6.The energy sector is changing. Economic, environmental, social and public health concerns, as well as national and international climate change ambitions, are shifting not only the way in which electricity and heat are generated, but also the way in which supply and demand are considered across the energy network. The emergence and rapid uptake of renewable technologies have created new pressures on the network, with a move away from the classical model of large, localised power generating stations feeding into the transmission network, towards a decentralised system, where generation and demand can be met at a distribution- and individual-level. The variable nature of renewable generation creates the need for baseload power and enough flexibility on the grid to manage peaks and troughs in generation so as to avoid black-outs if weather conditions are not propitious. These challenges require innovative solutions at all levels and an updated management of the electricity system.
7.Our Low carbon network infrastructure report explored some of these grid-level issues. We recommended an overhaul to network operation, system operators employing new tools to manage variable generation, and giving consumers a greater role in managing the UK’s electricity load. We urged Government to address the network system as a whole and develop its change-readiness capability so as to meet the ambition of a low-carbon future. Following from this work, we wanted to look more specifically at which technologies and innovations developing today could positively disrupt and improve the energy system of tomorrow, transforming market structures and creating new patterns of demand and supply.
8.We were not looking for a silver bullet: solving the energy trilemma and creating a sustainable energy market will not be the product of one single innovation. The answer is likely to be an evolving combination of new technologies, new business models, and new interactions between consumers and their energy use. The themes raised in stakeholder responses are summarised below:
9.In the time we had we focussed on four categories of innovations: Storage, demand-side technologies, digital engagement, and nuclear innovations. During our final evidence session on 11 October and our fact-finding visit to the United States we focussed on questions of funding and the regulatory challenges for the integration of new technologies and business models. We consider each of our four innovation categories in the following sections.
10.Electricity storage allows electricity to be transferred not just across distances, but between time periods. Technologies are varied and encompass different levels of capacity, response time, cost and maturity. Small-scale storage, typically in battery form, can help Distribution Network Operators (DNOs) and individual consumers balance their systems at distribution level or ‘behind the meter’, and large-scale storage, such as Pumped Hydroelectric Storage and Compressed Air Energy Storage, can provide services at the national level to balance variable generation.
11.Approximately one third of all submissions to our inquiry highlighted storage as a group of technologies that could revolutionise the energy sector, by far the largest technology represented in the evidence. These include batteries (lithium-ion, lithium sulphur, sodium-ion, redox-flow), fuel cells, large-scale storage/pumped-hydro, hydrogen (e.g. for transport), and thermal energy storage. We were also interested to hear about the concept of “virtual energy storage”, which was described to us as incorporating multiple technologies and processes including batteries, demand side management, heat storage, and coordinate these across gas, electricity or heat.
12.The important role played by storage was described by the Renewable Energy Association:
Energy storage helps provide not only security of supply and other important technical services to the grid network, but also a level of stability to the power market and wholesale electricity prices, therefore smoothing power supplies and intraday prices, saving consumers money.
UK Power Networks, a Distribution Network Operator (DNO), built and operates “the first multipurpose storage facility in the country in Leighton Buzzard”. Barry Hatton, Director of Asset Management at UK Power Networks, told us that this facility had demonstrated “a range of services that storage can provide” and played a part in alleviating the capacity problem they were experiencing at that site: “We have been able to demonstrate the benefits that we thought we would get from the storage”. UK Power Networks has taken a number of steps to enable storage at the distribution level.
13.There are also opportunities in the transport sector to integrate electric vehicles with the grid, as we discussed with Tesla Motors in the United States. Nissan, a car manufacturer, also told us that:
V2G [Vehicle to Grid] technology enables the electricity stored in electric vehicles to be used for purposes other than powering those vehicles. Our V2G technology allows electric vehicles to feed their power back into grid, making renewable sources even more widely available and affordable.
14.We heard that while costs still have to fall for storage to reach its full economic potential, these are coming down rapidly with deployment. However, despite the potential of storage to contribute to a balanced grid, to counter the need for carbon-intensive or nuclear baseload, and to provide cost savings for consumers, a number of challenges to its deployment remain. National Grid stated that there were currently two such challenges:
UK Power Networks added that:
As a result of our experience [at Leighton Buzzard], we have identified a number of commercial and regulatory barriers for the uptake of storage. We believe that at this point, all options should be left open for different commercial models and that storage should be a solution that network operators can own and deploy so we can always choose the least cost solution for customers.
15.Our Low Carbon Network Infrastructure inquiry outlined the need to urgently address regulatory barriers. One such hurdle is the double charging of balancing charges for storage. Dr Jill Cainey, Director of the Electricity Storage Network, explained that barriers around the end-user levies were still in place because the UK’s renewable incentive scheme was set up before storage came into play and “storage is not defined as not being an end user”. As a result, storage facilities are charged once for consuming the electricity they store, and then for supplying it back to the grid. The end-user of the electricity released is then also charged for consuming it. As a result, “everyone pays double and that has a material cost to projects”. Dr Cainey added that storage should face appropriate use of system charges, but that charges on the electricity passing through should be paid for “by the genuine end user”. Dr Nina Skorupska, CEO of the Renewable Energy Association, agreed that charges should be based “on the actual power consumed”, and stressed the need to consider the “thorny aspect of where storage sits within the UK legal and regulatory framework”. The lack of clarity on this adds perceived risks for investors.
16.We heard that the lack of a formal definition for storage was problematic. Amanda Lyne, Chair of the UK Hydrogen and Fuel Cell Association (UKHFCA), explained that “you cannot resolve many of the issues about a definition for storage because if you are going to treat it differently you have to know what it is that you are treating differently”. She added that the European Parliament had just adopted a motion that would see a new asset class for storage (in addition to interconnectors, transmission, distribution, supply and generation), which will provide “flexibility and optionality on who can own and operate” storage assets. A separate asset class for electricity storage “would allow different entities in the system, including suppliers as well as distribution network operators, to use storage”. All the witnesses we heard from in our storage panel supported introducing a separate asset class for grid-level storage.
17.The pace of change in storage regulation has been slow. Dr Cainey explained that such changes inevitably took time, and that even a “quick fix”—a modification of the generation licence to incorporate storage as a sub-class—would take up to eighteen months. The other route, primary legislation outlining a new asset class for storage, would take two to three years and require “a great deal of political will”. She welcomed the fact that the Government had dedicated storage teams in place since 2015.
18.The REA explained that storage also lacked a clear route to market in the UK because the main public mechanism that aims to support storage, the Capacity Market, is not fit for this purpose. The last two auctions “failed to deliver” significant energy storage. Dr Skorupska explained that because storage was still quite a young technology, the length of contract was an important consideration; storage can currently qualify for four-year contracts whereas new build generators can acquire 15-year contracts. She called for “an intelligent updating” of the Capacity Market, with a review of “all of those assumptions that were written and put into the capacity market many years ago”. Dr Cainey suggested that a number of “quick fixes” could be made to the Capacity Market during the annual review of its parameters that would better make use of the benefits of storage, mainly the fact that it can respond quickly to signals by the system operator. Dr Skorupska also called for a change to the Capacity Market rule that projects receiving any other form of subsidy cannot currently bid into the Capacity Market. She explained that this “restriction around stacking of revenues for the energy storage projects” was precluding storage from delivering grid and cost-saving benefits, as “different types of energy storage can provide [...] different services”.
19.We heard that another potential route to market could be through the Contracts-for-Different (CfD) scheme. The Renewable Energy Association called for Government to “consider reforms to the CfD mechanism to enable ‘hybrid’ storage and renewables projects”. A consultation on amending the CfD contracts and regulations—including storage consideration—was carried out earlier this year and the Government is due to produce its analysis of responses. Dr Skorupska said that hybrid CfDs would be “a really great win” for the storage industry.
20.These issues continue to make the economics of energy storage challenging, but there is immense opportunity for the UK to harness the potential of the storage industry and become a world leader in this technology. Scottish Renewables said that “if current regulatory barriers were removed, some £7bn per annum of savings to consumers could also be achieved”. We heard that “A recent report from Imperial College indicates that the potential savings in the operation of a decarbonised grid by deploying storage could reach £8[bn] per annum in 2030”. The Electrical Contractors’ Association added “if implemented correctly, with the use of Smart Meters to change tariffs, then little or no public incentive would be required as savings would accrue by storing power at cheap rates and using and/or exporting at high rates”.
21.Despite the then Energy Minister telling us six months ago that she was “literally about to publish a call for evidence on smart energy systems”, which would address barriers to storage, we are still waiting for action from Government. Witnesses stressed the urgency of publishing this consultation quickly.
22.Storage deployment has been more successful in the United States, thanks to the availability of the technology industry, state support and legislative incentives, with a plethora of storage developers located on the West Coast. Meeting with legislators and agencies in California, we learned that storage had been a priority for the state. The Storage Procurement Bill (AB2514), passed in 2010, requires the big investor-owned utilities to procure 1.3GW of storage by 2020. It was designed to encourage California to incorporate energy storage into the electricity grid, give the correct signals and help create the appropriate infrastructure for further storage deployment. We heard from the Governor’s office that that the Bill had created momentum in the storage sector and had played a key role in driving down costs, with storage expected to be market competitive in 2 to 3 years (see Annex 1 for a description of our meetings). Cumulus Energy Storage, a UK-US technology company focused on low-cost grid-scale rechargeable Copper/Zinc battery storage, told us that the legislative and policy signals in California had given the necessary signals for tech companies to invest and see commercial opportunities. We also heard, however, that while many demonstration projects existed in the United States, there was not yet any commercialisation of grid-scale storage.
23.Dr Cainey told us that while California’s target had “certainly incentivised the market”, the difficulty in the UK was knowing how much storage we want and how we would bring this to market. She considered a Government strategy and commitment to storage may give enough of a signal without the need for a UK storage specific target. She added “if you facilitate the markets and you make it a fair market and we see it being truly cost-reflective, which the markets are not at the moment, then the solutions will come, whatever those solutions are”. Amanda Lyne agreed that the focus should be on trying to enable change and allowing the market and the technology providers to respond. Dr Skorupska, however, considered that a storage target tied to an industrial strategy would be a positive step forward. She told us “Let us go for a target, let us say a range that we want to go for and at the same time do the whole system architecture and do it in a sensible way”. We also heard that storage presented not only an energy solution but was a “key industrial strategy opportunity”:
Energy storage is the hot topic [overseas.] If the UK can show a lead here, it could probably take advantage of that and help other countries to solve their low-carbon energy problems too. […] The UK has always had the lead on developing and incorporating markets [but] we have to catch up with the likes of California and Japan, who are really showing and demonstrating the use of energy storage.
24.By breaking down some of the regulatory barriers faced by the storage industry and providing a signal to the market on its importance, the Government could help to unlock further investment in this sector. The Institute for Mechanical Engineers explained that:
Significant investment well beyond the current £50 million committed in the last budget is needed to create storage that lasts effectively beyond three hours. This would create a step change in the energy infrastructure allowing more connection to the current infrastructure as well as independent small and off-grid opportunities.
Renewable Energy Systems added that “having the right control system to maximise revenues [for storage projects] is vital to a successful project, meaning greater market deployment”.
25.National Grid’s analysis of the UK energy market suggests there is a significant opportunity for greater storage, “equating to an extra 2–3GW of low-carbon generation by 2020, delivering over £100m p.a. of consumer value”. They added:
This potential will grow through the 2020s and 2030s as technology costs continue to fall. While current storage costs remain reasonably high, we anticipate cost reductions that will enable storage to compete with other flexibility providers. For example, battery capital costs are forecasted to fall by nearly 50% over the next five years.
26.Storage presents a real opportunity for the UK. Strong public financial support and clear legislation in California have been vital in developing the storage industry and laying the foundation for the full integration of storage infrastructure in the grid. There are similar opportunities in the UK for legislation to help support investment in storage.
27.We reiterate our previous call on Government to move quickly on addressing regulatory barriers faced by storage: there must be a clear definition for storage, double-charging must come to an end, and a separate asset class for grid-level electricity storage should be established as a matter of urgency. The Government must also review the outdated Capacity Market rules and regulations in relation to storage, including considering increasing the contract length and addressing restrictions around stacking of revenues for storage projects. We further recommend that Government sets out a high-level public commitment to making the UK a world-leader in storage and sets a storage procurement target for 2020. The Government should also consider a possible subsidy framework for energy storage to accelerate deployment given the importance of storage to unlocking the full potential of renewable energy.
28.Demand-side response (DSR) emerged as a key technology in responses to our initial call for evidence. It encompasses a range of mechanisms that encourage electricity users to reduce their consumption at certain times, thereby making energy demand an integral part of grid balancing. It can reduce costs to consumers and improve the efficiency of the entire energy system. DSR also paves the way for new and innovative business models and tariffs for network operators, suppliers, demand aggregators and smaller businesses or individual customers. National Grid told us that “roughly two-thirds of national demand sits in the industrial and commercial business sector and so initial focus should be on developing DSR in this sector”. Scottish Renewables told us:
Demand Side Response (DSR) is intelligent energy usage for consumers and system operators. Giving the right price signals for consumers to turn down their usage, to use energy at different times, or by allowing third parties to control a consumer’s energy consumption can mean savings for consumers, better use of low-carbon electricity – resulting in reducing carbon emissions and better network management for the operator. Meeting just 5% of peak demand by DSR could save consumers £790 million.
Professor Jim Watson, from the UK Energy Research Centre, added that DSR helps to tackle the trilemma: “it can help meet the three main policy goals, so it can help to decarbonise while maintaining security, but crucially do that at a lower cost than if you did not have the demand-side response there”.
29.Despite the potential of innovative DSR models to become a key piece of the puzzle in the future energy system, the full potential of its role in grid balancing is yet to be unlocked, with “a need to reform regulation and policy”.
30.We heard that technology maturity was not a barrier to the development of DSR, rather, the problem was the slow development of the DSR market. Sara Bell, CEO of Tempus Energy Technology, explained that “this is not about maturity, it is about whether there is a commercial opportunity”. Colin Calder, CEO of PassivSystems, added “the technology for doing this exists and as a company we will not enter the electricity demand-side response market until we see a sensibly organised market with less risk, fewer policy change, fewer barriers”. National Grid described how it was trying to encourage growth in the DSR sector:
To facilitate the development of DSR products, National Grid has developed a framework called Power Responsive which enables businesses, suppliers and policy makers to shape the growth of demand side response collaboratively. The aim is to deliver it at scale by 2020. To achieve the desired growth, there is a need for increased promotion and awareness of the opportunities in DSR complimented by a simpler set of products with clear value for end users.
National Grid said: “We are continuing our commitment [to Power Responsive] in a second year given the success of the campaign and the exciting challenge ahead to develop more flexible tools into the energy mix”.
31.Ultimately we heard there has been a lack of effective incentives for DSR providers and energy consumers. In August, National Grid announced that it would “not be procuring Demand Side Balancing Reserve (DSBR) for winter 2016/17”. DSBR is one of its new balancing services targeted at large energy users who volunteer to reduce their demand during winter weekday evenings in return for a payment. Representatives from the DSR industry expressed frustration at the way in which National Grid had designed the DSBR mechanism and suggested this was an example of the inherent bias in the market towards supply-side rather than demand-side solutions. National Grid explained that this decision was taken when it had become evident that a minimal amount of DSBR would be available across the peak period, and thus “the cost of procuring the volume of DSBR outweighed the expected benefit to consumers that it would provide”. They stressed that “the cancellation of DSBR does not logically mean we are not committed to growing DSR. We are actively encouraging participation of DSR in our other balancing services”. It was also acknowledged that the DSBR was a stop-gap policy and that in the long-run the Capacity Market was the mechanism to focus on.
32.The difficulties surrounding the treatment of DSR in the Government’s Capacity Market auctions have been well documented by this Committee and its predecessors. The Capacity Market provides a regular retainer payment to reliable forms of capacity (both demand and supply side), in return for the capacity being available when the system is tight. Generation and demand-side providers can compete for capacity payments in an auction held four years ahead of the year in which capacity is expected to be delivered (the “T-4 auction”), followed by a second auction one year ahead (the “T-1 auction”), if more capacity is needed. There are three main concerns regarding the ability of DSR companies to participate in the Capacity Market, as set out below.
33.The first issue is contract length. DSR aggregators can only acquire a one-year contract in the T-4 auctions, while new build power stations can acquire a 15-year contract. The Government has previously stated that:
Analysis of currently-available evidence indicates that DSR and existing generation do not require […] significant up-front capital investment, which would potentially necessitate access to long-term capacity agreements. […] DSR is a relatively low-cost solution and should therefore be able to compete effectively on the basis of one-year agreements.
Witnesses disputed this, suggesting that it was a misconception that DSR does not require significant up-front investment and that businesses that might be interested in installing DSR infrastructure would “tell you to go away” if you suggested they make that investment for the sake of only one year’s worth of returns.
34.The second issue is the capital bond that aggregators are forced to put up when bidding for the one-year contracts, whereas incumbent power stations do not have to. KiWi Power stressed that the bond issue represented a disproportionate amount of the total cost of a DSR project. Yoav Zingher, CEO of KiWi Power, explained that the cost amounted to between £5,000 and £10,000 per MWh, which “for a power station, […] is less than 1% of the total cost. For demand-side response, it is 95% of the total cost”. He added that “the biggest cost to doing business is the cost of paying the Government to allow me to do business”.
35.The third issue relates to the lead in time for providing DSR solutions. DSR aggregators were planning to make use of the T-1 auctions, which provide contracts for projects with a shorter one-year lead time. Kiwi Power told us that “aggregators feel that [the T-1 auctions] are now likely to be so small that one power station could out bid all the potential DSR [thereby removing] the primary route to market for DSR”. They argued that Government should “reconsider reducing T-1 auction volume” and “exclude existing power stations from any reduced T-1 auction”.
36.Together these issues leave demand-side measures at a serious disadvantage. It is clear to us that current policy is still skewed towards generation to meet balancing needs and regulation is inhibiting the development of the demand-side. Scottish Renewables stressed that:
Ofgem has stated that “Non-traditional business models have the potential to transform the energy system, through increasing competitive pressure, unlocking more value for consumers, driving improved consumer engagement and enhancing system resilience”. In order to achieve this it is essential that changes to regulation should promote a level playing field for all market participants.
Colin Calder added that:
There will need to be some form of financial support in the form of subsidies. Right now, every other form of energy in the market is attracting subsidies, whether it be renewables or even building new power plants today. It should not be for demand-side response to be left to find its own way into the market without some form of support.
37.We were interested to hear that California has had goals for demand-response for a few years, with the California Energy Commission setting demand-response procurement targets for the three investor-owned utilities through a pay-as-bid auction. California’s three utilities have collectively contracted for more than 40MW of DSR resources. In the United States, we heard about the loading order used by utilities when capacity is tight, starting with DSR, followed by energy efficiency, renewables and fossil fuels. We heard some support for such an approach being utilised in the UK. However, while California has the largest market for demand-side management, we heard that it too has barriers to overcome in incentivising large businesses to reduce their load.
38.The right policy framework needs to be put in place to unlock the full potential of demand-side response (DSR) technologies. Getting DSR right will empower consumers, reduce bills, ease grid pressure, and lower carbon dioxide emissions. Without explicit market mechanisms and target capacity goals DSR will not be able to deliver best value for consumers.
39.Changes to Government policy with regards to DSR participation in the Capacity Market need to be implemented and we urge the Government to implement these in time for the upcoming T-4 and T-1 auctions in the winter 2016–17. The contract bond requirement for DSR providers bidding in the Capacity Market is an unnecessary cost for businesses. It should be removed, and if not, it must be reduced to a level that is a more reasonable percentage of the cost of the projects that are bidding. Government must update its evidence base to justify why it thinks the DSR projects should be limited to one-year contracts. Our view is that significantly longer contract periods should be available to DSR providers. Finally, the Government should reconsider its decision to reduce the volume of the T-1 auction.
40.The market should also be given a clear signal that DSR capacity is to be procured as a strongly preferred alternative to diesel generation plants. We recommend investigating the use of a merit order for meeting capacity needs in the UK when margins are tight, which places DSR high on the list.
41.The Government should itself become a beacon of good practice by demonstrating the use of flexible demand solutions in its buildings in Whitehall and around the country. Parliament should also use the opportunities of the restoration and renewal of the Palace of Westminster to embed flexible demand and other new energy technologies within the Parliamentary estate.
42.In the digital era of smart phones and cloud-based applications, the ‘internet of things’ opens up a realm of opportunities for a smarter energy system, greater consumer engagement in energy use, and new models of energy trading and governance. Intel corporation told us that:
Digitization in the energy sector continues apace. By 2016, the global market for smart grid technologies, which includes sensors, management and control technologies, communication networks, and software, will be worth $80.6 billion: a growth of 28.7% from 2011. By 2020, the global smart grid market is forecast to exceed $400 billion. In the EU, policies are encouraging the development of decentralized electricity generation in which electric vehicles, energy storage and flexible demand are all expected to play a significant role.
43.Approximately 15% of the submissions to our energy revolution inquiry noted that digital solutions were important in driving change in the UK energy sector, highlighting opportunities in the buildings, electricity and heat sectors, as well as opportunities for new pricing models and new ways of trading energy. Innovate UK told us:
Through the convergence of [the] internet of things, digital creativity and new business models the future energy system will be dominated by energy assets of almost every conceivable type and size. Systems will manage their energy in sophisticated autonomous ways to provide significant levels of distributed generation, storage, new grid support flexibility, peer to peer energy trading which will minimise new infrastructure investment while creating value add utility, information and services to end users.
44.In the United States, we discussed the opportunities of a smart and interconnected energy system with several interlocutors. We heard that the California Public Utilities Commission was looking at how new planning processes feed into the smart grid, particularly to identify where distributed energy can be most ideally located. We also heard about the University of Washington Clean Energy Institute’s research on the role and meaning of smart grids, including questions around how much flexibility was needed, how to optimise it, and what market mechanisms could be used to deliver this. We visited Nest labs, a producer of self-programming, self-learning thermostats and other home automation systems, and heard about the range of products trialled and commercialised by the company and their success in driving down energy costs for consumers. During our meeting with Nest labs, we heard that the first phase of Nest’s smart thermostat study in the UK found an average of 6–8% savings in households. The Behavioural Insights Team (a social purpose company part-owned by the UK Government) concluded in their 2015–16 report that “the results of this research have provided statistically significant evidence that the [Nest Learning Thermostat] saves substantial amounts of energy”.
45.Large datasets such as those provided by smart energy systems open up opportunities for innovation and unlock new lines of research, but also raise issues around how to ensure consumer privacy is respected. The World Economic Forum said that “one of the greatest individual challenges posed by new information technologies is privacy. We instinctively understand why it is so essential, yet the tracking and sharing of information about us is a crucial part of the new connectivity”. Victoria MacGregor, Director of Energy at Citizens Advice, explained that “robust protections are in place around the smart-meter rollout around data privacy and interoperability, but that does tend to fade away as you start moving into the smart home”. She added:
We think that interoperability and interchangeability as principles are absolutely vital for consumers, because it stops existing monopoly companies taking advantage. Then we do get quite a lot of consumers contacting us with concerns about data privacy. Transparency and consumer control over their data—again as key principles as we move to a new system—whether that be in regulating or in policy, are things that we think are absolutely vital to give people the confidence to move to these new services.
46.The Government must stay on top of the developing challenges associated with data protection and privacy. While these issues are being considered in relation to the smart-meter roll-out, the Government needs to ensure that it is thinking ahead about these issues in the context of more fully-connected smart homes and businesses.
47.The full potential of the digital energy economy will require consumer consent and engagement in an area that is not typically on people’s minds. Stimulating and supporting people to rethink how they use energy and to optimise their use of smart and connected devices will be vital. Energy Unlocked told us that:
A number of companies heading in this direction such as Tesla, SolarCity and NEST are now household names, and the valuations show that these companies are capturing energy consumers’ imagination. Many others are not yet in the public eye but are working to apply new technologies and business models to the energy sector.
Sacha Deshmukh, CEO of Smart Energy GB, suggested that consumers will be able to engage in the same way in the energy market as any other aspect of their life when it is digitised. He explained that energy is an enabler and that:
There will be a marketplace where energy is much more closely aligned with other elements of our lifestyles and consumers will engage in that more deeply. Until that time, lots of people are doing their best to help consumers to engage in an analogue market. That is a good thing—it is not good to have a load of people stuck on deals that are not great—but it is only ever going to be suboptimal until it is digitised.
48.Consumer-driven change in the energy market can be a result of direct engagement and consumer interest, of systems smart enough to adapt to consumer preferences and reduce energy use without direct consumer actions, or through the use of intermediaries who manage changes on behalf of individuals. Citizens Advice explained:
New entrants with superior customer service and/or better technology can act as intermediaries between energy companies and consumers, taking control of supplier choice. […] The primary benefits of intermediaries should be cost and convenience. If implemented successfully, intermediaries should make it easier for consumers to reduce the price they pay for energy, the time spent searching, and potentially the quantity they consume. In practice this means helping consumers find the cheapest energy tariff, reduce the time they spend using electrical appliances, and improve the energy efficiency of appliances.
49.However, the ability to engage in the market will not necessarily mean greater consumer engagement. EnerNOC explained that:
Software will make it possible for many more customers to participate, but for the customers to want to do so, there has to be enough benefit to them for it to be worthwhile. The best way to achieve this is by allowing customers access to all relevant markets – either to buy directly at market prices, or to sell their demand-side flexibility in competition with supply-side resources. While the largest customers will participate directly if offered the chance, smaller customers need help and encouragement.
50.Citizens Advice warned that the use of intermediaries “could also lead to a ‘digital divide’ whereby participant customers increasingly avoid costs passed on to others”. Victoria MacGregor added:
Levels of engagement are low and there is a real risk that as we move forward, you would see the benefits of the new systems just going to that engaged minority. We would want to make sure that we are guarding against that.
51.UK Power Networks told us about their ‘energywise’ project in Tower Hamlets in London, which supports vulnerable customers in managing their household energy usage, whilst helping to also reduce peak demand and cut the cost of strengthening the electricity network:
Customer engagement has been fundamental to ‘energywise’ especially as many of those involved with the trial do not have English as a first language. We have, therefore, worked with charities such as National Energy Action, local trusted community groups that have included social housing landlords and a community centre. This project has given us invaluable insight on how to engage better with vulnerable and fuel poor customers. The energywise recruitment campaign received a positive response from the community in East London.
52.While network companies may realise benefits from helping consumers reduce their energy use, the benefits for energy supply companies are less clear and it is these suppliers that have the closer relationship with customers. EnerNOC told us that:
It is not necessarily in the electricity retailer’s interests for customers to work with third-parties to analyse their data intensively and find potential savings. To maximise its value, it has to be straightforward for customers to access their data and share it with third-party software providers, on as close to a real-time basis as the installed metering system allows.
Sacha Deshmukh also acknowledged that there was an issue with how much consumers believed that energy suppliers and the energy industry as a whole were really trying to get them the best deal, adding that “consumers are ready to be served by a marketplace that works a lot better”. Simon Roberts, CEO of the Centre for Sustainable Energy, told us that “there is no policy driver in the market for those energy suppliers to do something different except where it might benefit themselves”. He argued that unless there was a driver in the market such as a demand reduction obligation for energy suppliers, the UK would remain behind the curve and would have to “play catch-up”. He told us that if energy companies had such an obligation, they would act on it. Sacha Deshmukh considered that more “upstream” interventions were needed and that there was the need for “a fundamental move on from the way in which the market has worked previously”.
53.Messaging will be key to increased customer engagement, as we previously explored in our Home energy efficiency and demand reduction report. We heard that “placing behavioural insights at the heart of the way in which we develop the new system” was vital. Victoria MacGregor explained that:
Fundamentally, the energy market does not work with the way that people actually think and make decisions. If we can see policymakers and regulators using more behavioural science and behavioural insights in framing these new developments, that will make it much easier for consumers to make better choices.
She added that Citizens Advice would like to see the Behavioural Insights Team be much more involved in energy policy-making going forward, to “help markets work in a way that people actually think and act”. Simon Roberts added that behavioural science was not the answer as such but that the Government and regulator “should absolutely embed all of that understanding” when designing programmes such as the smart-meter roll-out.
54.It is vital to communicate effectively to consumers the benefits of smart meters and intelligent devices to manage energy use in homes and businesses. However, the Government must also develop methods to nudge the energy sector towards embracing the opportunities arising from developing a smarter market in which consumers are more engaged and where reduction of demand is valued over increasing supplies of energy. The Government should investigate the pros and cons of alternative approaches to do this, including the potential for a demand reduction obligation.
55.It is clear that the digitisation of the energy system alongside the increasing availability of “internet of things”-enabled technologies and appliances will revolutionise not only the energy market but also the consumer experience. Government will want to ensure that this opportunity for UK households is not held back by regulation or a lack of understanding within Whitehall.
56.Contributors to our inquiry highlighted two nuclear energy technologies that could revolutionise the energy system: Small Modular Reactors (SMRs) and nuclear fusion technologies, including small spherical tokamaks.
57.Innovate UK told us:
Small modular reactors (SMRs) have the potential to supply cheaper, secure, flexible, low carbon energy. They have the significant benefits of providing more flexible operation, allowing improved grid balancing, modular construction to facilitate ‘additive’ power generation, alternative uses and potentially lower full life cycle costs.
Developing the SMR industry could create jobs across the development and supply chains and place the UK at the forefront of the nuclear industry.
58.Our predecessor Committee conducted an inquiry into Small nuclear power in 2014 to explore its place in the UK. It concluded that SMRs could play a role in delivering low carbon energy at lower upfront capital cost compared to large conventional nuclear reactors but that the commercial viability of SMRs remained unclear. It recommended the Government take a proactive role in driving forward the development and deployment of these reactors in the UK.
59.In 2015, the Government announced that it would invest £250 million in a nuclear research and development programme to enable the UK to be a global leader in innovative nuclear technologies. In March 2016, it launched the first phase of its SMR competition to gauge market interest among technology developers, utilities, potential investors and funders in developing, commercialising and financing SMRs in the UK. It is too early to comment in detail on the extent to which Government’s approach is driving forward the development and deployment of SMRs. This may be an issue that our successors wish to scrutinise in the future.
60.The Government hopes to establish the UK as a global leader in the Small Modular Reactor (SMR) market. Our successors may in due course wish to investigate progress on the development and deployment of SMRs.
61.We heard both in the UK and the US that nuclear fusion, though many years away from demonstration and commercialisation, could be a revolutionary innovation “because it would produce abundant base load power with no CO2 emissions”. In the United States, we heard that the main challenges to the development of the technology were the difficulty of starting the reactions, technical complexity, high capital costs, and long engineering and development timescales. We discussed different fusion technologies and the various programmes and funding for nuclear fusion. We heard the US industry’s worry that, once the development difficulties had been overcome, fusion technologies would hit lengthy regulatory requirements that could set back product commercialisation for many years after it is technically deployable. We also touched upon the public perception of nuclear technologies and how the difference between nuclear fusion and fission could be communicated.
62.The UK Atomic Energy Agency set out in detail the UK’s involvement in fusion research both in a domestic and international setting:
The UK’s national fusion laboratory, Culham Centre for Fusion Energy (CCFE) […] is a leading player in the worldwide fusion programme. […]
The project that will confirm if [a commercially viable fusion machine] is possible is under construction at Cadarache in southern France. ITER is a €15 billion experiment backed by Europe, China, India, Japan, Russia, South Korea and the US. […] ITER – expected to begin operating in the mid 2020s – will produce 500 megawatts of fusion power […]. Although it will not be connected to the grid, a successful ITER will enable the project’s partners to proceed with plans for fusion power stations using the tokamak design.
63.The Centre for Nuclear Engineering at Imperial College London added that:
Capital costs (mostly materials) [of Small Spherical Tokamaks] will reduce rapidly. […] The USA and UK are currently the world leaders in SST technology and Tokamak Energy Ltd located in Oxfordshire are working closely with US teams at MIT and Princeton in developing the technology.
64.Fusion is an innovation for the next generation. In the United States, the prospect of over-regulation was clearly a worry. The UK is already involved in fusion projects and is home to some of the world-leading companies exploring this field. There is an opportunity to be a pioneer and world-leader in this area. Such is the potential of this technology, the Government should monitor and engage with developments in fusion research and plan ahead to minimise regulatory barriers to development and deployment.
65.It is unlikely that one single innovation will emerge to solve the issues faced by the energy sector. Rather, the energy transition will be led by the successful integration of a number of existing and developing technologies that, together, will improve the entire system. The UK is a world-leader in many of the clean technologies discussed in this report and their development provides an opportunity for UK jobs and the UK economy. These technologies need to be supported so that a real market can develop.
66.The Institute of Physics told us that “realising any of these potentially revolutionary advancements will require sustained investment in research through the science budget”. In the United States, we learned that energy innovation can be optimised by close partnership between academia, where many innovations begin, industry, which is placed to carry them to market, and government, which best understands the public need. In Washington State, the Department of Commerce is putting money into the University of Washington’s Clean Energy Institute because of its outward-facing, entrepreneurial focus. By doing so, it has created the right environment for companies creating cutting edge clean energy products to develop in Washington State. Energy Unlocked said “what these innovators care about are market conditions that level the playing field for their new solutions, and a policy and regulatory framework that does not overprescribe what the future will bring”.
67.By harnessing the opportunities presented by the current energy transition, it would be possible to create the right environment for the UK to be the global leader in the green technology sector. To do so, the UK needs to get regulation right, as we have explored across the different technologies discussed in this report.
68.The independent environmental consultants E3G explained that “a fundamental rethink of market and regulatory arrangements is required before we can take full advantage of these innovations”. Siemens also stressed the importance of deploying these technologies in the marketplace:
We also need changes to markets and for government to create opportunities for large-scale deployment of these technologies so that we can learn what they really cost and what part they can play in the UK’s future energy landscape.
69.Legislation therefore needs to promote innovation, a level playing field for all low-carbon technologies, and the right regulatory framework for new market entrants across the board. The UK has all the tools in hand to lead this transition. But what it needs now is certainty of policy direction to support the “vibrant start up scene in the UK”. The Government needs to seize the opportunity presented by the ‘green tech’ sector and develop a governance regime capable of delivering policy coherence along the value chain, across borders and between sectors.
70.Technological leadership can be lucrative, but often occurs on longer timescales than private investment is comfortable with so there is a role for Government in driving energy innovation. The UK has world-leading universities: leveraging these to attract and retain international talent, and support innovation throughout its cycle, is crucial to achieving an energy revolution. The Government should support efforts to get the next generation of students interested in (1) energy research, and (2) the policy implications of their research. The Government should embrace tripartite collaboration between academia, industry and government where projects help to address the UK’s long-term decarbonisation goals.
71.The energy revolution presents a huge economic opportunity for the UK. With the appropriate strategy, policies and regulatory framework in place, Britain can become a world leader in the green technology sector. The Government should make green technology a top priority in its forthcoming industrial strategy.
4 The trilemma relates to the challenge of meeting three goals: ensuring energy security, ensuring affordability for consumers, and meeting long-term decarbonisation goals
5 The Anaerobic Digestion and Bioresources Association (), Mr Chris White (), UK Parliament Youtube channel, ,’ accessed 6 October 2016
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7 Stag Energy Development Co. Ltd (), Cambridge Carbon Capture Ltd (), Origen Power Ltd ()
8 Mr Moore (), Landmark Associates Ltd (), Act on Climate Ltd ()
9 Mr McCann (), Electricity Storage Network (), Swanbarton limited ()
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22 Mr Moore (), Intel Corporation (UK) Ltd (), E.ON UK Plc ()
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32 Mr Slater ()
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34 The Royal Academy of Engineering (), London South Bank University ()
35 Renewable Energy Association ()
36 UK Power Networks ()
37 Q1 [Barry Hatton]
38 from Barry Hatton, UK Power Networks, to the Committee, 12 October 2016
39 Nissan ()
40 Q1 [Barry Hatton, Dr Nina Skorupska]
41 Q1 [Barry Hatton, Dr Nina Skorupska, Dr Jill Cainey]
42 National Grid ()
43 UK Power Networks ()
45 Q3 [Dr Jill Cainey]
46 Q3 [Dr Jill Cainey]
47 Q4 [Dr Jill Cainey]
48 Q6 [Dr Nina Skorupska]
49 Q6 [Dr Nina Skorupska]
50 Q6 [Amanda Lyne]
51 Q6 [Amanda Lyne]
52 Q11 [Dr Jill Cainey]
54 Q8 [Dr Jill Cainey]
55 Q8 [Dr Jill Cainey]
56 Q8 [Dr Jill Cainey]
57 Refer to paragraph 32 for more detailed information about the Capacity Market
58 Renewable Energy Association ()
59 Q6 [Dr Nina Skorupska]
60 Q6 [Dr Nina Skorupska]
61 Q14 [Dr Nina Skorupska]
62 Q14 [Dr Jill Cainey]
63 Q14 [Dr Nina Skorupska]
64 Renewable Energy Association ()
65 Department of Energy and Climate Change, Contracts-for Difference: Consultation on changes to the CFD contract and CFD regulations (May 2016)
66 Q20 [Dr Nina Skorupska]
67 Renewable Energy Systems ()
68 Scottish Renewables ()
69 UK Energy Storage Hub Oxford ()
70 Electrical Contractors’ Association ()
72 Q7 [Dr Nina Skorupska, Dr Jill Cainey]
73 California legislative information, ‘,’ accessed 7 October 2016
74 Q17 [Dr Jill Cainey]
75 Q 17 [Dr Jill Cainey]
76 Q 17 [Dr Jill Cainey]
77 Q17 [Amanda Lyne]
78 Q18 [Dr Nina Skorupska]
79 Q2 [Dr Nina Skorupska]
80 Institute of Mechanical Engineers ()
81 Renewable Energy Systems ()
82 National Grid ()
83 National Grid ()
84 Dunelm Energy (), Miss Carson (), Energy Managers Association (), Newcastle University Institute for Sustainability (), Energy Unlocked (), Tempus Energy Technology (), KiWi Power (), E.ON UK Plc (), National Grid (), UK Parliament Youtube channel, ,’ accessed 6 October 2016
85 Innovate UK (), EnerNOC (), National Grid ()
86 Energy Managers’ Association (), Western Power Distribution (), E.ON UK Plc ()
87 National Grid ()
88 Scottish renewables ()
89 Q27 [Professor Jim Watson]
90 Q27 [Phil Sheppard]
91 Q28 [Sara Bell, Colin Calder]
92 Q28 [Sara Bell]
93 Q28 [Colin Calder]
94 National Grid ()
95 from National Grid to the Committee, 12 October 2016
96 National Grid, Letter on the Decision on DSBR Procurement for 2016/17 (August 2016)
97 Qq30–34 [Sara Bell, Colin Calder, Yoav Zingher]
98 from National Grid to the Committee, 12 October 2016
99 from National Grid to the Committee, 12 October 2016
100 Q32 [Phil Sheppard]
101 Energy and Climate Change Committee, , Eighth Report of Session 2014–15, HC 664; Energy and Climate Change Committee, First Report of Session 2016–17, , HC 267
102 Q35 [Sara Bell, Colin Calder, Professor Jim Watson], KiWi Power ()
103 HM Government, , Cm 9090, June 2015
104 Q35 [Sara Bell, Professor Jim Watson]
105 KiWi Power ()
106 Q38 [Yoav Zingher]
107 Q36 [Yoav Zingher]
108 KiWi Power ()
109 KiWi Power (), Q37 [Yoav Zingher]
110 Scottish renewables ()
111 Q32 [Colin Calder]
112 California Public Utilities Commission, Decision resolving several phase two issues and addressing the motion for adoption of settlement agreement on phase three issues (December 2014)
113 Green Tech Media, ‘,’ accessed 10 October 2016
114 Q27 [Colin Calder]
115 University of Exeter Energy Policy Group (), Scottish Power ()
116 Intel corporation ()
117 Mr Pearson (), Landmark Associates Ltd (), Demand Logic (), Innovate UK (), Control Networks Solutions (), Atkins (), Intel Corporation (UK) Ltd (), Smart Energy GB (), University of Exeter Energy Policy Group (), UK Power Networks (), E.ON UK Plc (), Heriot-Watt University (), The Royal Academy of Engineering (), London South Bank University (), UK Parliament Youtube channel, ,’ accessed 6 October 2016
118 Demand Logic (), Innovate UK (), Control Network Solutions ()
119 Heating and Hotwater Industry Council (), Intel Corporation (UK) Ltd (), EnerNOC (), The Royal Academy of Engineering ()
120 Heating and Hotwater Industry Council ()
121 Citizens Advice (), Swanbarton (), Smart Energy GB (), Electrical Contractors’ Association (), E.ON UK Plc ()
122 Innovate UK ()
124 World Economic Forum, ‘,’ accessed 8 October 2016
125 Q62 [Victoria MacGregor]
126 Q62 [Victoria MacGregor]
127 Energy Unlocked ()
128 Q56 [Sacha Deshmukh]
129 Citizens Advice ()
130 EnerNOC ()
131 Citizens Advice ()
132 Q56 [Victoria MacGregor]
133 UK Power Networks ()
134 EnerNOC ()
135 Q55 [Sacha Deshmukh]
136 Q57 [Simon Roberts]
137 Q57 [Simon Roberts]
138 Q59 [Simon Roberts]
139 Q60 [Sacha Deshmukh]
141 Q56 [Victoria MacGregor]
142 Q56 [Victoria MacGregor]
143 Q57 [Victoria MacGregor] 11.28
144 Q58 [Simon Roberts]
145 The International Atomic Energy Agency defines ‘small’ reactors as those that produce the equivalent electric power of less than 300 MWe. SMRs are designed in a way that allows them to be manufactured at a plant, brought to site fully constructed, and installed module by module, thereby potentially improving manufacturing efficiency and cost while reducing construction time and financing costs. Innovate UK (), Algometrics Limited (), Centre for Nuclear Engineering, Imperial College London (), GE Hitachi Nuclear Energy (), Institution of Mechanical Engineers (), National Nuclear Laboratory (), Nuclear Industry Association (), Institute of Physics (), The Royal Academy of Engineering (), Moltex Energy (), Energy Process Developments Ltd ()
146 Innovate UK (), Centre for Nuclear Engineering, Imperial College London (), Tokamak Energy Ltd (), United Kingdom Atomic Energy Authority (), Institution of Mechanical Engineers ()
147 Innovate UK ()
148 GE Hitachi ()
150 HM Treasury, ‘,’ accessed 9 October 2016
151 Department for Business, Energy & Industrial Strategy, ‘,’ accessed 8 October 2016
152 Centre for Nuclear Engineering, Imperial College London ()
153 United Kingdom Atomic Energy Authority ()
154 Centre for Nuclear Engineering, Imperial College London ()
155 Innovate UK (), University of Exeter Energy Policy Group (), Association for Project Management ()
156 Atkins (), The Royal Academy of Engineering ()
157 Institute of Physics ()
158 Energy Unlocked ()
159 Tempus Energy Technology (), University of Exeter Energy Policy Group ()
160 E3G ()
161 Siemens Plc ()
162 UK Hydrogen and Fuel Cell Association (), Tempus Energy Technology ()
163 Dunelm Energy ()
164 E3G ()
14 October 2016