Can ‘smart power’ help deliver the cheap, low-carbon and secure energy that the UK needs?

In the Budget last month, the Chancellor accepted the National Infrastructure Commission’s recommendations on ‘smart power’. This announcement could herald a significant transformation in the UK’s electricity system. 

What is ‘smart power’?

The aim of smart power is to balance more effectively energy demand and energy supply. Rather than building expensive new power generating capacity, energy from existing infrastructure is used more efficiently. 

Smart power encompasses various new technologies, including: interconnectors, which are undersea cables that link our grid to those of our European neighbours; energy storage, which allows the grid to retain surplus energy and deploy it when demand is high; and demand-response systems, in which energy users switch their power consumption from peak demand time to when demand is lower.

The National Infrastructure Commission makes a number of recommendations about how the Government can bring about this “smart power revolution”. Among them is a call for the Government to negotiate with neighbouring European countries to build more interconnectors, especially those with an abundance of low-carbon energy like Norway and Iceland. 

Smart power has been a topic of growing importance in the UK energy debate. Interconnection in particular has been studied in quite some detail. This blog aims to set out some of that evidence. 

The opportunities and challenges of interconnection

There is a broad consensus that greater interconnection will have a positive role to play in the future UK energy mix and that, with the right regulatory framework, it can help deliver on all three aspects of the government’s energy trilemma (security, affordability, and decarbonisation). 

The literature on this topic tends to agree that bill payers will enjoy savings from further interconnection. National Grid’s report in 2014 found that just 5GW of additional interconnector capacity would save bill payers over £1 billion by 2020. They argue that, as the UK is likely to be a net importer of cheaper energy, at least initially, interconnection would reduce the wholesale price for consumers. 

Whilst generally agreeing about the financial benefit to consumers, some studies have highlighted the impact on UK energy producers. Energy UK’s Pathways to 2030 report from last month supports increasing the number of interconnectors. They express concerns, however, that imported energy currently enjoys an unfair advantage in the energy market over domestic capacity. Power generated in the UK is subject to the carbon floor support, but power which comes via interconnectors is not. Similarly, imported electricity does not have to pay UK network charges. 

There is some evidence that this imbalance could have negative consequences for security of supply and decarbonisation. The technical analysis carried out by Pöyry, which informed the National Infrastructure Commission report, highlights the inefficient and distorting differences in carbon tax rates among EU member states in the context of interconnection. Whilst greater interconnection would lead to an increase in generating capacity overall inside the EU, some individual countries could see a fall in their domestic capacity. They note that this could have implications for security of supply.

A recent study by Aurora is highly critical of greater interconnection, and is at odds with much of the other evidence. They argue that, because of the exemption of interconnected electricity from the higher UK carbon tax, high-polluting plants in mainland Europe will step up their production and displace lower carbon energy sources in the UK. The effect of this, they claim, is that net CO2 emissions across Europe could increase. 

This would only be a problem in the short-term, however, given the rapidly increasing share of renewables across Europe. In addition, the National Infrastructure Commission was explicit in its aim to build interconnectors with countries that have a superabundance of renewable power, acknowledging that the dynamics of interconnection vary according to the country being connected to.

The political context

Following the Chancellor’s endorsement, there is little doubt that smart power will now become a growing feature of our energy system. The Budget confirmed that the government would support an additional 9GW of interconnected capacity, almost double the current amount, and would allocate a fund of at least £50 million for research into energy storage over the next five years.

As more and more of our energy is derived from variable renewable technologies such as solar and wind, the need for a flexible and responsive grid will increase. Smart power has the potential to tackle this intermittency, and with it, one of the biggest weaknesses of renewable technologies. The Chancellor was right to back it in this month’s Budget, but care will be required to ensure a level playing-field on regulation and tax.