Disruption necessitates an energy security and resilience ‘rethink’

Olivia Carpenter-Lomax and Craig Lucas from the Institution of Engineering and Technology (IET) outline some of the conditions needed to enable sector-wide innovation amid challenges posed by gas and fuel disruption.

Decarbonisation of the energy system is a huge challenge, requiring fundamental changes in how energy is generated, transported, stored, managed, and supplied. It requires a redesign of a system that was planned and laid down many decades ago, and genuine cross-system coordination to ensure resilience.

Recent events have highlighted that with climate and markets both becoming more volatile, the UK will need to think hard again about energy security and resilience.

There also needs to be a deeper conversation about how to engage with consumers, who in the short term are suffering unforeseen impact of higher prices and greater uncertainty.

Accelerated decarbonisation critical

Gas markets are global, and it’s unsurprising to see a price spike as we emerge from Covid after a summer where storage levels were kept lower than usual.

The potential for a scenario like this was foreseen by some experts over a year ago – producers had ramped down production during lockdowns, the exact shape of the recovery was very hard to predict, and it is not straightforward to bring back closed or mothballed production.

The shortage was compounded by relatively low wind in Europe this summer, which has meant more use of gas generation in the electricity sector, and less diversion of gas to storage.

There is a healthy debate about whether gas storage – or lack thereof – makes a material difference, but the UK is an outlier in choosing to get by with very little strategic reserve. We are relying on the market for price resilience and physical resilience, at a time when global market prices are being shaped by forces we cannot control.

The government’s positioning that ‘we are not going to run out of gas’ underplays the fact that price resilience also really matters for the whole economy.

We have historically assumed that we are in a big enough gas market that we are not going to be held to ransom and don’t need to think about strategic storage. We are retiring our coal and nuclear fleets earlier than might have been foreseen and falling back on gas as the balancing fuel for our electricity market, increasing the interdependency between the two.

This underlines the critical need to accelerate deployment of all forms of low carbon generation, including new nuclear, and increasing our investment in storage technologies, low carbon heating, and energy efficiency, so that we do not sleepwalk into greater dependence on a global gas market where we are increasingly less self-sufficient.

Need for innovation in energy services

It’s not a surprise to see retailers exiting the market. Retailers were hit last year with reduced demand and climbing debt issues. However, the scale and impact of what is now happening is unprecedented, and we think exposes real fragility in our overall regulatory approach.

Energy retail is a business model with a lot of pass-through costs and social obligations, and it has had no specific tailored support as a sector despite these complexities.

The IET is concerned that the impact of the current shocks on consumers and major energy users will impinge on our ability to reach net zero, for several reasons.

Ultimately net zero transition requires buy in from consumers, which this crisis has made more complicated. Government has suggested for years that switching providers is the way to save money and the motive force to make the energy market more innovative, but the collapse of smaller businesses through the recent crisis may scare consumers and instead lead to a flight to safety.

Even though lights don’t go out, being told you can’t change supplier and finding nothing on price comparison websites damages consumer trust.

Additionally, this places major challenges on industries and businesses who are not covered by the price cap and can’t pass costs on. The price cap will no doubt need to be re-set higher bringing additional upset and consequence.

Currently, being taken on by a supplier of last resort is a like-for-like transaction.  If we imagine a world where value adding services – like EV charging and storage – are bundled into the market, this might not be so simple.

In the future, provision of flexibility may become as critical and valuable as provision of capacity, or energy.  If businesses fail, will consumers find themselves with stranded assets?  Will we wake up to find that intermediary businesses pose system risks we didn’t foresee?

We know we need innovation in energy services to meet our net zero objectives, but a hands-off approach by government risks a backlash which undermines the very trends we need to encourage.

Support for cross-sector thinking

These crises illustrate that we have a structural resilience issue in our energy supply industries, and that disruption in the supply of these energy vectors have knock-on impacts far beyond the energy sector.

These are still not fully understood even now and will only become more complex as the energy supply becomes more electrified, more reliant on intermittent renewables, requiring storage and demand side flexibility services.

We call on government to redouble its support to cross-sector thinking, within the energy market. To enable the innovations we need to decarbonise our electricity system by 2035, it must ensure future system design choices have genuinely whole systems resilience built in. It must work with industry to ensure actual implementation of the solutions are developed, with a focus on future system thinking and design.

Industry also needs to actively participate in and drive future system design, including collaborating with competitors and other sectors to truly understand the vulnerabilities, dependencies and opportunities, and prioritise the needs of everyone in society.

Olivia Carpenter-Lomax and Craig Lucas respectively chair the energy sector executive committee and the energy policy panel of the Institution of Engineering and Technology