In-depth: How a smart flexible grid could save the UK £40bn

A smart, flexible electricity grid could help the UK cut carbon more cheaply, saving up to £40bn between now and 2050.

That’s according to research by the Carbon Trust and Imperial College London, which was commissioned by the Department for Business, Energy and Industrial Strategy (BEIS). It is part of the evidence behind the government’s Smart Systems and Flexibility Plan, published jointly with the energy regulator Ofgem. This plan aims to facilitate a smarter grid through a series of technical and regulatory changes.

Carbon Brief looks at the potential savings from a flexible grid and the BEIS plan to unlock them.

Flexible grid

The UK’s electricity system is in the midst of a rapid transition. Just over a year ago, a member survey for industry trade group Energy UK talked of a “revolution” in the sector and the potential for “a complete paradigm shift in how the power sector operates”.

The UK’s electricity grid – historically, made up of a handful of large, centralised power stations – has in recent years added thousands of smaller, mainly renewable power schemes. In order to meet its legally binding carbon targets, the UK will add many more wind and solar farms, while electric vehicles and electric home heating could add to demand, particularly during peak periods.

Yet wind and solar output varies with the weather, leading critics to say a renewable grid will be saddled with a costly bill for backup. This bill might include building power plants designed to run only infrequently, providing electricity during peak periods or when there is little wind.

Costs might also arise from paying wind or solar farms to switch off, when the grid is too congested to carry all the power they produce, or when demand is already covered by the relatively inflexible output from nuclear plants.

Last year, the National Infrastructure Commission said a “smart power revolution“, making use of interconnectors to other countries, flexible demand and electricity storage, could keep these costs to a minimum, potentially saving up to £8bn a year by 2030.

The new Imperial College London report looks at these hoped-for savings in more detail, exploring how the potential benefits of a flexible grid might change if its components are more or less expensive and if demand for electricity is higher or lower than expected.

The report says:

“Quantifying these benefits is very complex due to uncertainties in how the future energy system will evolve, and the projected cost and availability of different flexibility options. Yet, despite these uncertainties, key investment decisions need to be made in the short-term, which will have a lasting impact on Great Britain’s future energy system.”

Across 12 scenarios for electricity demand and technology costs, the report shows that a flexible grid would be between £17bn and £40bn cheaper between now and 2050 compared to a system that adds no flexibility beyond the interconnectors and pumped hydro storage available today.

(Note that these are discounted figures. This means future costs or savings are considered to be worth less than costs or savings today. See below for more on how the figures compare to the National Infrastructure Commission’s.)

BEIS says its plans “will transform energy use for UK homes and business”. In comments to the Guardian, Greg Clark, secretary of state for BEIS, goes further on cost savings, saying:

“Given the possibilities we are on the cusp of at the moment, we might move to a world where energy is clean and abundant…If only we can capture it [power from the sun and wind] then we can go from energy being a worrying cost to people, to being, if not free, then very cheap.”

How to save

So how would a flexible grid save money? A key point is that the widely quoted estimates for cost savings are for a flexible grid, relative to an inflexible grid that still meets UK carbon targets. (Those arguing the UK could save money by using gas instead of nuclear or renewables frequently miss out these carbon targets, or ignore the climate costs of emissions).

In a flexible grid, supply from batteries and demand flexibility could help reduce peak demand, so that fewer peaking power plants – designed to operate for a few hours at a time when demand is highest – would be needed. This would also cut the cost of fuel needed to run these plants and the carbon costs of their emissions.

Similarly, importing power through interconnectors would help meet peak demand, while excess wind and solar output could be exported. Flexible demand and batteries could also reduce the strain on electricity grids, avoiding the need to add costly network upgrades.

These savings would be offset by the costs of building a smarter grid, from adding batteries, to installing smart appliances and software able to offer flexible demand. The chart below shows how the net savings from a flexible grid add up, in the highest (£40bn) and lowest (£17bn) scenarios.

Estimated minimum (left column) and maximum (right column) net savings from building a flexible grid. The range depends on electricity demand and the cost of building (CAPEX) and operating (OPEX) grid flexibility. DSR is demand-side response. Source: Imperial College London and the Carbon Trust: An analysis of electricity system flexibility for Great Britain.

A key part of the flexible grid needed to achieve these savings is interconnectors which link the UK’s grid to other countries’. Beyond the existing 4 gigawatts (GW) of links, there is a large pipeline of new projects, with BEIS expecting capacity to reach 15GW by 2024.

Imperial says this pipeline “appears to be optimal and delays…would increase costs”. Several recent news reports suggest Brexit is creating uncertainty that could lead to delays for schemes, including a link between the UK and Iceland – though others remain confident of going ahead.

The next piece in the puzzle is demand-side response (DSR), where, for example, appliances or electric vehicle chargers are switched on or off to help the grid balance supply and demand. This is the most uncertain flexibility option in terms of costs and potential, Imperial says, noting a large gap between maximum theoretical capacity and the realistic scope for adoption.

At present, DSR is limited to large commercial or industrial users, such as supermarkets. In future, homes could participate via time-of-use tariffs that offer variable prices for off-peak electricity, but only once they have the smart meters currently being rolled out across the country.

The final flexibility option is batteries, where costs are falling rapidly. If DSR proves more expensive than expected, then storage would need to step in if the benefits of flexibility are to be realised, Imperial says. It sees the need for, perhaps, 2-3GW of batteries by 2020 and 13-28GW of storage by 2050. These ranges can be compared to the 3GW of new storage BEIS expects by 2030.

On the savings side of the equation, Imperial sees far fewer peaking plants being needed with a more flexible grid. These peakers would be either open cycle gas turbines (OCGTs), similar to jet engines, or reciprocating (piston) engines.

The chart below show how a flexible grid could avoid the need for up to 29GW of peaking plant in 2050, if DSR and storage are relatively cheap, bringing substantial savings in terms of building and operating gas-fired power stations.

Similarly, a flexible grid avoids the need for up to 9GW of flexible low-carbon generation in 2050, modelled by Imperial as gas with carbon capture and storage (CCS).

Reduction in the need for flexible low carbon generation (purple bars) and peaking plants (dark blue bars) in flexible grid scenarios (S1:S12) across a range of costs and demand levels. Source: Imperial College and the Carbon Trust: An analysis of electricity system flexibility for Great Britain.

It’s worth noting that Imperial sees a continuing role for gas power, even in 2050, because of its ability to flexibly balance the demand and the output of variable renewables. Gas capacity might fall by just a third by 2050 from 28GW to 16GW. However, output will have to fall much more steeply to, perhaps, a tenth of current levels in 2050, as carbon budgets tighten.

Least regrets

The savings available from building a flexible grid depend heavily on the level of electricity demand, which in turn depends on the uptake of electric vehicles, energy efficiency measures and electric heating. There is also inherent uncertainty in future fuel and technology costs, while modelling the changing energy system brings its own problems.

The Imperial report tries to address this in its range of 12 scenarios and by using a “least worst regrets” approach. This “finds the safest path that avoids the worst possible outcomes”. At the top level, this analysis shows that a flexible grid is always cheaper than an inflexible one.

Beyond this, the report backs a portfolio approach to building flexibility. This avoids restricting choices in future or locking the grid into pathways dependent on a single technology that turns out to be more costly than the alternatives, for example. It says:

“A ‘balanced’ deployment pathway, with some deployment of DSR, storage and flexible CCGT [large gas plants] by 2020, and deployment of the current interconnector pipeline, is the most effective way to avoid worst regret outcomes. A strategy of balanced deployment avoids maximum regret scenarios which can arise when one technology is favoured and it turns out to be the wrong choice.”

Imperials also compares its findings with others, showing again that flexibility consistently offers savings. It says its £17-40bn range stems from “conservative estimates” of deployment. If more wind, solar or nuclear is built than expected, the relative savings from flexibility would increase.

The cumulative total net saving over the next 30 years amounts to £1.4-2.4bn in 2030, Imperial says. This is lower than the £2.9-8.1bn National Infrastructure Commission (NIC) estimate and also below a £3.3-3.8bn range from a 2015 Committee on Climate Change (CCC) report.

The main reason for these differences is that the NIC and CCC figures are for savings alone, whereas Imperial is for savings, net of the costs of building flexibility.

The top of the NIC range – the widely quoted £8bn saving in 2030 – is based on a tighter carbon target of 50 grammes CO2 per kilowatt hour (gCO2/kWh), whereas Imperial and the CCC only use a 100g/kWh target. The tighter the carbon target, the greater the benefits of flexibility.

These comparisons cannot eliminate uncertainty over the best path to take, but they do show that the expected savings from flexibility are robust to a range of assumptions and likely to increase as carbon budgets get tighter.

Flexibility strategy

BEIS, along with energy regulator Ofgem, has accepted the need to build a flexible grid. In their new joint Smart Systems and Flexibility Plan, the two set out a list of 29 actions they intend to take  in order to unlock the savings flexibility offers.

Examples include amending legislation so that batteries are a recognised part of the electricity market and changing the rules so that they do not have to pay levies on the power they store, as well as on the power they supply to the grid.

Other proposals would see DSR aggregators, who use software to combine demand flexibility from hundreds or thousands of appliances in stores, homes or factories, allowed to participate in the balancing market, where National Grid pays for help in matching grid supply and demand.

The government is also considering using regulations to ensure appliances are smart and able to offer flexible demand, for instance, by switching on overnight when power is cheapest.

BEIS considering regulation to make sure fridges, washing machines, aircon etc are smart/able to offer grid flexhttps://t.co/BUDcXesbG0 pic.twitter.com/6jnJAqB3nS

— Simon Evans (@DrSimEvans) July 24, 2017

The EU has already developed standards for smart appliances. However, manufacturers are not obliged to make smart goods and the BEIS proposal could allow UK ministers to force the matter.

The government also relaunched an already announced “Faraday Challenge” for battery storage research, worth £246m over four years. The competition, suggested by government chief scientist Sir Mark Walport in March, will include establishing a UK battery research institute.

The strategy proposals and battery investment have been warmly received, particularly in the media, but also in public statements from energy industry participants. Behind the scenes, however, Carbon Brief has discovered concerns over separate, more concrete and immediate changes that could counteract the flexibility strategy’s objectives.

“The incentives that have been allowing batteries to come in are being taken away without being replaced by new incentives in a timely fashion,” says Dr Felix Chow-Kambitsch, project manager at consultancy Aurora Energy Research. “[The government’s strategy] sounds promising but that transition might be difficult.”

“People will still continue to invest based on where the market is going…investors are vying for those opportunities,” Chow-Kambitsch says, but this enthusiasm “may be misdirected, potentially building the wrong type of flexibility,” as investors try to second-guess the future market structure before the details have been laid out.

Jonathan Ainley, head of public affairs and UK programme manager at KiWi Power, points to a consultation, published on the same day as the flexibility strategy, which he says would penalise storage and DSR in the capacity market.

Ainley tells Carbon Brief:

“The steps outlined by the government’s Smart Systems and Flexibility Plan are an important part of the future vision for a dynamic, responsive electricity system. However, it must focus on correcting the current market imbalances which are prohibiting maximum deployment of efficient demand response and battery storage technologies. For example, government and National Grid must work together to continue to encourage battery storage projects in the short to medium term by abandoning proposals to restrict capacity market payments for battery storage and to continue to procure batteries through the ancillary [balancing] services market. If the current course of action is not corrected the government’s Smart Energy Vision risks being unfulfilled.”

Another issue is a long-planned, but controversial change to the way generators pay to access the grid. This is expected to disadvantage small-scale power plants, known as embedded generation, but will also hit batteries. Nigel Cornwall, chair at consultants Cornwall Energy, writes that battery storage would see “swingeing revenue loss[es]” as a result of the change. He writes:

“At a time when policy-makers say they are committed to removing barriers to new business models and decentralised markets, the decision underwrites the position of the incumbents.”

Tom Andrews, regulatory analyst at Cornwall Energy, tells Carbon Brief of this move and the BEIS flexibility strategy: “They are kind of moving in opposite directions.” Andrews adds that many of the “actions” in the BEIS strategy were happening already.

Conclusion

The UK will need near-zero carbon electricity supplies to meet its climate goals. This supply will need to come largely from a mixture of variable wind and solar plus inflexible nuclear generation, with a limited role for flexible backup from gas.

A flexible grid that uses batteries, DSR and interconnectors will be able to incorporate zero-carbon supplies much more cheaply than the alternatives, offering savings net of costs that could reach £40bn by 2050.

The new BEIS flexibility strategy hopes to unlock these savings, but there are concerns that other changes could counteract this aim by discouraging investment in DSR and storage. Meanwhile, Brexit could create uncertainty in the delivery of interconnectors.