Current policies ‘not enough’ to attract net-zero investment

Current policies and regulations will not be sufficient to attract the hundreds of billions of pounds of investment required to decarbonise the UK’s energy system, industry figures have warned.

Speaking at an event held by Energy UK in London, they said significant changes will be needed if the country is to fulfil its commitment to reduce greenhouse gas emissions to net zero by 2050.

Kyle Martin, head of market insight at the consultancy LCP, said in the more ambitious net-zero scenario envisioned by the Committee on Climate Change, generation capacity would more than triple over the next three decades to 360GW. This would require an investment of approximately £340 billion.

He said the government has created numerous schemes to deliver these assets – Contracts for Difference (CfD) for low-carbon generation, the Capacity Market for dispatchable power, the Cap and Floor regime for interconnectors, and perhaps soon a regulatory asset base (RAB) mechanism for nuclear plants.

“But as we need more of everything – more renewables, more capacity – I don’t think any of these mechanisms really link up,” he added. “Getting to net zero doesn’t really work with any of these policies.”

A huge volume of renewables would need to be built – so much so that on some days “you’re looking at maybe 120GW of power being curtailed”.

Yet it is unclear how this would be achieved. The CfD auctions currently planned by the government will not be enough and any growth in renewable capacity will depress capture prices, undermining the case for investment on a merchant basis. Martin said negative prices have already started to emerge on the day-ahead market.

He continued: “Investing in these technologies and new ones going forward will probably require some rethinking.”

Cathy McClay, director of strategy, policy and regulation at Sembcorp Energy UK, said she was more concerned about whether there would be enough flexibility available to operate a zero-carbon power grid.

She described the electricity system operator’s (ESO) efforts to overhaul balancing and ancillary services as “encouraging”, but said she worried that smaller markets would quickly become saturated with existing technologies at the expense of those still being developed.

“How do we get to further down-the-line technologies?”, she asked, adding: “I don’t think we can run the system off a bunch of batteries and some recips.”

Both agreed that renewables should provide more of these services but said the nature of the subsidies they receive, which are only paid out when they are generating, discourages them from doing so.

“The thing about wind is, especially when you have a windy day, they don’t want to turn off, turn down, turn up,” said Martin. “They just want to run flat out because they get paid to do so.”

McClay suggested several solutions, firstly noting that the length of a CfD is currently defined in years: “If you made it a finite number of megawatt hours, for instance, that would encourage people to pull back.”

She said generators could alternatively receive availability payments if they are able to produce power but are instead providing services, as happens in the Irish market.

McClay also highlighted an issue over networks’ participation in these services, which she suggested posed a conflict of interest.

Ofgem recently agreed to allow Electricity North West to continue selling a new type of demand-side response service – whereby it lowers the voltage on its distribution network to unlock spare power – over the RIIO2 price controls. Any additional costs it incurs in providing the service will be subtracted from the revenues.

The regulator said this would be better for consumers than including the costs within its spending allowance and requiring the company to provide it to the ESO for free. As only network operators can provide the service, the other alternative was banning it entirely.

McClay, who previously served as the ESO’s head of future markets, said one of her biggest fears whilst in the position was that services like this “would undercut the market and everyone would leave.”

“You’re supposed to be facilitating this process and now you are judging my project whilst being in competition with me and I think that’s dangerous,” she remarked.

“The question of how you pay for them is really important. If you get paid for it through RAB and then you get paid the market price as well, that seems kind of wrong.”

With regard to networks, Martin raised concerns about the slow pace of reinforcement: “We all know we have constraints in Scotland. Getting those constraints fixed and having a system that can deliver the power where it’s needed is probably around eight years behind schedule.”

This problem has recently been exacerbated by an ongoing outage on the Western Link – a new 2.2GW subsea cable connecting electricity networks in Scotland and North Wales. According to analysis by Cornwall Insight, curtailment payments to wind generators hit a record high of nearly £31 million in January, partly as a result of the failure.

Citing the ESO’s latest Network Options Assessment, Martin said four more of these high-voltage direct-current “bootstraps” as well as four new overhead power lines would be needed to support the planned buildout of renewables between now and 2040.

He said the underlying problem is that both Ofgem and the network operators are too “risk averse”. Neither wants to be left with a stranded asset for which networks and their customers will be forced to pay: “I think Ofgem likes to normally wait until it’s definitely needed”.