The energy sector is set for a fundamental change. Long-term, think Blade Runner—everything everywhere integrated, controlled by AI and pre-set protocols but the outcome hopefully more utopian than dystopian. Back to today, an array of factors driving the change range from economic and social to environmental, technological and political. They will transform how electricity and heat is produced, managed, and delivered and will fundamentally change our current energy model from one that features large, localised power generating stations delivering power through the national network, to a more decentralised system. The need for sufficient baseload power and flexibility in the system to manage peaks and troughs in generation will remain but will require a more open, intelligent, automated, and flexible system.
Various innovations are coming to the fore to develop a more intelligent and responsive energy system, but the speed at which these can be delivered very much depends on political direction. If we consider how long it took to deliberate our next phase of nuclear development, it is unclear if political direction will provide sufficient motivation and engagement from investors, such that we can ensure our future energy system will be as integrated and innovative as it needs to be.
The answer to our energy future will come from a range of new technologies, business models, and demand response mechanisms, be that automated or through smart contractual arrangements. There are many themes being discussed, but shorter-term, the following seem to be attracting the most interest:
- Bioenergy
- DSR products and peer-to-peer energy trading
- Carbon capture
- Localised and grid-based innovations for integrated smart energy systems involving community energy, local supply markets and trading, consumer behaviour and engagement, demand-side flexibility, demand-side management, and demand-side response
- Energy efficiency innovations, including improved insulation, use of buildings, and efficiency of appliances
- Continued development of renewable power and heat generation
- Innovations in policy, governance, and regulation
- Electricity storage
As follows, those most keenly discussed are very interrelated and likely to have some impact in the short term:
Storage
Storage presents a real opportunity for the UK with the innovation and reducing costs over the last five years seen as an enabler within the sector. Its importance is reflective of the need for security of supply, support for the growth of renewables, and the potential for more stable pricing. However, it will require Government financial support and clear legislation to develop technologies, infrastructure, legislation, and a supporting regulatory framework to fully integrate the technologies into the system. The recent (T-4) capacity market auction and associated derating factors has been seen as a blow to battery developers, where new derating factors published by government made short duration storage assets less valuable in the capacity market, compared with more traditional market participants. Being able to secure these bankable contracts is an important revenue stream to finance development, but the derating factors lower the revenue open to battery developers. New suppliers such as Vattenfall are coming to the UK to deliver supply solutions based on renewable electricity generation and storage, so the model is there, but it will take time for the industry and regulation to catch up before it becomes a game changer.
A drive for Government to set out a prominent and open commitment to establish the UK as a world leader in electricity storage is reported and sets a storage procurement target for 2020. However, with 2020 only two years away, it seems somewhat unlikely with so many other projects such as the smart metering rollout delayed well beyond original deadlines. You also have to ask what message does the recent capacity market auction present to a burgeoning industry?
That said, the view of our Risk Management team is that the structure of the power curve suggests that power storage technology is getting closer, and the effect is likely to be a paradigm shifting one when it comes to decarbonising the grid.
Demand Side Response Technologies and Mechanisms
Critics cite that the right policy framework needs to be put in place to unlock the full potential of demand-side response (DSR) technologies. The view is that the market is too short-term and costly for participants to engage in. Considering the potential for storage and localised on-site generation technologies over the next 5-10 years, there will be a real opportunity to use DSR as a mechanism to benefit consumers and ensure the availability of power to the grid during peak periods, as well as the ongoing opportunity to balance demand and provide security of supply to reduce energy costs.
Digitisation of our energy system
It is interesting that the assumption of many is that the digitisation of the energy system is primarily focused on domestic energy consumers, paralleling the advancing “internet of things”. It will have a fundamental impact on the market in terms of demand and supply interaction, integrating smart-enabled devices, appliances, appropriate networks, and technologies to revolutionise the energy market. However, it may be a longer-term eventuality with the ongoing delays in the roll-out of enabling technologies such as smart meters and issues regarding communications with the initial phase (SMETS1). Notwithstanding this, Government will need to act now to ensure development is not held back by regulation. There are calls for example that the Central Switching Service (CSS) is a solution only really fit for today’s market and not a suitable solution for digitisation and the adoption of blockchain technology to realise a decentralised, flexible and open energy system.
DSR and digitisation do of course go hand in hand, where blockchain technology providers are seeking to become the arbiter of our future energy value chains, providing an open system environment for the significant increase in energy-related assets, associated data, and the level of automated secure and trusted interaction required, both now and more so in the future. Digitisation and decentralisation of our energy systems is fundamental to the realisation and operation of a smart grid of decentralised energy assets. Blockchain technology has the potential to be at the core of this disruption to the traditional energy model of today and the development to watch, the technology which, from a transactional perspective, underpins it all.
Will our politicians and regulators make the right decisions now to enable a quicker transition to this paradigm?
