The energy industry needs a ‘grand bargain’ on flexibility

Published on 7th Apr 2017

The future of European energy depends on flexibility. This calls for a regulatory rethink based on a grand bargain between all players, says Simon Hobday, partner at Osborne Clarke

If the future’s bright, the future’s flexible. The two go hand in hand. For Europe to keep the lights on in the long term, it must shift to a flexible power system.

If the energy industry gets it right, Europe could find itself on the verge of a clean, efficient and sustainable power system. One that matches supply to demand in real time to ensure that when an area needs power, it receives it and that power isn’t wasted once it’s produced – it’s redirected or stored for later use.

But the future isn’t certain yet. Challenges will arise along the way and often the true cost of change isn’t known or factored into decision-making. For example, the cost of adding a gigawatt of renewable generation to the system isn’t just the initial build cost. Renewables capacity can be more volatile than fossil fuel generation so the industry has to arrange measures to pick up any shortfall if it drops off to avoid grid instability. This carries a cost.

The transition can also cause significant changes to the flow of power across the grid. In Germany, energy flows south from northern windfarms, but the energy flows can surge or reverse within a short timeframe, varying with the weather conditions along the north German coast. The result? Cables can be overloaded and burn out. In extreme cases this can even lead to blackouts, as has been the case in northern Italy.

Innovation is imperative

Fixing issues like these and shifting to a new energy infrastructure will require time, investment and – perhaps most importantly – innovation. And there’s a lot of promising action on this front.

Take demand-side response. By encouraging energy consumers to use their energy at off-peak times, the industry can help consumers save money, reduce the amount of capacity needed at peak times and minimise waste at times of lower demand.

Energy storage is another innovation that is expected to play a crucial role in the flexible future. Successful integration of storage into the system won’t only match supply to demand by capturing excess energy to use during periods of shortfall, it will also be essential to the success of small-scale generation. Even better, it could serve as the key to unlocking the full potential of developments such as electric vehicles and intelligent buildings – and the new business models that follow in their wake.

Make no mistake, more is coming. We’re living in an age of innovation – a look at almost any sector will reveal some examples. In the books market, the Amazon delivery model first changed how we buy books and its Kindle devices have since changed how we read them. Uber and Airbnb epitomise the gig (contingent working) and sharing (subscription and renting of resources) economies, respectively – trends that are building flexibility into the wider economy. There is little doubt that similar change is coming to the power market.

Regulatory riddles

It’s already starting. People are already beginning to play with different models by innovating not only in terms of technology but also with economic and legal frameworks – something that’s essential if the industry is to achieve its ambition to provide secure and sustainable power to all.

Energy storage is just one example, with discussions taking place around intellectual property rights. Who owns a battery’s usage data and who can access it? The manufacturer? The maintainer? The operator of a supply asset?

And who should pay for storage? Should it be paid for on a network basis as a grid stabilisation measure? Does its role in maximising the cost-efficiency of production mean it should be treated as a generation asset? Or should the benefit be directly at the consumer level, given the money consumers can save by buying energy when it’s cheap and saving it for later?

These are all important questions. And each presents a business model on which the industry could operate. But the current regulatory framework makes such models difficult if not impossible.

Creating a new regulatory model is difficult. There are a number of dilemmas when dealing with any aspect of the transition. Who pays for what is just the start. The real issue is that the existing framework regulates the sale of kilowatt-hours. But twenty-first century businesses see their role far less transactionally. They want to sell a service. They provide the benefits of power – heat, warmth and light – but existing regulations don’t match up with this reality.

A grand bargain

The framework has to change. But its replacement can’t be determined by the strongest vested interests. The industry must look back to look forward and consider the principles under which it was first regulated.

In place of technical debate, the sector should take a step back, look at the bigger picture and determine the full effect of changes past, present and future. From this starting point, regulators can begin to determine what is fair, both financially and in terms of the burden of responsibility. The aim should be to strike a grand bargain – a compromise that might not delight any one party but under which everybody can reasonably operate. Only then should the impacts on specific legislation and codes be considered in earnest.

This will not be easy. Elected politicians are driven by short-term objectives and even when properly motivated it is difficult for anyone to quickly gain the specialist expertise required to fully understand such a vast and complex sector.

But it must happen. The power industry is ripe for disruption; for change that will blur the line between producer, consumer and operator, and transform how people think about and use energy for years to come. It will only be a success if those who would disrupt are given the space to do so – without leaving current players behind.

The industry needs a grand bargain.

This article was originally published with New Power Report in April 2017.

Simon Hobday sits on the advisory board of Penwell’s POWER-GEN Europe conference.

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* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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