Kelvin Ross, Deputy Editor
Smart Grid. Two words which to some mean big business and big financial rewards. Yet to many others in the power industry the concept of the Smart Grid is abstract: something going on elsewhere being carried out by other people.
The smart revolution is underway – the trouble is the bandwagon risks leaving with many key energy players not on board.
Yet the pace of change of electricity policy and regulation, coupled with the growing demand for more power and different types of power generation, mean that the potential the Smart Grid offers is needed sooner rather than later across the world.
Nowhere is this more true than in the UK. The government – via its Energy Bill and Electricity Market Reform – is instigating the biggest overhaul of the British electricity market in years. This is intended to deliver a surge in renewable energy from biomass, solar and, primarily wind, into the UK’s grid, and in turn meet demand and secure supply.
The UK government has also committed to cutting its carbon consumption by 80 per cent from 1990 levels by 2050. The Department of Energy and Climate Change acknowledges that to do all of this requires “transforming our electricity system”. “Integral to this transformation will be an electricity grid that is fitted with more information and communications technology progressively over time,” states the department. “We will need a modernised electricity grid with larger capacity and the ability to manage greater fluctuations in supply and demand, while maintaining security of supply.”
No pressure then – the grid is carrying the survival hopes of the UK energy market. So is this great transformation underway? Not that you would notice, and the longer there is a delay in a coordinated approach, the more likely it is that government targets – be they renewable or climate change – will fail.
But there is a lack of clarity in the UK about how to set in motion this shift to the Smart Grid and how long it will take. Already the government has put in place a smart meter roll-out and the Low Carbon Networks Fund, a mechanism set up by regulator Ofgem that allows up to £500 million ($780 million) support to projects sponsored by distribution network operators (DNOs) to try out new technology, operating and commercial arrangements. The initiative is aimed at helping all DNOs understand what they need to do to provide security of supply at value for money as Britain moves to a low-carbon economy.
|Lighting the way: While efforts are being made to drive forward the development of the Smart Grid in the UK, E&Y find “there is still a long way to go to make the Smart Grid a reality across the country” Source: Alstom|
Smart Grid GB – an organisation of 23 companies involved in the drive to advance electricity transmission and distribution in the UK – has commissioned a report by Ernst & Young (E&Y) to assess the benefits of a Smart Grid transition and how to unlock them. It concludes that while Britain is making significant strides towards the Smart Grid, “there is a long way to go to make the Smart Grid a reality across the country”.
The report adds that without further policy certainty, appropriate regulatory incentives and more investment, “Britain could quickly fall behind in what will be a new global growth market and a source of prosperity and jobs for years to come”.
Doing the math
The report finds that an incremental £23 billion will need to be spent between now and 2050 to upgrade the UK’s distribution network to make it ‘smart’. But the report adds that this figure is significantly less than the cost of Britain “pursuing a conventional investment strategy”. In fact, a Smart Grid investment strategy could result in savings of £19 billion, and £10 billion even if only low levels of low-carbon generation are brought into play, according to the report.
A huge growth industry is also waiting to be tapped into, finds E&Y. The report predicts a jobs boost of 8000 for the UK during the 2020s, rising by 1000 in the following decade, and it prices exports from the Smart Grid between now and 2050 at £5 billion.
But the report stresses that delivering smart initiatives is a race against the clock: “If a Smart Grid is not deployed in a timely manner, industries along the Smart Grid supply chain may not be able to benefit from these emerging industry opportunities and any ‘first mover’ potential that British industries may have could be lost”. The UK’s ambitions for clean-tech industries – needed to meet climate change targets – will also be hampered if a Smart Grid is not in operation. “If a conventional grid hinders the development of these industries, Britain could end up spending large amounts of money buying carbon credits to reach its targets: at an extreme level, the cost of this could reach £126 billion between now and 2050.”
Smart Grid GB highlights four major benefits for the UK if a Smart Grid is deployed swiftly:
- Expertise can be gained – companies can research, develop and commercialise their products and export them, resulting in the creation of a manufacturing base;
- Skills can be developed – the Smart Grid needs a range of technological and engineering skills to flourish, and there is no doubt that these skills exist within the UK;
- A global reputation can be built – other countries will look to the UK for best-practice;
- Secondary industries will be enabled – these will help build Britain’s advantage in the sector.
In the UK, a disaggregated market structure and resulting policy approach have led to a dislocate between the Smart Grid and smart meters, which provide a critical source of grid management data – in particular, detailed consumption flow and outage detection. A Smart Grid can offer more advanced dynamic and time-of-use tariff models, but these can only be realised if effective smart metering relays the data. “If you can’t measure the actual response then you can’t effectively monetise and incentivise it,” notes Smart Grid GB.
The flip side of the coin is that much of the benefit of smart meters cannot be realised without developing a grid ‘smart’ enough to handle the data from the meter in the most effective way.
Yet smart meters have had a troubled history, not just in the UK but in other parts of Europe and North America. Many problems stem from data security concerns that have yet to be allayed. Smart Grid GB warns: “If consumers form a negative view of smart meters, this will likely translate into a negative view towards Smart Grids, either through direct association or simply because their view of the entire energy industry worsens.”
When to act
So what is “a timely manner” in which to develop a Smart Grid? Britain can go one of three ways: it can be a ‘first mover’, a ‘fast follower’ or a ‘late adopter’ – all three titles are pretty self-explanatory.
Being quick off the blocks as a first mover would bring all the financial rewards already mentioned. Yet there is a ‘but’: research and development and subsequent pilot projects do not come cheap, and chances are some tests will not yield the anticipated results and may be scrapped. A fast follower jumps on the bandwagon once someone else has tested the software and hardware, and the technology could be cheaper than when it was first introduced to market. Being a late adopter is the option that is not really an option. Sure, all the first mover costs are cut out, but so too is the chance of building a supply chain and reaping all the associated benefits.
|Pushing the right buttons: Smart meters are critical to the Smart Grid and vice-versa Source: Siemens|
So first mover or fast follower? First mover is the choice of Smart Grid GB and of E&Y’s report: “The major opportunities for Britain lie in IP (intellectual property) and services export potential. The cost of setting up a service industry is low relative to a manufacturing industry. This suggests that the net benefits associated with taking early action to deploy Smart Grids will be relatively strong compared to a decision to try to lead the field in a heavy manufacturing-based industry, for example.”
The reports also sees the current economic climate as an advantage: “Wages are lower and there are economic resources available in the economy, so expenditure is unlikely to drive inflation. This expenditure will also help to spur economic growth in the UK.” It cautions against “an aggressive plan”, stressing the need for a measured, progressive approach, but concedes: “Given current initiatives, expectations are that the adoption of Smart Grid is likely to be slow, with little investment before 2023.” What then should be the UK’s next course? The Smart Grid GB report presents six key findings:
- Changes to current standards and rules are an important avenue to explore, and one that need not incur major costs. Indeed some interviewees felt these could deliver major financial benefits. Smart Grid GB says these ideas may need to be progressed in tandem with other initiatives such as demand-side response.
- Changes to the industry model need to be contemplated. For example, complex questions arise around how demand-side response can be made to work for energy and network purposes at the same time, and how this is shared between suppliers and DNOs.
- Changes to the mindset in the regulatory process also need to be considered. There is concern the mindset will remain one of seeking the optimal solution and investing only once need has been proven.
- Some interviewees noted that risks are asymmetric, with the consequences of doing too little potentially much larger than investing somewhat early. Interviewees therefore suggested that there needs to be additional focus on protecting customers by ensuring that there is sufficient investment in Smart Grid.
- Interviewees highlighted the importance of developing Smart Grid skills, both within DNOs and more widely along the supply chain.
- Interviewees suggested that it was important for there to be a step change in the scale of projects, with major pilot programmes using a number of approaches together, at a higher level of penetration and over a wider area.
The report concludes that “there is a need for some fresh thinking by government, the regulator and industry” and suggests how this could be achieved. It states that policymakers need to provide the maximum degree of guidance possible and adds that creating some additional flexibility in current standards will also be important. It may also be possible to say more about what is not needed yet, and a holistic energy roadmap could be usefully constructed.
It calls for a greater focus in the regulatory process on protecting customers by ensuring enough network investment to cushion them from risks. 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/reward balance faced by DNOs for innovating should include incentives to actually apply the learnings to their networks or seek to move faster than others in delivering Smart Grids.
There needs to be greater focus on consumer engagement both to ensure that consumers understand the positive attributes of Smart Grid, 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.
It is important that future projects do not take the current industry model as a given. There are some complex challenges to work through and so alternative models will need to be actively explored.
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