SMART METERS. PRIVACY ISSUES OR A VITAL TOOL FOR OUR FUTURE?

The Guardian two weeks ago featured an anguished reader’s letter concerned about the invasion of privacy involved in the installation of smart meters in UK households. It’s worth reflecting briefly on what the privacy and security issues might be, what the real social value of smart meters might be, and how we should balance these with an effective policy.

Smart meters, and I have just acquired one for my electricity supply, will tell you a number of things that you might have found it difficult to work out previously. These may include for example what your power use (in watts or kilowatts) is at any instant in time, what it was in the last few hours, days or months. The privacy concern is that the utility, your supplier, can be assumed to have the capability to collect and keep this data, and, for example, could build up a picture of the minute by minute electricity consumption of every household with a smart meter.

There are many, not particularly sinister, reasons why utilities might want to do this. At a minimum it can provide a better understanding of how consumers use electricity can help in planning future system needs, make sure that local networks have adequate capacity to cope with fluctuations in load, and so on.

On privacy and security issues we should perhaps be far more worried about the amount of sensitive information held on you by your bank and your credit or store card issuer, not to mention Facebook, Google and your telecoms supplier, or, and, currently in the news, the airlines you use. Between them these have tons of information about your shopping habits, lifestyle, opinions, financial affairs, favourite websites, and so on, all of which, if privacy and security are breached, potentially give rise to much more serious abuses than someone being able to work out what time a household has breakfast or runs the washing machine.

It’s also certainly true, as a number of readers are testifying, that the government has not fully thought through its policy objectives on smart meters, and that the programme is unlikely to deliver many of the promised benefits, at least in the short term. And of course there are as usual a lot of horror stories on installation failures. But none of this should blind us to the fact that there is a huge and essential future for devices which create a much closer connection between the way we use energy, and electricity in particular, and the factors that constrain when and how it is produced and delivered.

Let us take a simple future example. We expect a big future for electric vehicles. This has the potential to create big spikes in load, with everyone switching on together, in a period when we will depend increasingly on renewable energy sources which are much more variable than currently, and harder to match to varying consumer demand. One answer to this is for some EV owners to charge their vehicles overnight, but for the timing of that supply to be at the discretion of the supplier, who can match it to when production is available to meet it. In exchange for this surrender of direct control, consumers will get a much more favourable tariff for their EVs, and the practical issues of managing network overload, when all EV owners try to re-charge their vehicles immediately on return from work, can be avoided. This obviously implies an element of intrusion, in the sense that the utility “knows” the purpose of the load it is required to meet. It also assigns a choice (over timing) from the consumer to the utility. But this is a commercial transaction, willingly entered on both sides, providing benefits to both parties.

Smart meters are just a starting point for more sophisticated and user friendly tariff and conditions of use arrangements which can redefine the ways we use energy. No doubt there will be privacy issues to be managed, but essentially these will be no different in character from the privacy issues we encounter in relation to almost all our transactions with businesses large and small. They will be substantially less than most of those that we face in relation to financial transactions, social media and our day to day use of IT and the internet..

Some of the benefits that can flow from more sophisticated metering and tariffs are highlighted in a report published last week by Energy Systems Catapult, which starts to explore the numerous tariff issues highlighted by progress towards a low carbon economy.

Cost Reflective Pricing in Energy Networks.  The nature of future tariffs, and implications for households and their technology choices.

THE ROLE OF TARIFFS IN A LOW CARBON FUTURE

Redefining how we take our electricity supplies. The complexities of allocating fixed costs. 

And the need to recognise environmental costs through carbon pricing.

It is hard to understate the importance of retail tariffs[1] for the efficient financing and operation of public utilities, and especially in the power sector. Tariffs represent the pricing and charging structure through which most consumers are supplied. They influence how consumers use electricity. Tariffs revenues underpin the returns necessary to pay for utility investment.

To meet objectives of both equity and economic efficiency, it is generally accepted that prices should accurately reflect costs.  This provides a means to coordinate consumer choices, on how much and how they use power, with utility decisions on how they manage, operate and invest in their networks and in their sources of generation. Purchase, as opposed to sales, tariffs set the terms on which small scale producers can sell into the network and are an important influence on the development of decentralised power production in particular.  However, interpretation of how best to reflect costs is, as we shall discover, quite complex and requires careful analysis and judgement.

In the new world of low carbon energy, three important trends will change the way in which electricity is produced and delivered, the shape of future tariffs, and the nature of the service relationship between utilities and households (and business). These trends are Decarbonisation, Decentralisation and Digitalisation (the three D’s), and they impact on tariffs.

Decarbonisation of the energy sector is widely perceived as requiring much greater use of non-fossil electricity to substitute for current fuels in heating and transport. But it also changes the cost structure and operational characteristics of generation technology. It substantially reduces the importance of variable (fuel) costs, which are what largely underpin the design and operation of today’s markets, and raises the importance of capital costs. Low carbon technologies (both nuclear and renewables) are inherently less flexible in adjusting to fluctuations in consumer demand. This raises the importance of managing consumption patterns, and hence of tariffs and price signals, within a coordinating price mechanism for balancing supply and demand in real time.

Decentralisation is implied by the growing significance of small scale producers (also sometimes known as prosumers), by the smaller scale of many renewable technologies, and the increasing importance attaching to management of local network constraints, as electricity plays a large and increasing role in overall decarbonisation strategies. Tariffs, especially those on which small consumers can sell to a public network, should be designed to make an efficient connection between small operators and larger local or national grids.

Finally, digital technologies permit much more complex and sophisticated information and control systems. These can help maintain stable and balanced power systems, enable more sophisticated tariffs and consumer choices, and permit more efficient management of consumer requirements. They are therefore part of the solution.

We need to review many questions on retail tariffs, and establish general principles for development of retail tariffs and retail supply in a low carbon future. These proposals provide a new paradigm within which sector policies can evolve, and a benchmark against which options should be judged.  

The Long Run Marginal Cost (LRMC) Approach

It is widely understood that for both renewable energy (and nuclear power) the marginal cost of generation, defined as the cost of an additional unit of production from existing generation assets, production or from low carbon technologies is close to zero. Setting retail prices at this zero short run marginal cost (SRMC) is clearly not a viable basis for pricing, and making the consumer’s marginal electricity consumption free at the point of use has the potential to create an unlimited demand that cannot be satisfied.

There is however a well-established cost reflective benchmark for approaches to electricity tariffs based on long run marginal cost (LRMC) principles. This is intended to ensure that consumers pay the full incremental costs (at least of generation), including capital costs, that they impose on the power system “Marginal cost (as LRMC) is an engineering estimate of the effect upon the future time stream of outlays of a postulated change in the future time stream of output.”[2]

This implies that the real costs of meeting very different types of load can be very different. High load factor (eg continuous or baseload) loads or those that are well matched to patterns of production will require lower capacity requirements per unit of energy supplied. Low load factor loads, or loads concentrated in winter when generation is cheaper in summer, will be more expensive solar power. This makes the calculation of LRMC, and hence what different kinds of consumption might pay, subject to careful analysis and calculation.  “There are as many marginal costs as there are conceivable postulated changes.” ^[3]

The importance of digital technologies is that they allow us to think about this kind of cost reflectivity in a much more granular way, and reflect the very different costs implied by different kinds of consumption such as the traditional household applications, electricity for heat pumps, or the charging of electric vehicles. Each of these can have a very distinct load profile, with a very different servicing requirement for the consumer.

Reliability requirements, the differentiated nature of consumer needs, and supplier managed load

The importance of capacity costs also brings into sharp relief the fact that the standard of supply reliability is itself a very important driver of costs. A high standard of reliability, defined as a very low probability of failure to meet the maximum, unconstrained, instantaneous, aggregate demand of all consumers, implies a need for very substantial spare capacity margins. These may be needed to cater for daily and seasonal peak loads, for generator downtime (eg breakdowns) and for weather related fluctuations in renewables output.

However not all consumption requirements need the same level of instant access and reliability. We quite reasonably expect our power need for lighting, or for a television programme, to be met instantaneously. We are likely to have a very different approach to, for example, overnight charging of an electric vehicle battery with perhaps 50 kWh of energy, and be largely indifferent to when it is delivered, eg overnight or even over two or more days. It makes sense to permit the supplier to choose the timing of delivery, within clearly defined parameters, in order to match generation availability and any network constraints. Other loads, such as laundry, or domestic water heating, will also have their own requirements, which the consumer can choose, in relaxing the requirement for instantaneous delivery of power.

What we expect to see in a low carbon future, therefore, is consumers being able to make a selection from a menu of tariffs, with different supply arrangements and prices in each case:

·        Some supplies, eg for lighting circuits, taken at a premium price, with the highest level of guaranteed reliability.

·        Some consumers choosing a lower reliability standard, at least for some of their needs, with a lower price.

·        Some large loads, such as vehicle battery charging or heating, provided on the basis that the supplier manages the timing of energy delivery.

Future systems will place a high premium on pro-active and effective management, based on innovative tariffs and a redefined approach to retail supply, of the use of electricity for electric vehicle charging and domestic heating applications.

Allocation of fixed costs

Generation costs are however only a part of the story. A substantial proportion of total power sector costs reside in high voltage transmission, and even more in the local distribution networks. As with many networks (including road and rail) the marginal cost of accommodating extra throughput (the extra car or train) is, at least in uncongested networks, very low. But the fixed cost still needs to be recovered. How best to do it poses some very difficult questions in terms of reconciling considerations of equity and income distribution, on the one hand, and the efficient allocation of economic resources on the other.

Current UK practice for smaller retail consumers, for example, is simply to average most fixed costs over all units of energy sold. This seems fair, and prima facie results in those who consume most (and might broadly also be those with higher incomes) paying the most towards the fixed costs. However this distorts the economic message, that the actual marginal cost is much lower. When policies for a low carbon economy include persuading consumers to use large amounts of extra  electricity for heating (eg with heat pumps), this becomes a very serious obstacle. For a household consumer, a higher fixed charge in the tariff, and a lower unit energy charge, transforms the choice between using the low carbon solution (electric heat pumps) and traditional fossil fuels (gas or oil). 

Another problem arises with purchase tariffs. These provide an incentive to small scale producers that should, in ideal world, result in consumers installing their own generation when this is “efficient” and results in a reduction in total societal costs. However, if the kWh rate in the purchase tariff is overstated by including an allocation of fixed cost, it will result in too much own generation. There will be no saving in fixed cost and, while the individual consumer with own generation may benefit, a larger share of fixed network costs will be picked up by others.

There are potential answers to this question that not argued in detail here, since they take us deeper into complex policy, political and administrative questions than is appropriate for a short article. Possibilities include the recovery of fixed  costs through property taxes, and approaches in which fixed costs are recovered with differentiation according to the use to which power is put, for example with a higher fixed cost levy on EV charging (a premium use of electricity) than for heating which is in competition with gas.  

Reflecting the substantial environmental and climate costs of CO₂ emissions

In the transition to a low carbon economy the case for more realistic levels of carbon taxation, as an incentive to invest in low carbon generation assets, and to minimise the share of fossil fuel in both consumption and production, is overwhelming. However this is not current policy in many countries. The UK currently has a particularly perverse approach in that the burden of renewables innovation policy is loaded on to electricity but not on to other fuels, notably gas. A major plank of low carbon policy is to encourage the use of electricity for heating, through the medium of heat pumps, and to substitute for gas. But the impact of current policies imposes a discriminatory tax on electricity, raising prices and reducing any incentive for consumers to switch from gas. A well constructed carbon tax, by contrast, would increase the cost of gas, restore a level playing field, and tilt the balance of running cost comparisons towards the electric technology of heat pumps. Perversely, recovering the cost of innovation support through the power sector hampers progress towards a low carbon economy.

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[1] What we usually mean by a tariff is a set of prices that are published in advance, are open to all buyers (or for purchase tariffs, sellers) complying with a given set of conditions. They contrast with bilateral trading arrangements, and with “market” structures involving multiple buyers and sellers. They provide the standard route through which most consumers, and certainly smaller consumers, obtain their supplies of energy, water, and many communications services. It is quite normal for a supplier to offer a number of alternative tariff structures, between which consumers can choose an option that most closely reflects their needs. They can follow either simple one-part or two-part formats, or have more complex structures.

[2] Ralph Turvey, one of the pioneers, with Boiteux, of LRMC theory in electricity. Turvey, R., What are marginal costs and how to estimate them? University of Bath, 2000.

[3] Turvey, again.

SHOCK. HORROR. THIS IS A GOVERNMENT THAT DOES NOT BELIEVE IN FREE MARKETS.

Has May pinched Corbyn’s policies (or at least Ed Miliband’s)?

I commented a short while ago  (on 25^th April) on the very different treatments handed out to the idea of energy retail price caps, depending on whether they were proposed by Labour or Conservative administrations. To recall the discussion.

[2015]. The Telegraph said prices would go up before Miliband’s freeze, while the Times and the Sun warned the “lurch to the left” risked blackouts. The Times’s editorial described his plan as “flawed in practically every detail”. [2017] … on Sunday, the Sunday Times welcomed May’s price cap as an “attempt to capture the political centre ground”. [Guardian]

This was a timely posting. The FT reports today as follows.     Theresa May said during the Conservative party conference in October last year that she was planning to take action on high bills. Since then, the “big six” power companies have stopped trying to match or better the cheapest deals on the market, according to an analysis by price comparison website uSwitch.

So far this looks like first blood to the Daily Telegraph, as the big energy companies take pre-emptive action to raise prices or at least limit any pretence at aggressive competition. The FT also reports that: Iain Conn, chief executive of British Gas-owner Centrica, Britain’s biggest energy supplier to homes, has said there were people at the heart of the Tory government who “don’t believe in free markets”.  

Alternatively this could be interpreted simply as a recognition that in this particular industry, the principles of free markets and competition are beset by so many sources of market failure that some retreat from neo-liberal ideology was inevitable. An energy industry counterpoint came from Paul Massara, former chief executive of Npower, who said free market competition had not so far encouraged the majority of households to switch to cheaper deals. “Free markets haven’t worked and therefore you need to do something. The question is what is the right solution?”  [again according to the FT]

Watch this space. There will be many even more significant battles ahead within the Tory party around the broader questions of markets and “working for everyone”. But, I suspect, they will not be of great prominence in this election campaign.

PRICE CAPS. HYPOCRISY GOES INTO OVERDRIVE, BUT ARE WE WITNESSING THE DEATH OF NEO-LIBERAL PRINCIPLES FOR THE ENERGY SECTOR?

As we head at increasing speed for the policy train wreck of the forthcoming Brexit negotiations, the British political class (and MPs by an overwhelming majority) has chosen to divert our attention into one of the most pointless general elections of all time. This will inter alia call a temporary halt to the searching examination of false promises and expectations, and simple untruths,  that Hillary Benn’s House of Commons Select Committee on Leaving the European Union has been conducting. Readers not looking for the usual energy policy content of this blog may wish to read no further and refer instead to the Committee’s recent reports. These tend to be understated, but the material is there. In due course we will no doubt learn more about the effectiveness of EU exit in curbing immigration, boosts to our national income, the wonderful new trade deals on offer from Donald Trump, and much, much more.

POLICY TRAIN WRECK

However in the meantime the campaign will provide a useful opportunity for our leaders to hide from reality. Nevertheless connoisseurs of duplicity, smoke and mirrors, and hypocrisy, if not satiated by other aspects of the Brexit debate, can still find some rich material in campaign discussions on the subject of energy prices. The subject of energy price caps has come to the fore, just as it did before the 2015 election, with Ed Miliband’s promotion of the idea.

2015. RED ED'S POLITICS OF THE BANANA REPUBLIC. … like the pledge to cap energy prices, [these policies]  … merely serve to stoke up the politics of division. [Daily Mail].  “And despite the criticism of many experts, he remains committed to the principle of using State power to cap energy prices, with bills frozen by law until 2017, which strikes me as economically illiterate.” crowed another Mail columnist. BACK TO THE BAD OLD DAYS, the Daily Mail front page had screamed earlier in September 2013 on the same price cap issue. For the Spectator it had been MILIBAND'S LA-LA LURCH TO THE LEFT.

2017. But when the Mail reported earlier this month on Tory plans to take action on bills in the face of the latest rise by one of the big six energy companies, such statist intervention had become CRACKDOWN ON ENERGY RIP-OFFS. The Telegraph said prices would go up before Miliband’s freeze, while the Times and the Sun warned the “lurch to the left” risked blackouts. The Times’s editorial described his plan as “flawed in practically every detail”. [But] on Sunday, the Sunday Times welcomed May’s price cap as an “attempt to capture the political centre ground”. [Guardian]

The ironies in the contradictory treatment of the same policy when promoted by different factions are amusing. But actually there is a deeper significance to this volte face from the party of market fundamentalists.

As it happens I regard the use of price caps as misguided under most circumstances, now putting myself at odds with both Labour and Conservative. Obvious reasons are the risk that interventions confined to price will reduce supply and deter investment, and that it is better to address the disease (market failure) rather than the symptom. Nor do I entirely buy the view that the energy companies are making excess profits (see an earlier posting). But the endorsement by the Conservative party[1] of such a quintessentially statist, interventionist approach signals something more than simple electoral opportunism. It arguably represents the end of the road for the pretences of market liberalisation. This is certainly so in the UK, arguably the pioneer of deregulatory principles and their application.

Network costs, which can account for a third or more of a domestic consumer’s bill, have always been heavily regulated, even after privatisation in 1990. Generation investment is now almost entirely dictated by government, either directly through support for nuclear or renewables, or more indirectly through centrally controlled capacity auctions. The remaining element of the electricity supply chain, retail supply, has always been at best pseudo competitive, but that too is now being taken under the umbrella of government. What all this amounts to is the complete capitulation of the neo-liberal approach, at least in the energy sector.

It is surely time to recognise that this is a sector beset by market failure and that we need, not a series of ad hoc sticking plasters but a complete re-think of how we want the sector to operate and how we can better structure it to use the real dynamics that can come from competitive markets in driving efficiency and innovation. There is no point in pretending that we are still operating a laissez-faire competitive system, or that government can remove itself from the multiple policy choices and commitments that the sector, and particularly a low carbon power sector, will require.

There are further ironies and further opportunities for amusing speculation. The UK is not alone in wrestling with the paradoxes of the flawed neo-liberal paradigm. My last posting discussed a significant issue arising in a German and EU context. The EU followed the UK up the hill of unbundling and market solutions, but at least 15-20 years behind. The dawning realisation in the UK of the need to reverse direction and head downhill will shortly see it meeting an EU still struggling towards the summit.

But will this be an element in Brexit or future trade negotiations? And if we struggle to get back into the EU in (say) 2025 will be obliged to make further reverse policy changes to meet the EU energy sector and competition and state aid rules at that time. Or will the EU by then also have learned something from our experience as well as their own?

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[1] This is after all the party of the ayatollahs of free market fundamentalism such as Redwood, Lawson, Lilley et al.

ENERGY COMPANIES. VILLAINS OR VICTIMS IN THE PRICE CAP DEBATE?

Theresa May’s Conservatives have been rediscovering the virtues of a number of what were once familiar Labour themes, but perhaps their most surprising volte-face is the threat to impose price caps on at least some energy utility tariffs.  Populist interventions in what are supposed, in theory at least, to be competitive markets, are often bad news from a perspective of efficient markets and effective policy. And Ed Miliband and Labour were pilloried for this suggestion. On the other hand there is little evidence that the current UK retail market is working effectively, there is evidence that “captive” or “loyal” consumers get a bad deal, and consumers appear to be no happier with their utilities than in the “bad old days” of nationalised industry.

The real problem, at least in the electricity sector, is that there are a number of features of current market arrangements that are seriously dysfunctional. This is in large measure a reflection of “energy only” approaches to the construction of wholesale prices that are “baked in” to much of current thinking. Energy only wholesale prices, based around short run marginal costs, are incapable of rewarding investment. This has been a problem of the UK market since the NETA reforms in 2000, and has become an increasing problem for the rest of Europe. The UK government is now grappling with the resulting problems, including threats to supply security, through the mechanisms of capacity auctions, but these are aimed primarily at incentives for new capacity.

This is by no means a problem unique to the UK. It has been very evident for German companies in the power sector, and has had a number of adverse effects on their balance sheets, and may have damaged their ability to invest in new low carbon or indeed any form of generation, most notably in nuclear power (for RWE and EON).

The fundamental issue is that investors in infrastructure require the support of assurances over their long term revenue stream, support that had in the past normally been provided either by long term contractual or government commitment, or by the security of vertically integrated monopoly. To a significant degree the owners of conventional thermal generating plant lost that support, and found themselves in possession of stranded assets that find it increasingly hard to earn revenue in a world where marginal costs are often zero. Many of the companies anticipated the strategic problem many years ago and found at least a partial solution through vertical integration into the retail business, where market imperfections allowed them to recover some excess profit to compensate for the losses to which they were exposed in respect of their stranded assets.

The utilities, in this interpretation of events, can be viewed as both victims and villains. On the one hand older thermal plant constitutes an asset that has been stranded, at least partly through government policies for the power sector. As victims of this process, their attempt to recover lost ground through vertical integration was a necessary and logical response to that position. However this does imply that vertical integration confers an ability to exploit some form of market power, and is in some sense anti-competitive. The power that accrues to the supply companies comes through the inertia of their customers. That allows them to be portrayed as the villains.

As an illustration of this undue market power, we might contrast typical margins in retail supply with the view taken by previous regulatory bodies.  Prior to the introduction of retail competition, supply margins were generally assumed to be very low.  Thus a 1995 Monopolies and Mergers Commission Review held that 1.0% margin for Scottish hydro supply business was too high and set it at 0.5%.  Retail supply is not capital intensive and the “value added” is limited. In setting price controls in 1998, Offer and Ofgas considered a margin on sales of 1.5% would adequately take into account the increased risks from the introduction of competition.

In the “competitive” UK retail sector, margins have varied but have often been around 4%. Prima facie this looks like the extraction of extra revenue from the consumer for a function, supply, in which the retailer adds next to nothing in the way of extra value. If we add to this some of the extra costs of competing to do business (eg marketing costs) this does not look like good value for the consumer. Suppliers compete aggressively to maintain or gain market share, but a large number of consumers do not want the chore of perpetually searching for the best deal, and would prefer simply to get an uncomplicated service at a fair and reasonable price.

However it seems unlikely that imposition of a government price cap will resolve the deeper underlying issues of the power sector. What we really need is a more fundamental re-think of what we expect from retailers. My own view, expressed in more detail on another page, is that retail supply should be playing a much bigger role in shaping the future of the power sector, and that there are ways in which retail supply could become genuinely innovative and competitive.

DEEPMIND ALGORITHMS JUST THE START OF A CONSUMER FOCUSED REVOLUTION IN THE POWER SECTOR.

Deepmind algorithms to manage the Grid could be just the start of a consumer focused revolution in the power sector. The need to manage much more complex low carbon systems means there are strong incentives to manage consumer demand more pro-actively. This could be good news for consumers, offering them more choice, and also defusing some of the concerns that sit around supply security.

Yesterday’s FT reports[1]: Google’s DeepMind is in discussions with the UK’s National Grid to use artificial intelligence to help balance energy supply and demand in Britain.  “… It would be amazing if you could save 10 per cent of the country’s energy usage without any new infrastructure, just from optimisation. That’s pretty exciting,” Demis Hassabis, DeepMind’s chief executive told the Financial Times. National Grid’s role in balancing the system has become more difficult in recent years, however, as intermittent renewable sources of electricity — such as wind and solar power — have become a bigger part of Britain's energy mix. DeepMind’s algorithms could more accurately predict demand patterns and help balance the national energy system more efficiently.

This is currently a task that is at least partially delegated to the market. The principle behind most “spot” wholesale markets is that generators declare their marginal costs of generating (per kWh unit of energy produced) and are then selected to run in ascending order of cost (the so-called “merit order”), with the cheapest chosen first, and the most expensive plant that runs setting the price. That principle will be increasingly dysfunctional or inapplicable in the real world, partly because such a high proportion of current and future generating plant has zero or negative marginal costs of operation, and partly because the operational efficiency constraints on the power system are becoming more complex, involving considerations of plant inflexibility, intermittency, and energy storage, rather than just a simple stacking by ascending cost. Sophisticated algorithms are prima facie exactly what is needed to replace a defunct merit order.

This implies moving beyond prediction of demand patterns, for which fairly sophisticated approaches already exist, and addressing predictions of intermittent supply as well. It also means developing algorithms to make operational decisions that make sense in terms of efficiency and the secure operation of the system. The promise of a 10% saving in energy may be an exaggeration, not least because of the dominance of capital costs, and relative insignificance of fuel, in low carbon generation. But the bigger contribution of an algorithmic approach lies in the broader options it creates for the ways that the power system is managed and the ways in which consumption is managed. This could allow leaner systems and also transform the way that we think about electricity as a service.

Future Options

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 limited ability to differentiate on grounds of differing incremental costs, and a common security standard for all consumers and all applications. 

Consumer behaviour needs to be incorporated as a much more active component.  What is needed is to redefine the “consumer offering”, with 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, to take a particularly dramatic example, a consumer wanting to charge electric vehicle batteries might request 75 kWh to be delivered in a specified period, over several hours or even several days (eg a weekend), and the consumer’s terms of supply might specify that this requirement will be met in full but with timing that is “at the supplier’s discretion”.  Different arrangements and different tariffs could apply to the purchase of power for heat, and for some other uses, reflecting in each case the nature of the load, the extent to which it could be time-shifted without inconvenience, and the level of reliability for which the consumer was willing to pay.  Commitments to individual consumers would be made by energy service companies who would be able to aggregate consumer requests and feed them in to become part of the Grid’s system optimization routines. Such services might even be packaged with the provision of appropriate equipment (eg storage heaters).

The role of suppliers is then to act as aggregators, and their essential function would be to manage the complex interaction between consumer loads and system balancing requirements, including shaping and managing the pattern of consumption. This provides a major opportunity for a much more innovative approach to all aspects of metering and for the terms on which consumers purchase power. Suppliers could at the same time enter into individual contracts with generators, or a system operator or other agency, which would reflect the economic benefits of their ability to shape consumer loads. They would also take responsibility for managing loads within network constraints at lower voltages, ie within local distribution networks.

This has some powerful advantages.  First it allows consumers to purchase power for particular usages in ways more akin to their purchase of other goods and services, as opposed to perpetuating the “instantaneous commodity” characteristics that have hitherto been a unique and constraining feature of the power sector. This can reflect what consumers actually want and need from a utility.  At the same time it would help make the services more affordable.  Consumers could still choose to take some power “on tap” and would normally pay a higher price for this.^[2] Many of the issues associated with administrative setting of security standards would become much less significant. Security standards would be chosen in a market, not dictated by a central authority.[3]

This change is enabled by one set of technologies – those that surround metering, remote control, and system optimisation (Deepmind).  But it also helps to resolve the problems posed by another set of technologies, those linked to intermittent or inflexible sources of non-fossil generation and distributed generation.

………..

These ideas have also been explored by the author in Double standards for reliability in power supplies. Not such a bad idea. This was a defence of a controversial proposal from Andrew Wright of OFGEM on a proposal for consumers to choose the level of reliability that they want. They have been presented in a broader context in a paper, Markets, policy and regulation in a low carbon future, produced by the author for the Energy Technologies Institute (ETI), which  published a number of perspectives on low carbon futures in 2016.

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[1] DeepMind and National Grid in AI talks to balance energy supply. FT 12 March 2017

[2] “Electricity Markets and Pricing for the Distributed Generation Era”, John Rhys, Malcolm Keay and David Robinson. Published as Chapter 8 in Distributed Generation and its Implications for the Utility Industry, ed. F. Sioshansi, Elsevier, August 2014.

DOUBLE STANDARDS FOR RELIABILITY IN POWER SUPPLIES. NOT SUCH A BAD IDEA.

It was reported this week (FT, 12^th 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 21^st century power systems.

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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

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[1] (See panel of page headings above).

[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.