Analyst view: 2017 will be a critical year

2016 proved to be a year of change characterised by progressive energy policy on a global scale, juxtaposed with uncertainty caused by Brexit and the US election. With technology at the forefront of innovation, energy security redefining the generation mix and a smart revolution beginning to take shape, 2017 is poised to be another critical year for the UK’s energy infrastructure.

Here are the areas where we expect to see key developments over the next 12 months:

Energy security

The decline of the North Sea’s traditional gas supply poses a fundamental energy security question for the UK. Securing the first shipment of US shale gas at Ineos’s Grangemouth plant and the recent policy reversal on fracking could mean a changing landscape for gas in the UK in 2017. Questions remain over whether more gas-fired capacity will replace the ageing fleet of coal plants set to be decommissioned, particularly with Trafford’s proposed 1.9GW plant giving up its capacity market contract.

The UK looks to be pushing forward with its ambition to transition its energy mix away from fossil fuels, highlighted by 2016’s landmark Hinkley Point agreement. While this reinforces the role of nuclear power in the UK, it is not yet clear if this strategy will manifest itself only through similar projects such as Wylfa and Moorside, or also through more flexible, distributed Small Modular Reactor designs for which the Government recently pledged £250m in R&D funding. Further investment in BioSNG and Drax’s recent approval to convert another coal unit to biomass has paved the way for a more diverse energy mix in 2017.

Structural market upheaval

The changing landscape risks creating some casualties however, with the 34% increase in wholesale gas prices over 2016 jeopardizing the existence of some independent suppliers, with Co-Op recently stepping in to acquire GB Energy’s 160,000 customers. Winter 2017 may yet see further stress amongst suppliers.

National Grid’s divestment of its gas distribution assets also highlights the growing fragmentation of energy asset ownership, and is part of an increased trend towards diverse financial-sector or overseas investment and stewardship. Regulators and policy makers are having to deal with an ever broader range of issues and interests.

Technology-led innovation

Technological developments will continue to play a pivotal role in rising to the challenge of providing a secure and greener energy mix. For the first time, battery storage won 3.2GW of CMA auctions in December and as developers continue to improve the technology for smaller modules, 2017 could see greater economic viability for residential and commercial use.

Micro-Combined Heat and Power (CHP) is another potentially disruptive technology for the domestic gas market, increasing the amount of energy produced from burning fuel to simultaneously generate hot water and usable electricity. While the upfront capital for customers could be significant, falling system costs, innovative financing solutions, and a circa five-year payback may provide a compelling case for wider residential adoption of microCHP. Centrica recently invested £19m for renewable generators in Cornwall, including battery storage and microCHP in 100 homes.

Smart revolution

With the generation mix changing, the increased viability of distributed generation and storage, enabled by technology, smart meter deployment and the evolution of customers to ‘prosumers’, the emphasis on developing a smarter grid will be key in 2017 to manage a wider, more complex connection of power sources and demand nodes.

To play their part, traditional distribution network operators (DNO) which focus on managing the one-way transmission of electricity, must evolve into flexible distribution system operators (DSO) which can navigate a more complex system with nodes of distributed generation, storage and consumption both feeding from and into the grid at any one time. Modelling a range of load scenarios, enhanced system-wide monitoring and cybersecurity become critical capabilities DSOs must develop. DSOs must also look to alternative revenue models such as Electricity North West’s CLASS project trial which targets and incentivises commercial and industrial users to reduce demand during certain times in order to better manage peak loading.

Keeping pace

2016 closed with a flurry of significant events: Drax buying Opus and getting EU approval for its CfD; National Grid selling its gas distribution business; GB Energy collapsing and the Co-Op stepping in acquire its customers; Trafford reneging on its Capacity Market contract; and the latest Capacity Market auction again delivered a low price and a high level of embedded capacity. All signs point to a fascinating 2017, with technology-led innovation likely to be at the forefront of changing how we generate, transmit, store and interact with our energy. Whether policy and market structures can keep pace with the rate of change will be the big question.