The new government faces a daunting challenge with its energy policy. As the UK becomes increasingly reliant on electricity, the risks of power shortages grow. However, this challenge also presents an opportunity. The UK is endowed with a diverse array of renewable energy resources, including wind, solar, marine, and biomass. Properly harnessed, these resources can not only mitigate the risk of energy shortages but also enhance the nation’s economic competitiveness.
Historically, managing the UK’s electricity system was straightforward. Predictable demand patterns allowed for a stable supply, with thermal generators easily adjustable to meet needs. The 1990s’ “dash for gas” provided a surplus of capacity, complemented by a reliable nuclear base load. However, the 2030s demand a different approach. Future generations will heavily depend on variable factors like weather and seasons, necessitating a significant expansion and reconfiguration of the transmission grid.
An optimal power system will integrate variable renewables (wind, solar, wave) with more predictable sources (tidal and nuclear). Energy storage solutions, such as batteries and pumped storage, alongside energy exchanges with Europe, will be crucial for balancing supply and demand. Gas-fired plants will provide backup, transitioning from natural gas to green hydrogen over time. Operating this complex system requires precise planning and coordination.
For the new market to succeed, the system operator must have full control over deployment and operation, enabling them to retain energy in storage when necessary and plan long-term. Effective operation requires managing the grid’s ancillary services and ensuring each component is used to its maximum benefit.
Furthermore, achieving net zero emissions and updating the energy system will require substantial investment, estimated at £1,600 billion, or 2.5% of GDP by 2050. However, much of this spending is necessary regardless of net zero ambitions, as most current generation and transmission infrastructure will need replacement. Reducing electricity costs involves optimising the system and revising risk allocation strategies. Socialising risks among consumers can lower costs by avoiding inflated risk premiums associated with private sector risk-bearing.
The existing electricity market worked well for fossil fueled generation – as prices rose more expensive generation was mobilized. This elasticity doesn’t work with future zero marginal cost generation – paying more doesn’t make the wind blow or sun shine more. A proposed solution for the future energy market is to shift from procuring energy to procuring facilities. Under this model, the public sector would plan the electricity system, specify and configure facilities, and then invite private sector bids for financing and construction. On completion the private entity will lease the facility to a public entity which then takes full control of the operation. At the end of the lease term, ownership is transferred to the public entity, giving rent-free ownership for the residual life of the facility. This concept is known as FELT (Finance, Engineer, Lease and Transfer).
The proposed new publicly owned Great British Energy (GB Energy) company could spearhead this model. GB Energy would manage project preparation, act as asset owner, and oversee operations and maintenance. With leverage ratios up to 50 times, GB Energy could mobilise the entire capital investment required, with public funds covering only a fraction. This approach suggests that the £1,600 billion needed for energy infrastructure could be mobilised with just £40 to £50 billion of public funds.
GB Energy could also ensure value-for-money through short-term operation and maintenance contracts, avoiding the pitfalls of long-term Private Finance Initiative (PFI) arrangements. This separation of ownership from operation increases investment attractiveness and ensures flexibility in contractor management.
The existing electricity market is outdated and unsuitable for a net zero future. A facility-based procurement model, risk socialization, and clear separation of ownership and operation are crucial. GB Energy can play a pivotal role in this transition, delivering cleaner, cheaper energy and boosting economic growth with limited fiscal impact. Embracing this opportunity aligns with the government’s policy intentions and can secure a competitive and sustainable energy future for the UK.
The above is an excerpt from a longer piece by Mike McWilliams, Cebr Chief Energy Adviser, on GB Energy and how market restructuring can deliver energy security. The full text is available here.
For more information contact:
Mike McWilliams, Chief Energy Adviser – mike@mcw-e.com – 07941 302972
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