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Creating grids to match the ambition of COP26

Whilst there has been a lot of progress made in policy which finally recognises the importance of climate change, there is still the need to regulate for net zero and incentivise grid companies to create infrastructure that enables renewables, energy storage, electrification and Demand Side Management (DSM).  The pace of change of grid needs to match the ambition of COP26. In this article, we’ve spoken to Patrick Smart, Energy Networks Director in the UK and Ireland and Jesse Boyd, Transmission Director in the US about the state of affairs in their regions.

Over the past few years, companies, cities, financial institutions, and more than 130 countries have set or are considering a target of reducing emissions to net zero by mid-century. However, at this point, it is also equally important to ensure that energy market regulation, a key enabler of these broad policies, is aligned with our ambitious targets. Given the extent of the progress of deregulation in many of our global energy markets, the challenge of creating alignment between market regulator behaviour and government policy is one that will be faced all around the world.

The power grid will be the backbone of an energy system dominated by renewables. By 2050 renewable energies will be 81% of electricity. A net-zero energy system, largely running on renewable electricity, can remain reliable and resilient. But electricity grids need to be expanded and reinforced – onshore and offshore – as well as optimised.  According to WindEurope, the estimated expenditure for new transmission grid infrastructure adds up to €152bn in the decade 2021-2030 in the EU28 region.  Optimising existing grid infrastructure is a no regret option.

Take Great Britain (GB) grid network for instance. In GB, the custodian of energy market regulation is the Office of Gas and Electricity Markets (Ofgem), an entity independent of Government whose duties are set down in the Electricity Act 1989. In relation to the electricity market, Ofgem’s primary objective is to ‘protect the interests of existing and future consumers in relation to electricity conveyed by distribution systems or transmission systems’. In 2011, this primary objective was amended to clarify that the interests of consumers included the reduction of electricity-supply emissions of targeted greenhouse gases. What remains unchanged since the privatisation of the electricity industry in the late 1980s is Ofgem’s powers in regulating market behaviour through the enforcement of licences in four separate activities: supply, generation, distribution and transmission of electricity. Since privatisation, the UK electricity market has undergone several periods of evolutionary change. However, the fundamental structure has stayed the same and has arguably served the customer reasonably well, primarily because Ofgem’s focus has been on sustaining downward pressure on energy bills of current energy customers.

However, as noted by Patrick Smart, Energy Networks Director in the UK&I, “A good example of where GB’s net zero ambition and our approach to energy market regulation is misaligned is generator Transmission Network Use of System (TNUoS) charges. These are charges that many generators pay for use of the GB transmission system. TNUoS charges send a strong locational signal depending on where that generator is located relative to centres of major demand. This means that generators in the south of England pay low charges (or even receive credits) while generators in Scotland pay very high charges. This locational signal is forecast to get even stronger which will drive TNUoS charges higher in certain locations.

“The locational signal should provide incentives for new generators to locate in areas that will help deliver an economic and efficient transmission system, i.e. close to major demand centres.  But large urban, populated areas don’t often match with areas where we can harness the best wind or solar resources. This is to the clear detriment of delivery of net zero at least cost to the consumer.”

At the end of the day, all regulators need a net zero objective underpinning their mandate and a regulatory framework that enables the infrastructure investment required to be delivered efficiently and at the lowest cost to the customer.”

On the other side of the Atlantic, Regional Transmission Organizations (RTOs) were created to enable wholesale competition and promote open access to transmission without discrimination. Newly formed RTOs opened interconnection queues, to study new generation projects seeking to interconnect to their transmission systems and to determine any additional transmission capacity needed to accommodate the new generation. However, in the implementation of the RTO, the existing hydrocarbon-based generation were grandfathered into transmission capacity, while new renewable generation is required to pay to upgrade the transmission system to accommodate their generation capacity.

Jesse Boyd, Transmission Director, in the US stated, “The high cost and risk of these transmission upgrades make renewable projects a challenge to finance and sell. Nevertheless, RTOs still have large amounts of renewable projects applying to their interconnection queues.”

Outside of RTOs in the US, where vertically integrated utilities serve territories often smaller than a state, large scale transmission projects are needed to diversify access to renewable energy. This is to better balance their system needs. Transmission is also needed to bring power from locations of high renewable resource to loads like cities and industrial centres. These large transmission projects must go through multiple layers of approval and permitting and require collaboration between the transmission planning departments of multiple utility companies often with competing interests.

“A non-discriminatory, independent, federally authorized transmission siting and permitting process  is necessary to ensure the kind of transmission buildout which the US needs. Once the transmission capacity is created, the current RTO interconnection queues demonstrate the willingness and eagerness of the renewable energy industry to develop the necessary new generation.”

This is just two of the regions that we operate in and from speaking with both Patrick and Jesse, it is evident that delivery of a net zero whole energy system by 2050 for future energy customers will require levels of investment not seen since the introduction of electrification in the first half of the 20th century. That investment is required at all stages of the energy supply chain but particularly in new renewable generation assets and will need to link up existing and new infrastructure such as green hydrogen, in a way that has not been seen before. The fundamental structure underpinning energy regulation needs to undergo a revolutionary change in order to deliver change on this scale.  We need to focus on regulating for the future system and this challenge will need to be confronted in all the global markets in which we operate.