Dawn of the Abundant Free Energy System

There is no logical, technical, economic or political justification for operating the future energy industry as we have the past one, or to attempt to make these markets operate by common rules. The Low Carbon generators are so totally different from the legacy scarcity generators: fixed vs marginal costs, abundant cheap energy flows, vastly increased customer interaction through addition of transport and heat, distributed not centrally planned, digital not analogue.

 The Cost of Energy Review 2.0 (“CoER2.0”)

It is the season for one man bands to tell everyone how the energy system should work and I didn’t want to miss out on that.  Dieter Helm’s recent 200-page Cost of Energy Review[1] will no doubt sink into the mire of political reality as layer upon layer of advisers pick holes in it and political sandstorms erode its pointed edges.

What we need is an uplifting, innovative and thoroughly different ‘Cost of Energy Review 2.0’ (CoER2.0) and so I present mine here – why not? I take Dieter’s work as my reference but put back the missing bits and raise the innovation level a lot.

People of Britain, you have a wonderful opportunity to prosper with ‘free energy’ whilst at the same time cleaning up your environment. Let’s celebrate that and continue to support the fantastic new technologies that make it all possible, as they always have done’.

A quite obvious omission by Dieter Helm is his commentary of the past that was dismissive of the subsidy of renewable technology. Subsidy of wind and solar has created an industry that has spectacularly outperformed on cost reduction, far greater that Dieter had ever imagined or forecast.

CoER2.0 Recommendation 1

Patient Capital is required to get new British low carbon technologies to commercialisation[2]. Dieter has failed to support the increase in Patient Capital for hard tech in the energy market but does cover that in the report itself. Government could consider introducing a Patient Capital Obligation (PCO) on large institutional investors (e.g. pension funds, insurance companies, possibly also banks) requiring them to invest a small proportion of their overall assets in long term, patient capital funds that target industry sectors that match government priorities. There are various examples of government using such a mandate including in the energy generation sector with the Non Fossil Fuel Obligation (NFFO), Renewables Obligation (RO), etc.

 

 

 

 

Cost Of Energy Review Recommendation Dieter Helm David Casale
1. The cost of energy is too high, and higher than necessary to meet the Climate Change Act (CCA) target and the carbon budgets. Households and businesses have not fully benefited from the falling costs of gas and coal, the rapidly falling costs of renewables, or from the efficiency gains to network and supply costs which come from smart technologies. Prices should be falling, and they should go on falling into the medium and longer terms. When industry costs are falling and you remove legacy costs from the equation you can conclude that ‘energy costs are too high’; it is however slightly dismissive of the readers intelligence.

Abuse of market power is mentioned but not followed up, how about there really is none or very little. The problem is and its becoming even more so a lack of customer engagement

2. Households and businesses have not benefited as much as they should because of legacy costs, policies and regulation, and the continued exercise of market power.
3. The scale of the multiple interventions in the electricity market is now so great that few if any could even list them all, and their interactions are poorly understood. Complexity is itself a major cause of rising costs, and tinkering with policies and regulations is unlikely to reduce costs. Indeed, each successive intervention layers on new costs and unintended consequences. It should be a central aim of government to radically simplify the interventions, and to get government back out of many of its current detailed roles. This review explains how to do this. So true ! Energy is simple really but it is in regulators interest to make it complex, so they do, and this needs to stop.
4. The legacy costs from the Renewables Obligation Certificates (ROCs), the feed-in tariffs (FiTs) and low-carbon contracts for difference (CfDs) are a major contributor to rising final prices, and should be separated out, ring-fenced, and placed in a ‘legacy bank’. They should be charged separately and explicitly on customer bills. Industrial customers should be exempt. Once taken out of the market, the underlying prices should then be falling. Legacy costs can’t just be wished away but the bit about separating costs on customers’ bills is worth pursuing.

 

 

CoER2.0 Recommendation 2

The costs of energy supply are moving towards all being fixed cost in nature, using a universal prepayment [3]smart meter roll out the energy system is split into an ‘Abundant’ system and a ‘Scarce’ system, determined each 10 minutes of the day based on relative demand and supply. During energy Abundant periods (when low carbon generators are at high output and demand is low) energy is free or even customers will get paid to use it for certain purposes.  During Scarce periods energy is priced in bands as follows;

·         Band A – The Universal Service Obligation (USO) is set for each household in a similar way to Universal Credits to ensure the vulnerable citizens in our Great Britain are protected. The USO is a profile of consumption per day.

·         Band B – The Scarcity insurance market, this is an insurance policy with a fixed premium that is the revenue model for the legacy generators that are needed at times of Scarcity. Band B covers a certain (profiled) level of consumption per month. Consumers buy Band B power against a monthly premium payment to meet their individual needs.

·         Band C – The market clearing price for Scarcity periods using the old POOL model of marginal cost pricing. Expect these prices to be high but for ever diminishing duration as we move to 2050 and more low carbon generation assets are added to the system. Band C can be curtailed by the new Regional System Operators RSO thus introducing a rationing element to energy use; this stimulates energy efficiency further.

 

 

Cost Of Energy Review Recommendation Dieter Helm David Casale
5. The most efficient way to meet the CCA target and the carbon budget is to set a universal carbon price on a common basis across the whole economy, harmonising the multiple carbon taxes and prices currently in place. This price should vary so as to meet the carbon targets. It would be significantly lower than the cost of the current multiple interventions. Ok but, as the detailed analysis in the report itself says, this won’t actually work. This is a good economic policy but a hard-to-implement-in-reality policy.
6. There should be a border carbon price to address the consequences of the UK adopting a unilateral carbon production target. I see so we tell Europe, once we have left, that there is a tax on carbon, I wonder how they will respond to that
7. The FiTs and other low-carbon CfDs should be gradually phased out, and merged into a unified equivalent firm power (EFP) capacity auction. The costs of intermittency will then rest with those who cause them, and there will be a major incentive for the intermittent generators to contract with and invest in the demand side, storage and back-up plants. The balancing and flexibility of markets should be significantly encouraged. NO these are two completely different industries, they cannot and should not be blended together in some ‘expert’-driven averaging process (or EFP as Dieter proposes).  It’s true you can’t teach an old dog a new trick but we need new tricks.  Trying to squeeze the new technologies into the old format is unimaginative, overly complex, not possible for the Great British consumer to engage with and unnecessary.

 

CoER2.0 Recommendation 3

Low Carbon Generation [4]is a technology that collects free energy and distributes it. It is more akin to the water industry of the 1970s, where investment was made in collecting and storing water (if it rains, the system works = Abundance), bills are per month not per cubic meter. So, in electricity, investments would be made to collect wind and solar energy and distribute it, auctions are used to drive down the costs and low carbon generators are paid an availability payment as long as the low carbon generation technology is able and does collect the available energy. The energy is supplied into the grid and acts as negative demand; it is not metered other than to support the technical availability requirements of the availability payment. If needed, wind and solar can be turned down; this is fine and typical of energy systems generally.

We have now created an Abundant and Scarce system determined each 10 minutes of each day overseen by the new Regional System Operators (RSO’s) with the National System Operator taking a back seat.  As an industry we can market this; e.g. ‘use energy today between 2-4 pm, it’s going to be free to use’/’charge your car tonight at 11-12 pm its free etc.’

The availability payments are covered by a national taxation mechanism and become the same as roads and hospitals but charged to the consumer bill on a per kWh used basis (see CoER2.0 R2)

The POOL is brought back and all non-Low Carbon Generation bids its capacity into the POOL for Scarce periods. In effect this Scarce market is operated a bit like the RNLI Lifeboat crews over time, plants are not permanently staffed and when the ‘Scarcity red light’ goes on these trained staff take up roles to keep the lights on, prices for this can be quite low. This is a sunset market as over time, storage, demand side and interconnections mean that over time Scarce periods become increasingly well…scarce.  The revenue model for the scarcity legacy generators is from the Band B insurance premiums.

 

 

Cost Of Energy Review Recommendation Dieter Helm David Casale
8. After all existing commitments in respect of FiTs and low-carbon CfDs have been fully honoured, and in the transition to a proper, uniform carbon price and an EFP auction, they should be split into three parts: the construction and project-development phase; the operation of the plant; and decommissioning. The first should have a higher cost of capital, reflecting the equity risks; the second should be more akin to a regulatory asset base (RAB) in the utilities and closer to the cost of debt; and the third should be a charge to operating costs. The customers should benefit from the refinancing when the project comes into operation. Yes, for the Abundant market an infrastructure finance approach is used; this is not new and well understood. For an availability payment backed by a highly credit worthy entity the cost of capital will be much lower.
9. The current RIIO (Revenue = Incentives + Innovation + Outputs) periodic review price caps for the transmission and distribution companies are already being significantly outperformed – in part because of mistakes in the assumptions – and have resulted in higher prices than need to be charged for the efficient delivery of their functions. Ofgem should consider what actions should be taken now. Agreed.
10. For the networks, going forward, there should be no more periodic reviews in the current RIIO framework. Technical change is so fast that predicting costs eight–ten years hence is impractical. Agreed.
11. The government should establish an independent national system operator (NSO) and regional system operators (RSOs) in the public sector, with relevant duties to supply, and take on some of the obligations in the relevant licences from the regulated transmission and distribution companies. The NSO and the RSOs should, where practical, open up the various functions and enhancements to the networks to competitive auctions and, at the local level, invite bids for network enhancements, generation and storage, and demand-side response (DSR) from energy service companies. Agreed.
12. The separate generation, supply and distribution licences, at least at the local level, should be replaced by a simpler, single licence. Agreed.
13. As a result of the above changes, the role of Ofgem in network regulation should be significantly diminished. Agreed.
14. There should be a default tariff to replace the Standard Variable Tariff (SVT), based on the index of wholesale costs, the fixed cost pass-throughs, levies and taxes, and a published supply margin. The old Supplier Model should be abolished; it has never really worked, it adds little value and prevents deeper customer engagement. The new suppliers would sell insurance for Band B, smart meter services and home energy management, batteries and electric car services, much richer engagement and much more fun.

 

15. Capping the margin would be the best way to meet the objectives of the new draft legislation. By focusing on the margin within the default tariff structure, competition would be enhanced, thereby encouraging new entrants.
16. The government should issue an annual statement to Parliament, setting out the required capacity margins and providing guidance to the NSO and RSOs. Yes identifying the expected Abundant and Scarce periods.

 

 

Conclusions

  • There is no logical, technical, economic or political justification for operating the future energy industry as we have the past one, or to attempt to make these markets operate by common rules. The Low Carbon generators are so totally different from the legacy scarcity generators: fixed vs marginal costs, abundant cheap energy flows, vastly increased customer interaction through addition of transport and heat, distributed not centrally planned, digital not analogue.
  • A true revolution in energy, as proposed here, will happen in any case as these new technologies continue to emerge; the recognition of that by society and governments would lower the costs of the transition through greater engagement and increased speed of deployment.
  • The clear identification of the two opposite drivers of energy costs (The Abundant and Scarce Systems) would assist society to understand its own role, in this way both the Abundant market and the Scarce market would improve efficiency, demand side measures, batteries, electric vehicles and behaviours would change quicker
  • This is not a fanciful proposal, it is technically feasible today.
  • This would result in £110bn of energy savings; I put this in hoping the media will pick it up, no justification is given here but I could if you want one?

 

[1] See https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/654902/Cost_of_Energy_Review.pdf

[2] See Turquoise response to the Patient Capital Review

[3] See https://davidcasale.wordpress.com/2016/08/03/universal-prepayment-in-the-national-interest/

[4] I take solar and wind power as my examples of Low Carbon Generation but this applies for all types of low carbon generation based on the premise of lowest cost first.

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Gatwick gone bonkers

Gatwick has become the first UK airport to announce that it will be Carbon Neutral: http://www.mediacentre.gatwickairport.com/press-releases/2017/gatwick-becomes-first-uk-airport-to-join-global-renewable-electricity-alliance.aspx.

I have never been a fan of the concept of Carbon Neutrality. The level of certification required to substantiate such a claim makes the Brexit negotiations look like a tea party. All we really want is to reduce emissions, not claim some isolated, innocent status by declaring ourselves Carbon Neutral. The government tried it with Zero Carbon Homes, a scheme now abandoned, but to declare that ‘Gatwick Airport is Carbon Neutral’ – now that is bonkers.

Gatwick Airport plays host to hundreds of thousands of cars, trains, trucks and planes every day; it is an epi-centre for the release into the atmosphere of vast quantities of carbon.. Whilst we need to decarbonise, air travel is an area that no one has a solution for at this time so Gatwick needs others to save carbon on its behalf because it is certainly NOT Carbon Neutral.

To pronounce that Gatwick will achieve this lofty aim by next spring produces a number of very unhelpful effects:

  1. Many people will think they mean the planes as well, thereby solving an impossible problem by next spring. We need folk to engage with this issue in an informed manner and this does not help.
  2. Even for those who do not fall for the above, travellers will feel very uncertain that any science is valid. How on earth can Gatwick be Carbon Neutral? It can’t unless you employ some very creative assumptions. For more insight on the dangers of green labels, I’d invite you to watch our recent TEDx talk: ‘Cleantech does not exist’ (see TEDxOxford.co.uk)
  3. It makes Gatwick look silly. This simply draws attention to a piece of corporate Group Think that expects everyone to believe that you are part of the solution when in fact you embody the problem. Better to acknowledge that you need people like me and the investors and entrepreneurs in New Energy to solve this issue for you. And I believe that we will, which is why I will continue to fly from Gatwick.

Please go ahead and buy some renewable electricity and replace oil with gas; that’s great and I’m all for it. You can put it in your CSR report and announce it all over the terminals. But, Carbon Neutral? No, thank you.

TEDx Oxford -‘Cleantech does not exist’

My TEDx talk at the New Theatre Oxford on 5th February 2017 is online at;
https://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwi5i460i7jSAhXlAcAKHcYtAvoQtwIIGjAA&url=https%3A%2F%2Fwww.youtube.com%2Fwatch%3Fv%3DIV4sE1hddxg&usg=AFQjCNEudrukSF8adzl_RfTa5QGBcSROlg&sig2=WFvoGIgW7nvC9rSDbNOgog&bvm=bv.148441817,d.d24.

Quite difficult to follow the online video without the slides so I have uploaded the slides here:

iamdave-final

 

In Retail Energy – More meddling is needed!

The CEO’s of major British energy challengers have called for an end to ministerial meddling in the UK energy market. I am acutely aware of the downsides handing back my licence for Open4Energy out of disgust at the Labour ‘Price Freeze’ proposed by Ed Milliband, a Herculean effort in meddling of the worst kind. I also understand the desire for stability for the current energy market participants. However, as Chairman of the Energy Research Partnership committee looking at the utility of 2050 and as an innovator and financier in energy my current concerns are for the long term.

We need much more meddling. The retail energy design is the way meters, distribution companies, wholesale energy, bills, suppliers and customers all interact and it is a relic of a previous era in computing when folk talked about ‘main frames’. Now we need a retail energy design that looks like Alexa, requires the same training as Spotify and is run by tech-centred companies that embrace technology rather than ignore it. Customers would buy energy when they wanted, from whom they wanted, at any time in any amounts, pay for it in advance with a simple bill delivered at the point of sale, with a sprinkle of complete trust and totally open.  This can be done now (in fact, it could have been done years back), would be cheaper to run than the current system and no one would need to miss out, we would all be on pre-payment.

So why has this not been actioned? Well, it’s a combination of political uncertainty (no party is in power long enough to take a long term view) and regulators (by their own admission) always playing catch up. Moreover, neither of these two are renowned for being a hive of innovation, rather more for a culture of procrastination.

Such a redesign of the way we buy energy is an essential step as we tackle the increasing pressure on our society and the global community to decarbonise not only power but also heat and transport.  The utility of 2050 will need to have such a simple customer-centric system and the earlier we set about designing it the better but currently no one is doing this.

A cross-party, cross-industry group should be set up to start this work now, with a clear mandate to redesign using modern digital designs to meet customer objectives and not to put a patch on a broken and fatally flawed design from 1994 that has long outlasted its welcome.

David Casale

Former CEO and co-founder of Utilita (2003-2009), Fellow of the IMECHE, Associate of Poyry and Chairman of the Energy Research Partnership Steering Committee looking at the #UTILITY2050.

 

Mind the Gaps – Hinkley is more like Trident

Extract from BBC Reality Check

The claim: The cost of Hinkley Point C to bill payers has risen from £6bn to about £30bn.

Reality Check verdict: The projected cost of guaranteeing the amount paid for electricity from Hinkley C has risen considerably because the government forecast for the wholesale price of electricity has fallen.

Another figure that is given in 2012 pounds is the government’s estimate that the cost of Hinkley C will add £10 per year to each household’s bill…. It’s a figure that Andrea Leadsom gave to a parliamentary committee in May. But the National Audit Office says that figure for project cost has risen to £29.7bn, and if you calculate that per household per year then you get to £25 per household per year.

The ‘Certaintists’ are certainly wrong

Sorry Andrea Leadsom, National Audit Office and BBC Reality check (‘Certaintists’) you are all WRONG.

We can all agree that the cost of Hinkley (and any CFD supported power plant) is calculated based on the difference between the strike price and the price of electrons in a wholesale market. We know the strike price £92.50 increased by inflation from 2012, we do not know the wholesale price of energy over the next 35 years. As with many energy projects the problems are in the assumptions.

The Certaintists have assumed that the Government is a good source of forecasting for power prices as if it is was the Government that sets them. Experience shows that forecasts of power prices over the long term are always wrong in a material way. No we have gaps and issues and I can summaries them here. Firstly here are some issues to consider;

  • No one (and I mean no one) has any idea what the future price of gas and oil will be
  • The only capacity being added to the power system today is sponsored through a subsidy provided by Government and has a zero or very low marginal cost and so can displace any other generator when it is available to generate
  • No one knows if we will desire to meet our stated aims in the Fifth Carbon Budget that legally (in theory) binds the UK to reduce pollutants
  • No one currently has a credible plan for how we will meet our stated aims of pollutant reduction in heat and transport but most agree that these will be significantly supported by substitution by power systems.

If a power system is in receipt of subsidised low marginal cost plant the price of power will not increase it will decrease and so therefore the fact that we wish to reduce pollutants in the next 35 years means that the cost as defined as the difference in price as above will rise if you use these fundamentally flawed assumptions.

Mind the Gaps

There are gaps in the approach to reducing levels of pollutants;

  • Enforcement gap; In the UK we have air quality standards but we do not meet them in many parts of London, if we have a change in heart sponsored by a public outcry to meet our pollutant targets led by informed younger people that might then apply to ALL pollutants and drive up the price of fossil fuels through carbon tax
  • Global Warming gap; There is a gap between predicted global warming if we all globally achieve our Paris pledges and the required path to 2 degrees or less of global warming.  That warming gap is as wide as say a gap of two meters between the tube and the platform, which is for most too wide to jump. If we committed in the next 10 years to actually make the gap say a mere 50 cm then the investment needed in power assets would be huge and non-fossil
  • Energy storage gap; we need to store the increasing levels of renewable power and industry is still working on these technologies and as yet we do not know what they cost

We need to reconcile these issues and gaps if we are to talk sensibly as society about how we transition to a low carbon economy, figures such as £10/customer etc. simply do not help and have so many assumptions attached as to be certainly wrong and more importantly worthless as a source of information for society.

A better way but unfortunately not quantified[1] would be to say; Government invests in Trident as it has determined that it is in the nation’s security interest, Government invests in Hinkley as it has determined that it is in the nation’s energy supply interest.

 

 

 

 

 

[1] The road to a quantifiable answer is only achieved once we have a global price for the pollutants as well as a limit on their use

Three reasons why Hinkley Point should be built

I work for Turquoise investing in and raising funds for Energy, Environment and Efficiency companies that in the main are in competition with Nuclear Power. In my previous career, I have never worked on nuclear projects. So why am I making a case for Hinkley?

Let’s start at the beginning. The UK has now adopted the Fifth Carbon Budget, limiting our emissions of pollutants such as CO2 to a level 57% less than that recorded in 1990 en route to a target of 80% reduction by 2050. We have, as the UK (note: not as the EU), made this the law of the land; in theory it would be an illegal act for any Government to fail to deliver on this commitment.

Science tells us that, during this century, we will probably need to stop using any form of fossil fuel in our heating, transport and power systems unless we capture the pollutants and store them.

So far we have met the early carbon targets because we have been lucky, not through any particularly brilliant and consistent energy policy intervention. Gas became cheaper than coal in the 1990’s, we have quietly become more energy efficient and the 2008 crash reduced industrial activity. All of this would have happened with or without a carbon budget. Of course, we have made significant progress in wind power and some other nascent areas but basically we have not really begun the task of decarbonisation in its own right in earnest.

The carbon budgets are for ALL energy use: heat, transport and electrical power. It is clear that in heat so far we have done nothing, in transport practically nothing and in power quite a lot. In most forecasts the power system will be the first (by miles) to become 100% decarbonised and that will be necessary to compensate for the lack of progress in the other two sectors. So, how are we going to do it?

Now we could build gas fired CCGT at a cost of £47/MWh but that assumes they run for 15 years or so and a lot of the time, as above we are not allowed that freedom by the simple fact that the fails in heat and transport require power to do all the heavy lifting. If you try and pay for a new CCGT in say a 5 year period to avoid this conundrum its cost of power goes up in a material way and certainly above the Hinkley price.

I’m Chair of the Energy Research Partnership Steering Group analysing how a utility might look in 2050 (we call it #Utility2050 – genius). If we wish to watch TV and drive our Teslas ‘whenever’ whilst not freezing ‘ever’, we need to balance a growing power demand with a shrinking power supply and to do that every 1/50th of a second (as is the grid requirement). Not an easy thing, so we look to energy storage and demand side management to help.

OK batteries are here and getting cheaper but the long term stated targets are $50/MWh all-in (compared to around $400/MWh for Tesla Powerwall currently) and then you have to add the cost of power itself on top of that so $50/MWh to store and £115/MWh to make (using wind) is an all in costs of say £141/MWh; are we sure it’s not cheaper to just dump abundant renewables if we can’t use them or ship them somewhere that can and use an old coal station converted to biomass use and revamped to cover the gaps? Demand side could make a huge difference but we have to explain that to consumers as it’s probably going to involve giving something up, most likely the ‘whenever’.  What seems clear from the initial #Utility2050 work is that we don’t know a lot more than we do know.

HMG is the buyer of all new capacity in the market, no one invests in what we used to call merchant power, and it is all CfD or Capacity market fed. So if you are the buyer of all new electricity capacity in the market what power would you buy on behalf of the nation?  Well here are three reasons why, given the above, you would buy from Hinkley:

  • Hinkley is cheap: forget all the baloney about the world’s most expensive power station, we are only paying for the power at £92.50/MWh (and if it doesn’t work we don’t pay). Compared to, say, intermittent offshore wind at £115/MWh (which by the way I think as an industry has a massive future, so relax if you’re in wind defence mode) it looks attractive. As mentioned long term and hard running gas CCGT is cheating on our carbon aims.

 

  • Hinkley is baseload: it runs all the time, can be turned up and down more than you think and I, for one, will sit eating a mince pie on December 25th in the mid-2020s at about 16:30 with the TV on hoping it is a dark crisp winter’s night outside and confident that Hinkley Point at least is blasting out electrons full tilt.

 

  • Hinkley is consistent: we have had 14 Energy Ministers since 1996, we have flipped and flopped from Carbon pricing ON/OFF to competition ON/OFF to state buyer models to feed in tariffs ON/OFF and ROCs ON/OFF and I don’t know what else. HMG has spent considerable time attracting investors into Hinkley and changing its mind for no good reason (and there are none) would be a very bad step for meeting the funding needs of an energy system in unprecedented state of transformation. Note that we are not increasing our nuclear fleet in the UK, just replacing old stations (something that good old engineers like me would have quietly done in the past without fanfare).

The energy industry needs to come together to explain to society how we are going to meet our decarbonisation targets in the medium and long term. It’s not Nuclear v Renewables or Low Carbon v Fossil; we will need all concerned working to a common goal to transform the system whilst keeping the lights on at a cost we can live with in 2050.

Hinkley should proceed with confidence from investors, owners and customers that it is a useful part of the bigger and harder-to-solve jigsaw puzzle. Politicians should man (or woman) up and say so.