We are all facing a new, simpler existence. For my part, I have been self-isolated for three weeks. My little flat in central London has become almost my entire existence, my days have settled into a simple routine, and I’ve had plenty of time to reflect.
Although COVID-19 presents an uncertain future, it is also a unique opportunity for the industry to reflect. The energy market that we have is not fit for purpose. It is too complex and uncoordinated, and this will lead to bad outcomes for consumers unless we seriously start talking about reform.
We used to talk about a ‘missing money’ problem in GB. But as our energy system becomes increasingly complex, and objectives increasingly critical, I think we should be talking about the ‘misaligned money’ problem.
We need to be clear on the costs and risks that the misaligned money problem poses for net zero. We also need to return to principles of consumer-driven outcomes, efficient dispatch (across the whole system), and simplicity.
My day begins with the kettle
Depending on my morning, it’s a mug of tea (Barry’s tea bag, boiling water); a pot (heat the teapot, loose leaf, milk first); a coffee (off the boil, black). I need caffeine, but the process matters.
In 2020, the despatch and investment signals are a complex orchestra of different revenue streams – the revenue ‘stack’ – which invariably includes payments for capacity, energy, balancing services, and embedded benefits.
It used to be simpler. For the first 12 or so years of New Electricity Trading Arrangements, we had an energy-only market geared towards mostly transmission connected-capacity, a Balancing Mechanism (BM), and payments for ancillary services, often in long term contracts.
Since then we have (among other things):
- Introduced a Capacity Market (CM), Contracts for Difference, and Carbon Price Support
- Introduced some new balancing services, taken some away, and then re-vamped the whole suite, against a context of changing system needs
- Introduced a single imbalance price (enabling ‘Net Imbalance Volume chasing’)
- Introduced the concept distribution system operator-procured flexibility
- Seen a number of local and peer-to-peer projects
- Seen the kind of technological change that seemed unimaginable 20 years ago when our market was designed.
I try to juggle too many things during the day
Working from home is tricky: between work and looking after my wellbeing, somehow I’ve forgotten how to eat, have pins and needles and…was that a mouse?
We have more revenue streams than we ever had since privatisation, controlled by an increased number of organisations. In theory, with market driven solutions, and good governance, it should not matter if we have different value coming from different places. But there are some heroic assumptions in there that I think it is time to challenge.
For example, notionally value in one market will inform another; for example, wholesale and other revenues will be priced into CM bids, and this should mitigate the risk of capacity receiving ‘double payments’.
However, the landscape of revenue streams is diverse, and difficult to disentangle. Rules are changing, and value is shifting around. Given the uncertainty, there are differing views on what the value will be going forward. This will be reflected in less efficient bids and ultimately less efficient outcomes for the system and the consumer.
We also need to challenge how well different organisations can work together, without a very clear coordinating function. Even when organisations have the same objectives, it often feels like they are not moving in the same direction.
An evening walk gives me a chance to reflect
I focus on the positives, the silver linings and the ‘learning opportunities’. How I used to say I wanted a simpler life. And now I have one. As well as a lot of time to (virtually) connect and figure out what’s important.
I am not the first to ask these questions, and there are a number of projects across the industry that are looking to coordinate and ensure the whole system is fit to deliver net zero – for example Ofgem and BEIS’ Smart Systems and Flexibility Plan, the Electricity Network Association’s Open Networks programme and National Infrastructure Commission analysis.
However, in the scheme of things (and certainly in light of the last few months) these workstreams have felt slow-moving. Each organisation has ultimately remained responsible for its own patch, and it has felt like there is no single party responsible for assessing the value across the whole system. It has felt like we have been trying to pull disparate strings together, rather than starting from the central objectives and building out.
My evening ends with a kettle
Herbal tea (boiling water, mug, some degree of comfort).
No doubt there will be a period of prioritisation in the coming months and years, and I hope we can use this as an opportunity to focus on what needs to change to get us to net zero by 2050.
It is time we start talking about wholesale governance reform, and challenging whether the energy market is fit-for-purpose to deliver whole system outcomes. We need to put the consumer at the heart of everything. And to facilitate net zero, I think we need we need to start talking about much more coordination of decision making, and centralisation of despatch signals, and of pricing.