Nose to the grid stone

We need to knuckle down and get on with smart grid deployment or risk losing many potential benefits, say Bill Easton and Jenny Byars.

Within the UK and internationally there is a broad consensus about the longer-term need to move to smarter grids. However, there is much less clarity or agreement about how quickly this change is needed, or how to make it happen. SmartGrid GB commissioned Ernst & Young to assess the potential benefits of smart grids to Britain. Its report, published at the end of April, provides the broadest assessment to date of the economic impact that smart grids could have.

There are two major findings. First, the investment case for the timely creation of a smart grid appears strong. Second, the timely development of smart grids has the potential to unlock significant benefits across both the smart grid supply chain and in other industries, resulting in economic growth, jobs and exports.

A combination of the Low Carbon Network Fund (LCNF) and academic research has created a strong initial position in Britain. If momentum is maintained, there is potential for Britain to establish a global leadership position in smart grids. This would confer even greater benefits to the country. However, to enable this, some degree of fresh thinking and action by government, regulators and industry is vital.

In terms of direct benefits for networks, the Department of Energy and Climate Change and Ofgem Smart Grid Forum suggest that incorporating smart technologies into distribution over the next 38 years would cost £27 billion, but this would be £19 billion less than using only conventional technologies (which has a price tag of £46 billion). Importantly, the savings are projected to remain as high as £10 billion even if low levels of decarbonisation and electrification occur. These projected benefits far outweigh the potential downside of moving early – which is projected to be no more than £1 billion.

Between now and 2050, expenditure on smart grids could add approximately £13 billion of gross value to the British economy. Jobs will be boosted by an average of 8,000 during the 2020s, rising to 9,000 in the 2030s. The value of exports from this emerging industry could be worth £5 billion between now and 2050, and benefits arising from intellectual property and foreign direct investment may also result.

A smarter grid will also play an important role in facilitating the growth of industries such as electric vehicles, heat, renewables and distributed generation. The development of these industries is vital to achieving Britain’s carbon targets. And if the supply chains are encouraged to develop domestically, these industries could also create significant additional value for Britain. Our economic modelling suggests that the electric vehicle industry alone could help protect £17 billion of value to Britain in 2030 and up to £52 billion in 2050.

So Britain stands to gain a lot but risks relatively little from the development of smart grids. However, a number of challenges need to be overcome before Britain can progress at full speed. Ernst & Young conducted over 20 interviews with key stakeholders about barriers and required enablers. Notable concerns were expressed about the ability of current or proposed mechanisms to deal with the numerous complexities and uncertainties of smart grids.

There was a definite sense that in the absence of a step change, the adoption of a smart grid would be slow, with little investment before 2023. And there were strongly differing views on the merits of this. The distribution network operators (DNOs) interviewed were not greatly concerned about any increased degree of stress on networks before then. Other stakeholders suggested that such a delay would prevent Britain from exploiting the full value of the benefits that smart grid could offer.

Ultimately, we recommend:

· policymakers need to provide the maximum degree of policy guidance possible and incorporate additional flexibility into current standards. It may be possible to say more about what is not needed yet, and a holistic energy roadmap could be usefully constructed;

· there needs to be greater focus within the regulatory process on protecting customers by ensuring there is sufficient network investment to mitigate risks, rather than just through minimising investment spend. This could come from both the regulator and companies being expected to publish a risk review, and also a requirement to identify and evaluate what might be termed “no or at least low regrets” investments. The risk and reward balance faced by DNOs for innovating should include incentives to apply the learnings to their networks or seek to move faster than others in delivering smart grid;

· there needs to be greater focus on consumer engagement, both to ensure that consumers understand the positive attributes of smart grids and also how a smart meter will contribute to this. It will also be important to explore how best different types of customers are engaged on a day-to-day basis and whether a degree of automation is required.

· further investment in skills is required and there is a need to ensure a co-ordinated national approach spanning the entire smart grid supply chain. Projects under the successor scheme to the LCNF must progress to a larger scale of testing, trialling multiple components together and deploying them at a higher level of penetration over a larger area. It is important that future projects do not take the current industry model as a given.

Even if policymakers were minded to mandate the introduction of smart grids, there is not yet sufficient clarity about what this would entail to allow them to do so. Comparisons between progress in the UK and elsewhere are made difficult by the fact that in other countries, smart meters are often seen as part of smart grids. Here, we view them as separate initiatives. Some headlines suggesting that a particular country is powering ahead on smart grids are actually referring to smart meter programmes.

Looking beyond the media headlines, it is clear that the LCNF has given Britain some practical insights and a position of relative international leadership on smart grids. However, there is real concern that unless mindsets start to change, we will revert to a more cautious approach, investing only once the need to do so has been conclusively proven.

As DNOs and Ofgem work through the preparatory activities for the next regulatory period, the challenge for them is to find ways to use the LCNF results to develop detailed investment plans. There is currently little evidence to suggest that DNOs are holding back the development of secondary industries such as electric vehicles, but if we decide to adopt a “wait and see” approach at this critical juncture, it would be a missed opportunity for Britain.

Bill Easton is director of utilities and Jenny Byars economic advisory assistant director at Ernst & Young

This article first appeared in Utility Week’s print edition of 31 August 2012.

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