UK’s cautionary tale for the NEG

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As Australian stakeholders debate the relative merits and pitfalls for the proposed National Energy Guarantee, it is useful to reflect on the UK’s energy market reform trajectory in recent decades.

UK energy reforms

When the UK transitioned its wholesale energy pool to bilateral trading arrangements in 2001, it also jettisoned its centralised capacity market. Winter supply shortfalls were soon looming large and, while these were dampened to some extent by the global financial crisis and resultant industrial slowdown, reliability joined with the emerging objective of emissions reduction and the ever-present theme of affordability to form an early version of the stated ‘trilemma’ that now dominates energy market policy making across the globe.

Never shy of trailblazing in matters of energy market reform and spurred on by a special, though temporary, synthesis between relevant parts of the executive government and civil service, the UK determined that it would address its capacity shortfall, up its clean energy volumes, and incubate select emerging technologies under reform framework intended to incentive £110 billion investment in UK energy infrastructure.

At the time, many said it couldn’t be done, however the Low Carbon Contracts Company, a hastily erected quango, now manages over 13GW of low carbon new build generation, while the UK’s capacity market that has recently cleared over 50GW to ensure medium term system reliability. The UK now leads the world in offshore wind, a technology for which the subsidy contract strike price halved in the two years between the first and second contract auctions, as construction techniques were proved up and development cost plummeted. Having established the world’s first civil nuclear programme in 1956 but been out of the nuclear new-build game since the mid-90s, the UK is currently constructing the 3.2GW Hinkley Point C facility, and set to deliver some of the world’s most advanced forms of commercial-scale waste-to-energy technology.

The quest for equivalent firm power 

But criticism has followed the UK’s success in equal measure. On 25 October 2017, Oxford University economist Dieter Helm published his findings in relations to the UK’s much-anticipated cost of energy review. Helm was merciless in his critique of the raft of subsidy arrangements and incentive schemes that UK’s energy policy trilemma has spawned, as well as the various agencies and interest groups that have grown around these initiatives, further impeding efficient capital allocation to achieve stated energy objectives.

In Helm’s view, an energy system increasingly dominated by zero-marginal cost renewables requires capacity to be priced by reference to the next increment required to service peak times, rather than use of existing capacity in the off-peak. Helm considers that such pricing of incremental capacity required by the system ought to be administered centrally by the system operator via periodic auctions, and that capacity prices must incorporate the cost of both reliability and emissions intensity. Taking account of his bold recommendations to deregulate distribution network pricing, licensing, and coordination arrangements to facilitate innovation and competition, Helm is essentially recommending the winding down of all existing incentive schemes in favour of a unified auction scheme for equivalent firm power (EFP), a ‘capacity’ metric that would facilitate competition between aggregated distributed energy resources (DERs) and demand side response, and large-scale renewable plus storage technology combinations.

A lesson learned for the NEG?

Helm’s findings were not available at the time the Finkel review was published in July 2017, or when the Energy Security Board set out its proposal for the NEG on 13 October 2017, however their appears to be some opportunity for these principles to be applied, if it is carefully designed.

On 15 February 2018 the ESB released a Consultation Paper in which the risk of market disfunction, calcification through uncertainty, complexity, and perverse incentives are immediate. However, the ESB has emphasised that, far from favouring centralised incumbents, the NEG is technology-neutral and designed to make opportunities for lower cost, lower emission, dispatchable solutions. This suggests that the ESB would welcome unlocking the value of existing DERs and demand side response capabilities by designing NEG requirements in a way that enables distribution-level solutions originated by new entrant aggregators to compete on an equal playing field as traditional trading and hedging arrangements between incumbents. This would support the development of more customer-focussed energy solutions that enable customers to take back some control over their spiralling energy costs.

While an onerous task, given complex web of certification, reporting, and auditing that the NEG will entail, if the ESB can ensure equal applicability of new requirements to centralised and distributed resources, then vigorous competition between incumbents and new entrants to supply low-emission dispatchable electricity may achieve market outcomes that approximate the efficient EFP auctions that are sought in the UK.

 Also read: NATIONAL ENERGY GUARANTEE: An Opportunity For Water Utilities