ROYAL SOCIETY REPORT HIGHLIGHTS LARGE SCALE ENERGY STORAGE AS A KEY ISSUE

I was recently asked, as one of the major contributors, to comment on the recent Royal Society report on large scale energy storage. This had been a major exercise, impressively managed and directed by the lead author Chris Llewelyn Smith, involving the examination of how a UK system based on weather dependent renewables might measure up against the actual weather variations observed over 37 years of weather data. My contribution was confined to general observations on how power systems work, and in particular how operational and investment choices can or should be managed in a market economy.

 

This was the subject of a previous post, but readers are recommended to refer not to my earlier comments but to the report itself and to the policy briefing. Links are given at the foot of this post.

 

The results were interesting and to some extent surprising. The work indicates a very large scale of storage requirement, driven primarily not by seasonal but by inter-annual variations – runs of years when wind may be below average, and a host of other interesting findings and questions. I was asked just to comment on what I saw as the core economic and financial implications regarding large scale storage.

 

Economics in his context is clearly about securing the right combinations of generation and storage, the principles to guide our decisions, and the mechanics of getting where we want to be. The objective is to find market or other mechanisms for the outcomes we want, ie getting to low or zero carbon at an affordable cost compatible with an acceptable level of reliability and energy security. It follows that this has to be much more than just a theoretical optimisation, but has to cover national policies, institutions, coordination, markets, regulation and infrastructure?

 

There are several particularly important general lessons from the report that have general economic and policy implications:

 

1.     First is the potentially huge scale of storage. With both scale and major economies of scale, we have typical infrastructure characteristics, that need to be financed as cheaply as possible. 

 

2.     Second, interactions between storage and generation choices and multiple other factors: including the demand side. The report illustrates just how complex this is.

 

3.     Third, conversion capacity, for moving energy in and out of storage, will matter and has perhaps hitherto been largely overlooked. 

 

4.     Fourth is the whole issue of policy and planning for reliability of supply. Traditionally this was mostly about adequate margins of generation capacity required over peak demands – so-called needle peaks. But the new world demands a quite different understanding of reliability, when we are talking about, for example, wind drought. The issue then is of kWh energy rather than kW capacity – a major distinction.

 

So the report raises some very serious questions. We can treat each of the above in turn.

 

First, it is clear that the storage need has all the characteristics that we associate with large scale infrastructure. This includes possible or probable incidence of natural monopoly, certainly substantial investment costs, long lived assets that are highly use specific, and a financial necessity for a cost of capital as low as possible. For private capital that would mean a high level of reassurance over future revenue streams and the future market and regulatory environment.

 

Second is the issue of the very complex choices, and their coordination, in systems that rely on storage. It’s important to recognise that there are two distinct timescales here. One is operational - operating the system as efficiently and economically as possible with whatever is the current mix of assets. The second is about necessary investment -  creating the best mix of assets for the future. In a perfect market efficient solutions on both timescales might be expected to result from market prices.  But in the new low carbon world that looks increasingly like a pipe dream.

 

The conventional view of power sector markets was that the price signals  in a competitive market derived from the immediate needs for the efficient operation of mainly generation assets, replicating what might happen in a fully optimised system such as the merit order. It also had to provide an incentive for adequate capacity.  Various extra mechanisms have often been added that attempt to put a valuation on reliable supply; this is sometimes referred to as value of lost load or VOLL.  In principle it was hoped that all this collectively would  incentivise the right mix of assets, generation, networks and storage for efficient and affordable future systems. In practice the most that can be said is that experience has been mixed.

 

So what is new. Traditional spot markets were developed to deal with gas and coal powered generators, and to replicate a merit order based on SRMC. They were also largely designed by the employees of those generators They do not translate or adapt easily to low carbon technologies with more complex, probabilistic, intermittency and operating constraints.​ Storage adds new dimensions, by being intrinsically multi-period, requiring in addition that attention is paid to conversion capacities, and the very different nature of the reliability issue.

 

The simple metrics of short run cost that sit behind conventional market mechanisms do not capture the information or the complexity required. Investment choices, on the four-way balances between generation, transmission, storage, and conversion capacity, pose further questions, implying a need for coordination. Discussion at the Royal Society brought out some additional questions on the subject of conversion capacities, my third point.

 

My fourth point may well be the most important public policy question for the future – the security and reliability of electricity supply. We all know that governments cannot stand aside from issues of energy security, and electricity security in particular, however much they might wish to. However this is another dimension where the economic and policy calculus has to change radically, with some very different metrics.

 

Historically supply reliability in the UK has been about generating capacity – kW, and occasional insufficiency of kW to meet needle peaks. But future crises, if they relate to sustained weather related shortages, will be about kWh rather than kW.  Threats of months of energy rationing require an entirely different way of thinking about reliability. Possibly once in a generation events, like the 1970s 3-day week, a covid crisis or curtailed gas supplies, may mean looking at not just energy supply planning but also the overall energy resilience of the economy. 

 

Answering all these questions means great attention to the institutional and market structures of the sector. We have to decide who should own and operate large scale storage, on public or private ownership, integration with grid operation, guarantees for private capital, who should make the decisions on energy security and reliability, and so on.  

 

All these issues are closely inter-related, and the report offers an indication of where we might find the answers. These must rest on some combination of the following:

 

·      Novel market mechanisms and incentives to reward provision of storage capacity and conversion capacity.

 

·      elements of long-term contractual assurance for infrastructure providers,  eg a regulated asset base approach, or government guarantees.

 

·      Centrally driven coordination of investment plans. Quite common internationally (eg France’s EDF and Germany’s Energiewende).​

 

 

·      Enhanced role for the National Grid 

 

·      The creation of a ‘central buyer’, to procure capacity, but also to buy power from generators and sell to retail suppliers and large consumers.

 

·      Close cooperation between energy companies who implicitly assume collective responsibility for reliability  (the US ‘power pool’ model) 

 

In summary the economics for me is about:

 

·      balancing the roles of markets, thus retaining a role for competition, and central coordination

·      financing storage as essential infrastructure, and 

·      re-evaluating the policy approach to planning for reliable future systems

 

Possibly the most important observation of all, though, is that all these things take time and the task is urgent. That means starting to address these issues now.

 

 

Large-scale electricity storage report

https://royalsociety.org/-/media/policy/projects/large-scale-electricity-storage/Large-scale-electricity-storage-report.pdf

 

Large-scale electricity storage policy briefing

https://royalsociety.org/-/media/policy/projects/large-scale-electricity-storage/Large-scale-electricity-storage-policy-briefing.pdf

Principles for the effective integration of renewable or low carbon energies into national or regional power systems.

This is the substance of a recent talk I was asked to give at a recent COP26 roundtable in Turkmenistan. It is an attempt to summarise, for policy makers, some of the general principles we have learned in the course of the Oxford Martin School Integrate project.

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First, the context. A low carbon power sector has a central role in reducing CO2 emissions and making progress towards zero carbon. This is not just because fossil-based power has high emissions and we already have numerous technologies for low carbon generation. A low or zero carbon power sector means we can progressively use electricity solutions to reduce CO2 emissions in other major categories, notably transport and heat.

The task then is developing and integrating renewable and other low carbon energy resources into power systems that deliver what we need and expect. The main factors that have to be respected and reconciled are the following:

·         Power systems require flexible responses to balance real time supply and demand.

·         Low carbon sources (mostly) lack the flexibility of traditional thermal generation plant using coal oil or gas.

·         Renewables output can be intermittent and unpredictable

Today I am going to summarise some of the general principles we have learned in the Oxford Martin School. The principles apply not just to the UK but in virtually all power systems. However, lesson one is that every country and every network is different, in terms of its available resources, its climate, weather and seasonal effects, and the needs of its consumers. So the best choices for the future will also be different.

Framing the Policy Choices

We have used this diagram to represent the task, and the large number of questions that need to be addressed. The potential resources and activities that we can manage, the options available to the power sector, are shown in the top row - generation, storage, networks and consumption. Costs are generally coming down.

The policy instruments that we have to manage these options can be categorised, in the left-hand column, in terms of technology and innovation, the wise use of markets and price signals, social engagement in the process of change, and finally the whole framework of law, organisation, policy, regulation and governance on which the sector depends.

There are 16 cells in this 4x4 matrix, and there will be important questions in almost all of them.

Starting with the resources, choices involve selection from a long menu, much of which I am showing on this slide. Virtually all the items here feature in the UK as part of our likely solutions, and they are all potentially important. I will just comment on a few highlights.

·         When we look ahead to planning the power sector, we have to look not only at the current use and applications of electricity but also at its substitution for other fuels in new applications, especially transport and the provision of heat. This implies coordination across sectors.

·         Electric vehicles especially have the potential to play a huge part in the operations of the power sector.

·         Interconnection. The recent power crisis in Texas has highlighted the importance of interconnection and the risk of isolation.

·         Solving the storage problem is one of the most challenging parts of the exercise, at least from a technical and economic perspective.

·         Consumers are also a vital part of the system, technically, economically, and politically. They merit a separate conference on their own.

Technical and technology choices

The choices have to be complementary rather than exclusive. This will involve substantial computer modelling of alternative combinations to find out what works best.

So the balance, getting the right mixture, of solar, wind, biomass and other sources is essential. For the UK, for example, meeting seasonal variations is very important, implying a higher ratio of wind to solar.

Storage is going to be important everywhere. Battery technology and pumped hydro, possibly some interconnection, combined with the ability to make use of more time-flexibility in consumer demands, will mostly be more than adequate for smoothing daily variations. But inter-seasonal storage is potentially a much bigger problem, unless the capital cost per unit of energy stored can be greatly reduced. The most promising answer appears to be conversion of renewables output into high energy forms which can be stored more cheaply. Hydrogen may be the preferred long term storage option at the present time, but there are other contenders.

In the UK, a bigger issue than seasonal storage may turn out to be risk of prolonged periods of low wind. Some modelling has simulated the effects using weather data over the last 40 years, and this has proved a useful exercise.

Markets and prices

These issues have related to technical planning, and available innovations, but there are also major implications for markets, governance, and the management and control of the sector. Turkmenistan and the UK have very different starting positions. Turkmenistan starts from a position of government ownership and control of the power sector, and supply to many consumers has been free. The UK has private ownership and some market structures but also has increasing government involvement in underwriting new low carbon investments, and in ensuring coordination within the sector. Despite these differences, I believe that there are some important common principles.

One is how to choose the most efficient plant to operate. In the UK we call this the merit order. As we progress towards low carbon economies, this will normally imply the plant with lowest CO2 emissions per kWh. In the UK and Europe this means that a price has to be attached to emissions and that must impact on the economic choices made for the sector. But it is also true that the task of managing power systems effectively with high renewables presents new challenges. In the UK we are also having to re-examine the methods that we use to get the most efficient operation of the system. The optimisation methods designed for a world of coal and gas generation are not necessarily the right ones for a low carbon system.

Consumer tariffs are very important. They are central to the ecology of the power sector as the primary means of communication between production and consumption. The priority attaching to reduced emissions is such that this should be reflected in cost reflective pricing. Tariffs are even more important if we need to promote more flexible demand. We expect to see some profound changes in the nature of the services provided by electric power in meeting consumer needs.

Finance and Governance

My last big economic issue is financing. It is widely held that collectively the world has a glut of savings waiting to be invested in useful projects. Also, the cost of capital is at historically low levels. But to access that capital, for any country or industry dependent on external or private finance, it will be essential to demonstrate that the investment is going to be well managed. The institutional structure is important for that and also for successful implementation.

This means ensuring a good and stable legal and institutional framework within which low carbon investments can be delivered, and one that banks, the World Bank and others, or other investors, can rely on. That of course depends on the commitment of governments, in the UK as much as anywhere, to low carbon objectives.