UK Energy White Paper Review: Energy System

The White Paper notes that the UK’s energy system was designed for the age of fossil fuels; but by 2050, electricity could provide over 50% of final energy demand, displacing petrol and diesel in vehicles and some gas for heating.

This necessitates a very different approach, and the White Paper sets the goal of creating "investment opportunities across…to enable a smarter, more flexible energy system, which harnesses the power of competition and innovation to the full". It commits to "instil competition deep into the operation of our energy markets" to drive down cost and increase innovation.  So, consistently with the "Power" section in Chapter 1, the Government's policy is to encourage change and innovation via a free-market economy.

The Key Issues

The White Paper identifies the following key issues:

• Separate networks for electricity, gas and petrol or diesel for vehicles will increasingly merge into one system, as electricity becomes the common energy currency.
• Decentralisation - more numerous and smaller sites of generation in place of large, centralised power stations.

• New sources of demand, especially Electric Vehicles ("EVs") and heat pumps.
• The need for flexibility, allowing supply and demand to be shifted in time or location, so they are matched most efficiently.

The Government's Key Commitments

The Government's key commitments regarding the energy system are:

• Publish a new Smart Systems Plan in spring 2021, and define electricity storage in law, to enable greater flexibility, in part by embracing battery storage.  The White Paper also envisages "working towards a market framework which ensures that national and local electricity markets are fully co-ordinated and satisfy the full suite of system requirements", although the Government "will keep open the option of legislating in support of local flexibility markets, should DNOs fail to make sufficient progress". The Capacity Market will continue to be the primary policy mechanism for delivering security of electricity supply, albeit subject to review.
   
• Launch a major competition to accelerate commercialisation of longer duration energy storage from spring 2021.
   
• Legislate to enable competitive tendering in building, ownership and operation of onshore electricity network. The Government believes that competition will drive the innovation and investment required to achieve a "complete step-change in approach and scale" for the electricity network.
   
• Support roll out of charging and associated grid infrastructure to support the switch to EVs. The Government has brought forward a ban on the sale of new petrol and diesel vehicles by ten years, to 2030, which will require scaling-up the rollout of EV charge points and, in turn, an associated expansion in electricity generation and network capacity.  Funding of £1.3 billion will be available.
   
• Implement a more efficient approach to connect offshore generation to mainland grid.  The White Paper envisages realising at least 18GW of interconnector capacity with continental Europe by 2030, representing a 3-fold increase and enabling the UK to export excess renewable energy.  The Government will also review the current regime for connecting offshore wind farms to the onshore grid by single point-to-point connections.
   
• Build world-leading digital infrastructure for our energy system, and publish the UK’s first Energy Data Strategy in spring 2021.  The White Paper envisages using data harvesting and analysis from transport use, smart meters and other sources to enable more efficient use of the energy system, especially the integration of low-carbon technologies, such as solar panels, heat pumps and batteries. The Government has committed to implementing the Energy Data Taskforce's recommendations.
   
• Consult on updates to the Gas Act, ensuring gas supplies are decarbonised (e.g. by increasing use of hydrogen) while continuing to provide the right price signals to market participants.
   
• Consult to ensure institutional arrangements governing the energy system are fit for purpose for the long term, so for example can address increasing flexibility and decentralisation.
   
• Set out Government's vision for energy as a guide to Ofgem.

Comment

These commitments are undoubtedly praiseworthy, but whether they can all be achieved in time is questionable. For example, the goal of electricity becoming the primary source of power for vehicles and domestic heating requires massive infrastructural changes given the sheer scale of the task for a nation with approximately 27.8 million households[1], where currently EVs constitute approximately 10% of UK market share now[2].

The White Paper envisages market providing the necessary investment and innovation in response to Government "price signals" and support. However, energy and construction companies will likely need incentives to take on the risks of such a technologically ambitious project of this scale.  The Government has already spent a fortune tackling Covid-19 and, following Brexit, will it have sufficient funds to support these energy projects?

There are also legal obstacles to overcome. For example, the adoption of clean energy sources like hydrogen is a central part of the Prime Minister’s Ten Point Plan and the White Paper, but there is currently very little legislation in relation to hydrogen specifically. The Gas Act 1986 applies to hydrogen[3], and so any corporation planning to transport hydrogen by gas pipelines must follow all the requirements applicable to gas transporters in the Gas Act (e.g. obtaining a license in advance). This may deter local, decentralised production. Transportation of hydrogen is further restricted by the UK Gas Safety (Management) Regulations ("GS(M)R"), which only permits 0.1% hydrogen in the network. A recent test shows that up to 20% of hydrogen can be injected into the gas distribution network safely, albeit there has been no such practical experience in the UK due to the restriction in GS(M)R. To promote the use of hydrogen in the UK, a special regime for injection, transportation, storage and pricing of hydrogen is likely to be implemented via amendment of the Gas Act and GS(M)R. But will there be the necessary legislative time for all this, while the country adapts to a post-Brexit, post-Covid world?

Another issue is the Government's desire to enable competitive tendering in the onshore electricity network.  Currently only offshore electricity transmission projects are open for competitive tendering, and Ofgem is responsible for managing the competitive tendering process.[4] This is regulated in Article 147 of the Energy Act 2013 and the Electricity (Competitive Tender for Offshore Transmission Licences) Regulations 2015.[5] To enable competitive tendering for the onshore electricity network, the Energy Act is likely to be amended again, and a set of new regulations promulgated. Is there the legislative will and time to get this done?

Conclusion

The White Paper's key commitments are laudable, and it is particularly praiseworthy that the Government has identified the critical need to embrace cutting-edge technological/IT solutions to build a world-leading digital infrastructure for the UK's energy system. However, it remains to be seen whether the necessary legislative reform will occur and whether the light-touch, free-market approach can achieve the ambitious goals set out in the White Paper.