Demand Management is not your problem! (or is it?)
Should the consumer be spared the complexity of the electricity market’s supply and demand challenges?
I’ve been looking at the UK electricity market over the last couple of weeks, seeking to understand how the economics of the energy sector works. I’ve previously criticised Financialization and its role in both complicating and impeding climate change mitigation efforts, including solar energy. This time, I looked into the electricity wholesale market and how it functions behind the scenes of the retail market offered to consumers, dynamically pricing and trading energy between market participants based on supply and demand.
The interesting thing I found about the wholesale market was the inclusion of “Non Physical Traders”[1].
What social value does this type of participant add to the market? Is this simply another instance of misguided deregulation, creating secondary markets, speculation, price volatility and market instability? Are energy traders simply value extractors hedging their bets on the rise and fall of energy surpluses and shortages? I’d love to hear the view of former energy trader Amit Gudka, who quit to co-found Bulb, a 100% renewable energy ‘challenger retailer’ priding itself on a single competitive variable tariff, a digital customer experience and a highly effective referral scheme. Did he ‘see the light’ (pun intended) or does he have no regrets about being a ‘Non Physical Trader’?
The other interesting thing about the wholesale market is the impact that renewables are having, even causing negative prices in some cases![2] This is caused by renewable energy (e.g. Solar PV and Wind) generators flooding the market with more electricity supply than is demanded at that particular time. In these instances, the generators can either switch off their production or pay retailers to take the electricity. These electricity surpluses are both inefficient and can be dangerous to the health of the grid. Similarly, the practice of ‘baseload’, whereby controllable (e.g. fossil fuel) generators are used to produce a minimum supply of electricity regardless of actual demand poses similar inefficiencies.
As a result, the government and industry are going to great lengths to create a smarter system whereby supply and demand is better monitored, reported, managed and balanced. There are 3 complementary solutions to the Demand Management problem:
- Store electricity (e.g. via batteries), charging at times of surplus/low demand, discharging (i.e. generating) at times of shortage/high demanded
- Apply better information management to the grid, improving data/ information/ knowledge/ wisdom about real-time electricity demand and supply
- Extend grid management controls into the consumer realm, creating a two-way flow of both electricity and collective demand management burden
A major announcement from UK Gov Business Secretary Greg Clark MP yesterday (24th July 2017) has done exactly this. The Department for Business, Energy & Industrial Strategy has put forward an exciting ambition to establish the UK as a world leader in battery technology through the launch of a £246m Faraday Challenge. The secondary part of this news story included new rules that will enable money saving via two-way smart-grids and smart appliances.
The BBC’s environment analyst Roger Harrabin reports[3]:
“The rules are due to come into effect over the next year.”
“And they will even support people who agree to have their freezers switched off for a few minutes to smooth demand at peak times.”
“The tiny energy savings of millions of people and firms will be pulled together into packages by traders, who will offer substantial chunks of energy saving to the National Grid at the click of a computer.”
Perhaps there is a value-adding role for energy traders after all!
Personally, I agree there is a bright and essential future for energy storage (be it at a utility, commercial and/or residential level) and for better exchange of information to improve demand management. At a push, the two-way flow may even extend from embedded/micro-generation systems (e.g. solar PV/ wind turbines) to include (re)claiming electricity from storage batteries when most needed by the grid.
However, I can’t see a future where consumers allow for their appliances (e.g. fridges/freezers) to forgo charging temporarily for the sake of the greater good, or for their electric vehicles to be allowed to discharge in order to provide electricity back to the grid. The consumer society we live in is simply not accustomed to this two-way interaction with a utility and would struggle to understand and accept the complexity which this would bring. As it is, even in the non-smart one-way electricity supply model most of us live in, more than 60% of customers aren’t benefiting from the best deal, remaining on their supplier’s standard variable tariff[4] — in many cases because they don’t have the knowledge or awareness to take action. So far, consumers have been shielded from the price volatility existing in the wholesale market and the retail market model has not pushed the burden of demand management onto the consumer. Besides basic ‘time of day’ tariffs (e.g. Economy 7), there are currently very few pricing signals available to the average consumer to assist with grid-wide demand management.
Add to this a new market in which traders can aggregate and sell households’ electricity to the grid, and you head towards something that can become a speculative derivatives market akin to what caused the financial crisis of 2007–8.
The BBC article also warns about the potential security risks that a more connected two-way grid may bring about:
“Some will urge a degree of caution amongst the enthusiasm: the more the energy industry embraces the digital age, the more vulnerable it will be to hacking.
Recent reports suggest that Russian hackers may already have tried to compromise the system.”
In summary, I’m very excited to see the UK step up to the Energy Storage challenge that goes hand in hand with a move towards more (variable/intermittent) renewables. However, I caution how much two-way control the grid should be able to exert on households. Instead, I would rather the UK government reverse their recent cuts to the FiT and encourage more micro-generation and self-consumption. Either way, the grid must undoubtedly become smarter.
1 https://www.elexon.co.uk/wp-content/uploads/2015/10/beginners_guide_to_trading_arrangements_v5.0.pdf
2 https://www.theguardian.com/business/2017/jun/17/green-energy-surge-fuels-anxiety-uk-power-grid
