Importing cheap hydropower from Norway and Denmark is deemed a ‘quick fix’ for Britain’s capacity shortage as investment in new large power projects is hard to come by. Yet, Britain’s vote to leave the EU is jeopardizing the future use of interconnectors in the UK capacity market scheme. Demand-side response and power storage are some of the options left.
Uncertainty around spark spreads, demand, and above all the role of interconnectors has caused some analysts to add a risk premium to the estimated clearing price of the UK’s next capacity auction. The third UK capacity auction will be held this December, government confirmed on July 8, setting out the target to procure 52 GW of capacity for winter 2020/21.
Importing 'cheap hydropower' from abroad
Even CCGT projects which won capacity contracts over a year ago still struggle to attract financing. The National Infrastructure Commission (NIC) earlier called on the government to pursue additional interconnectors with continental Europe but most notably with Norway and Iceland. Demand flexibility, power storage and interconnection are estimated to help consumers save up to £8 billion a year by 2030.
Curbing peak-load demand could be achieved through pilot business models for energy-intensive industries and enterprises. Competition and fairer regulation, rather than new subsidies, should create a level playing field for the “smart power revolution” to take hold in Britain.
As for energy storage, NIC calls for a review of its regulatory and legal status in order to “remove outdated barriers” by spring 2017 for implementation “as soon as possible“.Ofgem should thereafter encourage network owners to make more use of energy storage.
Catching up on energy storage
Staying optimistic, Lord Adonis suggested that “the UK can lead the world in harnessing these innovations” which are believed to “bring jobs and investments into the country.” Given that the US has set its first energy storage standards back in 2011, while both American and German companies are already manufacturing and rolling out energy storage projects – UK firms might have some catching up to do.
Yet, energy storage is still at its infancy – and capital-intensive R&D projects in Britain will now have to primarily rely on private money as funding from EU funds is drying up.
Projects that straddle the Brexit negotiations are likely to face difficulties in securing debt financing for long pay-back periods as forward wholesale market spreads are becoming increasingly difficult to anticipate.
Flexibility – the ‘low-regret option’
On the supply side, operational flexibility can curb the integration cost of intermittent renewables, to the point where their whole-system cost makes them a more attractive expansion option than CCS and/or nuclear.
Even in a system that is less decarbonised (e.g. reaching 200 g CO2/kWh in 2030), increasing flexibility was found to be low-regret option, reducing the overall cost while maintaining security of supply requirements.
Analysis shows that gross benefits of flexibility for reaching the 50 g CO2/kWh intensity are between £7.1-8.1 billion per annum, while the corresponding benefits for the 100 g/kWh target amount to £3-3.8 billion annually (savings in the system with 200 g CO2/kWh would also be significant at around £2.9 billion per annum).