It was
reported this week (FT, 12th December) that Andrew Wright, a senior
partner at OFGEM, had argued that Britain could be moving towards a two-tier
power market in which some households pay for reliability while their
neighbours “sit in the dark”. Ignoring for the moment the selective reporting of
a complex discussion, and a mildly hysterical media reaction to this
proposition, we need to recognise that the world is changing. Different tiers
of reliability, in which customers can choose their own combinations of price
and quality/availability, are now both technically feasible and advantageous to
consumers. There are deficiencies in current retail markets, so new formats for
the “consumer offering” are both necessary and desirable. They will give us
better control over our power systems and can even help with thorny problems
such as those of fuel poverty.
Possible supply failures in
which households “sit in the dark” are a source of nightmares for government
ministers and are seen, often correctly, as a sign of political failure. The
last national “black-outs” in the UK occurred in the 1970s with the miners’
strike and the 3-day week, resulting in political turmoil and the fall of a
government. But, historically and internationally the more common cause has
been either inability to plan for, or inability to finance, sufficient
generation capacity. The UK safety margin in generation is currently at a
historic low, so risk of failure is increasingly seen as real. Responsibility
for maintaining adequate supplies, within the current institutional
architecture, is largely left to the “market”, with a degree of oversight from
OFGEM. Some of these issues, and
instances of market failure, are spelled out in the page[1] dealing with low carbon
power.
But Andrew Wright has raised different
questions that deserve some very serious consideration, and go well beyond the
simple question of whether we currently have enough capacity in our power
system. They go to the heart of the ways in which consumers in future will and
should be able to purchase electricity. Reliability is an expensive commodity
and the idea of consumer choice over the standard of reliability required is
one that can only benefit consumers and the overall efficiency of power
systems. In most sectors of the economy the ability to choose combinations of
quality and price that suit a consumer’s needs is well established, and indeed
a normal characteristic of a vibrant market economy. An incidental benefit in
the power sector is provision of an additional instrument to improve overall
system reliability and, along with storage and interconnection, to assist in
managing future low carbon power systems with operational features that include
intermittency or inflexibility.
The changes that are coming
stem from technological developments in control and metering systems that were
considered futuristic in the 1970s, and were to a large extent inhibited by
deficiencies in the structures of the UK retail market, including the adoption
of load profiling. With load profiling, all consumers of a particular type are
assumed to have the same time profile in their consumption pattern, implying a homogenous
mix of peak/ non-peak, day/night and winter/summer loads. The supply business
is then essentially commoditised. All
suppliers provide the same product, with differentiation only on price. This
undermines, or rather excludes from the market, any competitive benefit from
offering consumers a truly differentiated service. Profiling inhibited UK
development of sophisticated metering and control systems and tariffs, arguably
for a generation[2].
The conventional utility model
has consumers able to treat electrical energy supply as “on tap”, with limited
or no differentiation between applications (e.g. as between lighting, heating
or mechanical power). Tariffs and prices for the most part approximate to an
averaging of the costs of supplying electricity, with very limited ability to
differentiate on grounds of differing incremental costs.
Technology change is now
forcing re-examination of this model and offers an opportunity to transform the
market. Just as new low carbon generation
and storage technologies, with very different operating characteristics and
cost structures, will force us to re-examine system operation and wholesale
markets, so should developments in metering, telecoms and control technologies
lead to re-examination of the way consumers use electricity and control their own usage, changing the whole nature of the
supply business. These developments have created an explosion of possibilities
in metering and service provision, including sophisticated metering or even
real time pricing, and sophisticated remote control of individual appliances. Given
the interactive nature of these possibilities, utilities need to consider how
end use should be incorporated into processes for the secure and efficient
operation of the system. Consumer behaviour, and consumer choice, will be
incorporated as a much more active element in the system.
What is needed is to redefine
the “consumer offering”, defining electricity as a set of services, rather than
a homogeneous commodity. This requires starting with a clean sheet in defining
the nature of the services that consumers will want, and the basis on which
they pay. So, for example, a consumer
wanting to charge electric vehicle (EV) batteries might request 75 kWh to be
delivered in a specified period, over (say) 60 minutes for “instant” service, over
several hours, overnight or over several days, and the consumer will pay for
his 75 kWh requirement to be met within the agreed time but with the supplier
choosing exactly when the charging takes place.
Corresponding arrangements could apply to the purchase of power for
heat, for refrigeration, and some other uses, designed in each case to reflect the
nature of the load. Such services might
even be packaged with the provision of appropriate equipment (eg storage
heaters). Commitments to individual consumers would be made by energy service
companies who would be able to aggregate consumer requests and in turn contract
with network operators, for whom the flexibility would be an additional
instrument in maintaining a reliable and efficient system.
Implicit in all this is the
option to take electricity supply at varying levels of “reliability”. Most consumers will want 100% reliability for
lighting or the ability to watch “Strictly” live, and to continue to pay a
higher kWh price to get it. But many will be relatively indifferent to the
exact mode of operation of their storage heaters (as they are now), water
heaters, or EV battery charging. But in each case they will have a choice
between a higher price premium service with guaranteed instantaneous delivery, and
a lower price with delivery still guaranteed but with timing subject to some
external influence.
For all households, but
perhaps particularly those struggling to meet their energy bills, this choice
can have a real value if, for major parts of their kWh consumption, they are no
longer forced to pay the full price for a “gold plated” concept of reliability
that they neither need nor want.
The development of
such schemes still requires a great deal of research and product design work
and public consultation, but Andrew Wright is to be congratulated on bringing
to our attention an idea which will be of increasing importance for 21st
century power systems. ........................................................
A fuller development of the above ideas can be found in the author's paper published by the Energy Technologies Institute: MARKETS, POLICY AND REGULATION IN A LOW CARBON FUTURE
[2]
The CALMU credit and load management unit was pioneered by Fielden and Peddie
(then an Area Board Chairman) in the 1980s, and has enjoyed worldwide success.
It died in the UK with privatisation and the adoption of profiling.
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