On July 16, Ofgem, the UK energy regulator, announced the investment of £22 billion for the electricity and gas transmission, and gas distribution networks. This investment will equate to an average increase on annual household bills of £11/year for each year of the price control period from 2013 to 2021. This investment is in addition to the £7bn approved by Ofgem in April for the Scottish electricity transmission networks. By a crude rule of thumb, that £11/year per customer increase is then really closer to £15/year per customer.
These investments are part of a wider package of measures identified in Ofgem’s Project Discovery, totaling an expected £200 billion, that will obviously see further substantial rises in utility customers’ annual bills. The industry stated drivers for this are well understood—replace aging transmission and distribution infrastructure, meet environmental targets, and deliver secure energy supplies—but they are, and can only be, based on a range of projections about an uncertain future.
What may be less evident is how customers will respond to these increasing prices. This will usually engender a change in behaviour, but the nature of those changes and the consequences of the resultant change in energy demand will have a bearing on the network investments. A recent investigation by the Department of Business, Innovation, and Skills highlighted a position of competitive disadvantage of the UK manufacturing sector, due to the high cost of electricity. Any further exodus of manufacturing in the UK will have further consequences for the economy, as well as personal disposable income and customers’ energy consumption patterns.
Microgrids may provide an answer—allowing large companies to resource their own low carbon production sources—which could have a significant impact on required traditional network infrastructure investments. Also, has full consideration been given to a time-of-use tariffs’ ability to influence consumer behaviour? How much of the necessary investment relates to peak demands that could be ameliorated through such tariffs?
The Irish regulator, the Commission for Energy Regulation (CER), recently published its decision paper on smart metering deployment, stating time of use tariffs will be mandated. The UK seems to be a long way behind grasping the benefits that such a simple mandate could achieve, and instead seem to focus on the promotion of demand response, without the realisation that such behaviour will only occur with pricing incentives.
Of course, £200 billion is big business, and you should remember that these energy businesses make returns on their asset base, and perhaps are understandably less enamoured with solutions that may dilute such investments. However, the claimed creation of 7,000 jobs from this new £22 billion investment may pale in comparison to the possible losses that could occur, due to loss of competitive advantage and further economic hardship.
By: Graeme Sharp, principal consultant, Management & Operations Consulting, DNV KEMA Energy & Sustainability