Ian Marchant FEI Immediate Past President
The biggest energy policy issue facing us is not the so called energy trilemma but the various perspectives and drivers of the demand and supply of energy. The demand side involves decisions by millions of different people and businesses all over the country, whereas there are probably only a hundred or so companies involved in the supply side. The scale of decision is also different, ranging from hundreds of pounds to hundreds of millions. Just consider your personal decision about whether to replace your gas boiler and your corporate decision whether to replace your gas-fired power station.
For all these reasons and, because supply side energy assets are interesting and give good photo opportunities, it dominates the policy agenda. The supply side is like a black hole which sucks all the life from the energy policy debate into it. The three issues of affordability, security of supply and sustainability are a useful framework for a policy discussion, but it’s invariably a supply side discussion with occasional lip service to the demand side. Electricity policy debates quickly descend into who should build what power station, using what technology, where and when.
The supply side trilemma is important. But it is only half the story. We need a demand side trilemma. In conjunction with the Centre for Energy Policy at Strathclyde University, here are some suggestions. I ask you to weigh them up and think what yours would be.
2. Meetings of needs
I think that policy on energy demand needs to balance these three forces and policymakers have to give equal emphasis to the two trilemmas. Let me explain a bit more what I mean about each force.
Firstly, flexibility. Our current energy system is actually remarkably flexible but in an oddly constrained way. When we flick the switch, the light comes on; when we turn up the thermostat, the boiler fires up; and when we get in the car it starts, usually. But the constraint is economic in that the cost of providing that flexibility varies enormously over the day and the year – but we are completely unaware of that variable cost. For example, the variable cost of producing electricity can range from effectively zero to hundreds of pounds per MWh, but our tariff is fixed regardless. However, as users we still want flexibility and in fact we want more. We want to be able to control our central heating and lights from wherever we are. As businesses and consumers, we increasingly want to be able to match our own generation with our own demand. So as a consumer, I want more flexibility and more control.
However, it isn’t that simple. The electricity industry also wants to increase flexibility and control but for its own purposes. There are two. The network operators want to use flexibility and control to manage their networks more efficiently and to avoid expensive, asset-heavy reinforcement. Imagine if every car on the street was a plug-in hybrid and they all plugged in at the same time. The local substation fuses would all blow and the street would be plunged into darkness until an engineer arrived to fix the fuses and switch the circuits back on, when they would all blow again. This is why network operators are exploring what they call smart grids. They want to know what’s happening on a real-time basis and try to create flexibility in demand. But their needs might be different from those of the other part of the electricity industry: the supply side.
In both its generation and retail forms, the supply side wants to make sure that demand knows the economic cost of the choices it makes, which means much more flexible pricing than we are used to. The industry jargon is “time of day” pricing, but what that really means is that you will pay a variable amount for your energy depending on its cost of production. This bit of the industry wants you to run your dishwasher when it’s windy, charge your car when it’s sunny and sit in the dark when it’s a still, clear night. The better the price signals, the more efficient the despatch of generation and the lower the overall cost.
From this brief description you can see how these three demands for flexibility and control can pull in different directions. The network wants you to delay charging your electric car, the generator wants you to charge it now and you want to know how much the different choices will cost and then make your own decision. Demand side policy has to address this flexibility trilemma but there are two other factors.
Meeting of needs
I don’t know about you, but I don’t actually want a kWh of electricity or a therm of gas and can’t actually visualise what they are. What I want is my phone charged, my lights on, my house warm and my shower hot. The trouble is that I don’t directly pay for these things or know how much they cost; I just get an estimated bill covering a few months. Smart metering will clearly help but I still won’t know what I’m spending money on, just when I’m spending it. Because we don’t know what is happening we overcompensate by using more energy that we need to make 100% sure that our needs are met. The setting of central heating time clocks is the best example here. I wonder what percentage of time your heating will be on this month when no one is at home? Demand side policy needs to put actual needs in the foreground, not just consumption.
The third leg of the demand side trilemma is the same as for supply: affordability, but this time with a difference. The supply side addresses the unit cost of energy but the demand side looks at unit consumption. One times the other gives you your bill. This is often referred to as energy efficiency and that is a key part of making energy affordable but we mustn’t simply be wasting energy more efficiently. It’s no good if my car has a good fuel efficiency if I drive it when I should be using video conferencing.
In looking at the affordability of energy, it will be increasingly important to look at the three bills: power, heat and fuel in aggregate. If I switch to an electric car, then my power bill goes up but that doesn’t mean I’m more likely to be in fuel poverty as I’m saving even more at the petrol pump. For most people, the cost of filling their car each year is about the same as their annual power and gas bill combined, so let’s start looking at all three together.
The two energy trilemmas need to sit alongside each other in the policy debate and be given equal weight. We also need to recognise that the two sides of the energy industry are fully interconnected and when a lever is pulled on one side it has consequences on the other. Policymakers, and those who seek to influence them, need to be aware of this full picture as an over aggressive focus on one trilemma or a point on a trilemma will only be counterproductive and potentially damaging. The biggest shift we need is to remember the demand side. On the supply side, policymakers and indeed engineers often like big “binary solutions” like nuclear/carbon capture etc and this “centralised supply side thinking” needs to change. We have seen the democratisation of intelligence in the computer industry from large mainframes through to PCs and smartphones. The same needs to happen in energy and I believe that a new demand trilemma of flexibility, meeting of needs and affordability should help to achieve that refocus.