the network.
Ensuring people and businesses benefit from flexibility
It is essential that the DNOs value flexibility and that people benefit from those flexible assets. It would be suboptimal if DNOs benefitted from people installing flexible technologies (e.g. through lower network investment costs) without passing on those benefits to people and businesses. Heat flexibility products have value in reducing peak demand in winter in a consistent, predictable and smart way. This value partly stems from a long-term, permanent reduction in the need for building and maintaining network infrastructure.
Valuing flexibility may include differentiating between firmer and weaker flexibility, with smart thermal storage offering more certainty to the DNO than options such as pre-heating. Similarly, flexibility from a dedicated electro-chemical battery is firmer than using an EV.
System planning
The last electricity system transformation was in the 1960s as the electricity grid was expanded for new nuclear generation. This included building infrastructure ahead of need. As it turned out, increasing energy efficiency and deindustrialisation created slack in the system, as shown below.
Ofgem highlights the importance of system planning for the transformation. To help deliver this planning, we recommend that the UK government develops real-time and detailed modelling to support system planning. The power and cost of software has improved beyond recognition since the 1960s.
This model would cover connected generation, transmission and distribution capacity and the behaviours of demand-side products (including peak demand, average demand and flexibility capacity). The model would adapt in real-time and could evolve into a digital twin. Even if this model cost as much as the UK government has invested into the Met Office’s Cray supercomputer and its successors, this is a small cost in comparison to the scale of the investment needed for the energy system by 2050.
Next steps
We support Ofgem’s work to ensure networks are fit for the next 20 years. The networks will need to work incredibly hard to ensure that the wires and substations remain sufficient for increasing renewable generation and demand for electricity. Planning flexibility upfront will help to deliver this transformation at lowest cost.
If you have any questions or ideas about the work of Thermal Storage UK or are interested in joining us, get in touch.
Note - The graphs in this blog are taken from Ofgem’s consultation on frameworks for future systems and network regulation, available here.