Regulatory shake-up needed to hit net-zero

The UK is showing unquestioned leadership in striving to become the world’s first major economy to achieve net zero carbon emissions, but achieving it will require major investment in all aspects of energy infrastructure, the widespread adoption of innovative engineering solutions, and a serious revision of energy regulation.

The imperatives of the energy trilemma come at a time when utilities face an uncertain future. With heightened zero carbon goals, a new sense of urgency is required. The way forward will require stronger partnerships among all key players – Ofgem, the Department for Business, Energy and Industrial Strategy (BEIS), the investment community, equipment manufacturers, power generation developers, as well as transmission network operators and distribution network operators (DNOs). All must adopt a fully integrated approach to dealing with the energy trilemma that encompasses increasingly interconnected energy vectors.

Greater electrification of heating and transportation will create a substantial need for new generation, including a greater share of renewables and grid-scale energy storage.

In order for storage to help propel the UK toward a zero carbon future, regulators must get their policies right to ensure adequate compensation for the benefit it provides networks. Storage is both a generating resource, supporting periods of peak demand, and a technology resource, regulating frequency and ensuring continued system reliability. Ofgem and BEIS should develop policies that reward this new technology appropriately.

The role of transportation

Electric vehicles (EVs) are undeniably a crucial part of the “road to zero”. A recent report by National Grid outlines at least one scenario in which millions of EVs equipped with vehicle-to-grid (V2G) charging technology could store enough power to support the grid during periods of high demand. Unquestionably, electricity demand will grow as more and more EVs hit UK roads.

It is now time to begin giving attention to charging infrastructure. The system is currently able to handle the demands of the more than 200,000 EVs on the roads. But that is likely to change as market penetration climbs above 25 per cent. At that level, there will be a need for widespread deployment of smart charging technology to control the times of day when vehicles can be charged. This technology is already being deployed and demonstrated as part of LCNI-funded projects from the DNO perspective.

Technology is advancing to allow faster charging cycles, and consumer acceptance is likely to increase when recharging times approximate the time it takes to refuel at a petrol station, although we are a long way from this point yet. As levels of EV penetration approach the 50 per cent level, investments in electricity networks will be required with higher capacity distribution networks, substations, transformers and advanced capacitors, inverters and other equipment.

Space heating and cooling

Of course, electricity won’t be the only energy source. Hydrogen will play a key role in heating and commercial transportation. It is a feasible alternative to natural gas for home and business heating because it produces no carbon emissions when burned. It is a fuel that can be stored and thus can be produced through electrolysis during periods of surplus power from renewable energy sources. But there are significant barriers that must be overcome: there is, for example, no dedicated hydrogen transmission or distribution infrastructure that could safely deliver this energy source to homes and businesses.

Part of the solution could be conversion to 80/20 blends of natural gas and hydrogen. Demonstration projects currently under way are proving the feasibility of this approach. In addition, much of the gas transmission infrastructure currently being built is being installed with materials that are compatible with hydrogen chemistry.

Transitioning to a hydrogen economy will take significant investment, but it is feasible and must be part of the plan. A whole-system approach to gas, heat and electricity must be the underlying principle of the zero carbon strategy.

Dealing with regulatory barriers

Under the currently proposed RIIO2, there is concern that utilities could come under intolerable earnings pressure that could discourage them from making the investments necessary.

Under current regulation, utilities lack the ability to invest in their networks ahead of need, and this problem is not corrected under RIIO2. Capital projects to upgrade networks will be of massive scale and complexity, requiring many years to engineer and build. Forcing operators to wait until demand forces them to act will create needless delays and impediments in critical areas needed to support the generational changes we need with respect to EVs, renewable energy from multiple distributed points on the grid, bi-directional power flows and further technology advances we cannot envision today.

Revised regulations would need to look at a whole-system approach and procuring the services customers and networks need.

A re-evaluation of all incentives throughout the value chain is also required, to re-examine all the potential markets and lower barriers to entry. Providing certainty will drive investment and result in the outcomes we desire – a reliable and resilient network.

Third, value should be stacked across the chain so that all players have incentives to play. In the US, for example, storage owners can sell into the capacity market or into the frequency regulation market.

We are at a critical juncture where important policy decisions need to be made, and in some cases revisited and corrected. Ofgem will undoubtedly continue its focus on removing cost from the industry to keep profit levels “reasonable” and on maintaining important safety nets for consumers.

The industry has the engineers to solve technical challenges and the investment community is poised to jump in. But these are only two legs of a three-legged stool. Ofgem and BEIS are the third leg, and the whole system will benefit as sensible policy and regulations are devised. The industry is ready to get to work and realise a brighter future.