A new Department focused on the energy portfolio is a step forwards, and reflects a realisation by the government of the growing importance of energy. However, “Energy Security and Net Zero” sounds like a dichotomy – can we really have both?

I think that there is a way, but it will require bold decisions and a radical re-structuring of the British electricity market (Northern Ireland’s is in a separate single market with the Republic and is locked into EU rules).

This Forecasting Eye Special looks first at the technological issues and then at the economic and financing issues.

Technology

Britain is unusually well-endowed for low-carbon energy compared with our major industrial competitors: we have on-shore and off-shore wind, solar, tidal range, tidal current, wave, hydropower, geothermal and biomass (energy crop) potential, as well as access to nuclear technologies. We need to develop all of these.

Irrespective of Net-Zero targets, virtually all of today’s generation facilities have to be replaced before 2050 due to old age; only the hydropower and pumped storage plants and continental interconnectors will remain. Hence we have the need and opportunity to build a new fleet of generation plants to suit the future system.

While this may sound expensive, it is easily affordable. Our Cebr analysis shows we can build all of the generation to supply the energy we need at a cost of about 1% of GDP per annum over 30 years, assuming full transition of transport and domestic heating to low-carbon energy (mainly electricity but some hydrogen). Much of this money would need to be spent anyway to replace our aging power stations even if were we to persist with fossil fuels, so the additional cost of moving away from fossil fuels is likely to be relatively small at most.

The good news is that Britain is at the bottom end of the cost spectrum, along with the USA, Germany and Japan. Countries like China, Russia, and South Korea will have to spend three to five times as much relative to GDP to achieve net zero. Also Germany and Japan will be disproportionately dependent on nuclear, contrary to their current stance, and problematic when operating conjunctively with wind and solar – nuclear cannot be ramped down when the wind blows and sun shines, meaning substantial renewable energy curtailment.

If we get it right, Britain has the opportunity to have some of the lowest cost energy in the world. And with energy displacing labour as the key driver for industrial development as robotics, AI and 3-D printing become much more important, this will provide opportunities for re-shoring our manufacturing and boost our energy dependent service industries.

So Net Zero is within reach, and an attractive prospect if we get it right. But what about Energy Security?

We have persistently warned against our over-dependence on the interconnection with Europe for energy security. Its problem is that many of the issues that create energy shortages in the UK are also likely to create shortages in Continental Europe at the same time. We have drawn attention to the risk of a wide-spread Dunkelflaute (dark doldrums) where lack of wind creates shortages both in the UK and Continental Europe. And in the past year we have also seen the impact of Russia disrupting the gas supply.

We need to invest in our energy infrastructure to insure against Black Swan events. Texans found out the cost of under-investment in February 2021 when they lost one-third of generation capacity due to extreme cold weather, leaving most of the state shivering in the dark. It could be even worse for us once virtually all of our heating, lighting and transport is dependent on electricity.

Electricity storage is proposed by some as a means of providing secure and dispatchable electricity to cover wind and solar droughts. However this is expensive – we have done the sums and estimate that to provide enough storage to cover a 10-day Dunkelflaute in Britain would require investment of as much as 3% of GDP for 30 years. This is less than the equivalent cost for most of our competitors, but there are cheaper alternatives.

While we need significant storage to time-shift solar energy and smooth out varying wind generation, this can be done cheaply using vehicle-to-grid, some battery storage and existing and planned pumped storage hydropower, alongside the use of European interconnectors.

For load-following, fast ramping and securing electricity supplies during low wind and solar events, a fleet of gas-fired reciprocating or gas-turbine plants with underground gas storage would be infinitely cheaper than using electricity storage for security. Although these would initially run off hydrocarbon gas, they would only operate a small proportion of the time, providing 2% to 3% of our energy, and making little dent in our low carbon aspirations. Later these same plants can transition to hydrogen to achieve Net Zero.

As we can see, the technology side of Energy Security and Net Zero is relatively easy. The real question is how to get there.

Economic and financing issues

Our electricity market is currently lumbered with an auction system that worked when electricity supply responded to price elasticity: when the prices rise, higher-cost producers enter the market and supply increases.

But with renewable energy this elasticity of supply no longer works: paying more doesn’t make the sun shine or the wind blow more. All the system does is ensure we pay the maximum possible costs for electricity supply and have hugely variable pricing.

In the past, trading energy (kWh) made sense.  Energy production had a real marginal cost, and because of the nature of our fossil-fuelled generation the system operator did not need to buy many balancing services – they came free with the energy. Balancing services are needed to keep supply and demand in balance on a sub-second basis to maintain the grid frequency at 50Hz. National Grid, the system operator, currently lists 15 balancing products that need to be bought to keep the system working, alongside the purchase of energy, and is considering more.  These are typically procured through auctions and add to the cost of energy.  However, these auctions compare apples with pears: a service provided in Cumbria has a different value to the system to one supplied in the South-East; the specifications for the products are wide to accommodate different technologies, but technologies that can ramp quickly or produce for a longer time are paid at the same rate as less valuable technologies if they meet the product specification.

The electricity market is becoming increasingly complex, less functional and needlessly expensive. Dismantling this system will be a bold move, but is necessary to bring down the cost of energy.

In order to develop the most cost-effective, secure low-carbon energy system, the system operator, not the market, needs to specify and procure the capacity and hence the plants that are required, taking into account the ancillary services provided by each alongside the characteristics and quality of the energy.

In this way a fleet of plants can be built that will meet our energy needs and all of the system balancing service requirements at the lowest cost. Least cost system development planning used to be normal before the “dash for gas” and is still practiced in many countries.

This central planning requires the system operator to pick winners but does not preclude participation of the private sector in financing, constructing and operating power plants. By procuring the facility, rather than the output, the capital cost of the facility is covered, and the risks of variable output are transferred to the consumer, rather than the private operator, reducing the overall cost.

We will need to install the capacity for energy in advance and will require some redundancy to ensure that adverse events do not prove disastrous.

Concentration of energy into a single vector – electricity – increases our dependence and the consequences of supply failure.  This means that transmission and distribution networks need to be expanded and made much more resilient at a capital cost that probably exceeds the cost of new generation. However, this will need to be done if we are to rely increasingly on electricity, irrespective of how we get to Net Zero.

Conclusion

This short essay shows how the UK could rejig its energy production to meet the twin objectives of security and clean energy while still making energy in the UK cheaper than in most competitor countries. It requires brave decisions that take advantage of the fact that the UK is now outside the EU energy market.

Will the new Department take the decisions that are needed? Or will it continue the mistakes of the past?

For more information contact:

Mike McWilliams, Chief Energy Adviser – mike@mcw-e.com – 07941 302972

Cebr is an independent London-based economic consultancy specialising in economic impact assessment, macroeconomic forecasting and thought leadership. For more information on this report, or if you are interested in commissioning research with Cebr, please contact us using our enquiries page.