Boris Johnson

Experts Urge Overhaul Of U.K. Energy Market

The U.K. must overhaul its entire electricity market if consumers, the economy and the climate are to benefit from new innovations in green energy such as smart homes, electric vehicles and heat pumps, a new report has concluded.

While the way Britain produces its electricity is unrecognizable from 10 years ago, with renewables such as wind and solar power helping the country to get halfway to its net zero emissions target, the outdated way the government awards contracts is preventing consumers from feeling the full benefits of a decarbonized grid, and holding back efforts to achieve grid flexibility, the report contends.

Instead, says Energy Systems Catapult, the U.K. non-profit energy and tech center which authored the report, the government should give innovative energy and tech companies the ability to drive the push to net-zero carbon emissions by decentralizing its process of contracting energy providers.

“The current government-directed approach to energy is like Boris Johnson telling Steve Jobs how to design the iPhone,” said Guy Newey, strategy and performance director at Energy Systems Catapult. “The progress on renewables over the past 10 years has been extraordinary, but if we are to finish the job of decarbonising the power sector—and create new businesses and jobs—we need to unleash the potential of our brilliant digital energy innovators to create a more flexible and greener system.”

The Catapult recommends six major changes to the U.K.’s electricity market, including a demand for more accurate, real time electricity pricing, and an obligation for sellers to source ever more low carbon energy. The report also calls for investment mechanisms such as the government’s Contracts for Difference—a form of subsidy—to be phased out, making the argument that such mechanisms were designed for a far less mature market, where the business case for renewable energy was not yet proven. The Catapult argues that these should be replaced with “outcome-based” policy mandates.

Opening the market up in this way, the authors say, will enable consumers to take full advantage of new technologies such as battery storage, heat pumps and electric vehicles, and help maximize the effectiveness of digitization, whereby home heating and other services can be controlled from the customer’s smartphone, offering greater comfort and potentially lower bills.

The Catapult says the reforms would also help facilitate “energy as a service” business models, which bundle together low-carbon energy supply with low-carbon technologies such as heat pumps or solar panels and batteries, much like a payment plan from a mobile phone network.

“What’s needed is an aggressive evolution of the energy market,” Newey told Forbes.com. “You need a set of market signals that reflect the physics of a system where supply varies.”

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Until recently, Newey explained, the relationship between people and electricity providers was entirely one-way, with energy flowing from generators to consumers. But with digitization, he said, energy consumption could now be controlled and stored flexibly, improving efficiency and reducing costs.

“These new innovations will benefit from our reform proposals because electricity markets will more accurately put a value on products and services that can utilise and store energy when it is cheap and plentiful, delivering a cost saving to the energy system,” he added.

Needless to say, firms in the energy sector have welcomed the proposals. Caroline Bragg, head of policy for the Association for Decentralised Energy, an industry body that represents a large number of energy services firms, said: “The center of gravity of the energy system is well and truly on the move—shifting from large generation and supply to energy users from industry, offices to our homes … This very timely report sets out how we can unleash the vast, hardly tapped potential of innovative offerings across zero carbon heat, flexibility and energy efficiency.”

“This is just the sort of market reform we need to drive down costs as we go renewable, to accelerate Britain’s green recovery and to make the U.K. the Silicon Valley of energy,” said Greg Jackson, CEO of Octopus Energy, a rapidly growing electricity supplier. “Adopting this approach we can make the green revolution faster and cheaper than anyone imagined. But we need to act now: neither the climate, nor citizens, should have to wait.”

For its part, the government in its recent Energy White Paper floated the possibility of energy market reform, while the U.K.’s influential Climate Change Committee in its Sixth Carbon Budget called for a “clear long-term strategy as soon as possible, and certainly before 2025, on market design for a fully decarbonised electricity system.”

In response to a Forbes.com request for comment on the report, a spokesperson for the government’s Department for Business, Energy & Industrial Strategy (BEIS) declined to say whether the Catapult’s recommendations would be taken into account in its reforms.

“As stated in our Energy White Paper, we are clear that we need to fully decarbonize electricity by 2050 as part of our commitment to building back better and greener from the coronavirus pandemic, and reaching our ambitious emissions targets,” the spokesperson said.

“It is the government’s job to create the right market conditions to deliver on that objective, encouraging competition to empower industry to find low cost routes to net zero. This is why we committed to a £1 billion net zero innovation portfolio in the Prime Minister’s Ten Point Plan—including £100 million for energy storage and flexibility—to help create the market competitors of tomorrow,” they added.

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