How the electricity balancing mechanism is undermining renewables future

Recent press coverage about allegedly high payments to windfarms to stop generating (to avoid electricity grid bottlelnecks) should be drawing attention to the cock-eyed way that electricity balancing mechanisms are organised. But instead the problems are being made even worse by the way that the Government is introducting the 'contracts for difference' (CfD).

Put simply, renewables are being fitted into a system that is designed to suit (and reward) conventional generators. There is no real effort to improve system flexibility by bringing in opportunties for 'demand response' so that shifting electricity demand can be incentivised at the same time as the wind is blowing or sun shining. Instead the renewable operators are just being given the same incentives as conventional generators to switch off to avoid the grid being overloaded. Most of the money paid to generators to switch off actually gets paid to coal and gas power station operators, not windfarms (although you would not get that impression from the press stories).

Green campaigners stress how 'smart meters' will bring in an age when dishwashers etc will be programmed to turn on and where electric cars will fill their batteries when renewable energy is flowing. But, unbeknown to them, nothing of the sort is happening. Indeed, developments are moving, at considerable speed, in promoting precisely the opposite. Renewable generators, essentially, are being pressed to be just more snouts in the troughs of excessive payments to generators. As discussed later this is being emphasised even further by the terms of the new 'contracts for difference'. But while the renewable generators gain in the short term (albeit at the cost of more sniping from the anti-windfarm lobby), the cost of providing renewable energy is increased and the amount of renewable energy that the system can absorb is constrained.

To put it in a nutshell, the smart meters being installed are totally incapable of helping 'demand response' and the rules governing the electricity market are actually making it even less likely that there will be much more demand response in the future than there is now (and there's not much happening now). I will explain, below, but first let me draw your attention to some recent coverage, first about how anti-windfarm campaigners are highlighting the payments made to windfarms to switch off sometimes

http://www.thetimes.co.uk/tto/environment/article3704842.ece

In this story there are hopeful (but currently very unlikely) comments that matters will be righted by 'demand response' measures. More balanced coverage is given by 'Carbon Brief', but unfortunately the report merely recycles the very naive rose tinted impression that people have got about the prospects for 'demand response'. See Carbon Brief's account at:

http://www.carbonbrief.org/blog/2013/03/why-windfarms-get-paid-to-switch-off

You can see a general description by the National Grid of their arrangements on this issue at:

http://www.nationalgrid.com/uk/Electricity/AboutElectricity/Balancing+the+network/

In order to elaborate on earlier points, we first need to understand that essentially there are currently two routes at the moment to short term balancing of the electricity market between demand for and generation of electricity: the 'balancing mechanism' (BM) and the 'short term operating reserve' (STOR). It is possible for large and medium sized industrial units (typically refrigenration companies) to offer balancing services,  since they can contract directly with the National Grid, or, indirectly with the help of companies such as 'Flexitricity' (see http://www.flexitricity.com/core-services/frontline).

However, such services have to compete with the electricity suppliers, who in turn have strong incentives to get money for the power plant that they own rather than make sure renewable energy stays online for as much as possible. And remember, the electricity companies are likely to make much more money out of selling electricity generated by their power stations (or in receiving payments for their power plant NOT to produce energy) rather than making money out of saving supply costs by shifting demand.

Under the present regulations there is simply no agent around with clear enough interests in mobilising or organising ordinary consumers with their dishwashers, refrigerators, electric cars or whatever to engage in demand response. You would think that green energy suppliers would have good reason to do this, both from a marketing and cost reduction point of view (you can help us generate more green energy and save money at the same time!).  However, if the green electricity companies are being incentivised to shutdown the windfarms rather than keep them running (which is what is happening at the moment) then they are not going to be very keen on organising demand response campaigns. Yet as the amount of renewable energy increases the need to avoid shutting down renewable energy production will increase. Building interconnectors will help ease the porblem, but this is a slow process. Hence there is good reason why electricity trading regulators at an EU level are likely to stress the need to utilise demand response as the prime method of dealing with increased fluctuating renewable energy supplies. But the EU does not control the regulations to achieve this, although maybe the EU could try harder to influence national regulators to prioritise demand shifting.


You would hope that the UK electricity system would be regulated to take account of the increasing need to balance fluctuating renewable energy supplies, but of course it is not. A high proportion of the people who understand the system are likely to be associated with the Vertically Integrated Large Electricity Suppliers (VILES) who dominate the system. And they are not in a hurry to make themselves alter their ways.

But, in fact, other factors make the situation even worse than this (yes, really!). One is the fact that the wrong sort of smart meters are being installed. Although they will help people (and electricity suppliers) monitor energy consumption better, they are simply not configured to engage in the sort of interactive 'bottom-up' automatised trading that would permit demand response to occur. For that you need something that David Hirst has described as 'flowcost meters'. They can interact with with the short term and future electricity supply market (or, perhaps the electricity supplier's own generation cost structures) and automatically schedule operation of equipment according to consumer timing and cost preferences. However, nobody is installing such equipment, and, to my knowledge, there are not even any plans to do so.

The reason why nobody is installing the right sort of smart meters, is, as implied above, because electricity balancing markets are not regulated in the right way. The National Grid's license should be altered so that they have a duty to prioritise shifting demand to incorporate variable renewable energy before it is contrained. A part of this could be to 'cap' payments to renewable operators at the level of the 'strike price' of the feed-in tariff. The EU should bring in regulations to ensure that demand shifting is prioritised. But it is doubtful whether we can just wait for this to materialise.

This brings us around to the way the Government is implementing feed-in tariffs through the CfD. This does not help. The CfDs pay the difference between the 'strike price' set by the Government of the value of each unit of generated electricity and the wholesale electricity price - except in those (occasional) circumstances when the wholesale price is higher, when the generator will get nothing and actually pay money. Hence the CfDs have the perverse incentive of encouraging  renewable energy suppliers to want to stop generating electricity when supplies are most needed (when the wholesale price is high) and get paid to stop generating electricity precise at the time when it would be much better to shift demand. Of course, this perverse incentive would not exist if there was a 'Fixed' FiT used (see earlier blogs on this).

Now, it is possible to regulate the electricity market to give priority to demand shifting and to encourage, first, green electricity suppliers, and then hopefully others, to install the right meters and encourage demand shifting. But we need a review to make this happen - a specific review of balancing regulations with the objective of maximising demand response - and it should not be a review dominated by the VILES. The question is, what interests can pressure for a review to give priority to demand shifting? Well, green NGOs should have a go for a start, perhaps in alliance with consumer groups.

But for the sake of the planet please let us do something improve the present ludicrous situation!