WIREDGOV

Two separate pieces of work that look at the future of our electricity system were published yesterday by the Department of Energy and Climate Change. These are:

• A response to a consultation on transmission licences, which found that changes to the regime on constraints could save up to £300m between 2012-17; and
• The conclusions of the initial Electricity Demand Reduction Assessment, based on internal work and some analysis by McKinsey & Company, which finds significant potential for greater efficiency in the use of electricity.

Transmission Constraints Licence Condition:

Last year constraint payments of £324m were paid to gas, coal and wind generators in order to alter their output when congestion on the transmission system meant electricity could not be transmitted from where it was generated to where the demand existed.

Most constraint payments are reasonable and compensate generators for having to reduce or increase the amount of electricity they have planned and committed to provide to suppliers. 

However, it is possible for generators to take advantage of the current arrangements, especially when there are limited options available to National Grid for balancing the network.

Following a consultation, Ministers have decided to modify electricity generators’ licences to prevent behaviour allowing them to profit unfairly at the expense of consumers during periods of transmission constraint.  Enforcement of this measure will be overseen by Ofgem, the independent energy regulator.

Charles Hendry, Minister of State for Energy, said:

“It is vital that the cost of balancing the electricity system is a fair one. The changes we are making aim to strike a balance between compensating generators for financial risk, and protecting consumers from excessive charges.

“Going forward, we expect upgrades to the electricity network to improve the flow of electricity through the system and reduce the need to constrain transmission.”

Electricity Demand Reduction:

Our initial Electricity Demand Reduction Assessment, based on internal work and some analysis by McKinsey, concludes that implementing existing efficiency improvement measures to their full potential could release significant annual electricity savings of approximately 150 TWh (over a third of predicted demand) by 2030. However it also found that roughly 100 TWh would not be realised through existing policies.

The majority of the un-captured abatement potential was found to exist within the services and industrial sectors. The biggest areas for potential savings were building efficiency improvements and lighting controls in the commercial sector, as well as pump efficiency measures in the industrial sector.  A draft of the relevant report is being published today for comment, before we publish a final version.

In response to this, the Government has yesterday announced it will consult in Autumn 2012 on how to realise potential savings.

Commenting on electricity demand reduction, Charles Hendry added:

“With such vast potential for more efficiency in the electricity system, we must look closely at all the possibilities.

“That’s why we have today agreed to explore these options through a formal consultation.”

Notes for editors:

1. A full copy of the Government Response to the consultation on the Transmission Constraint Licence Condition is available on the DECC website.
2. Last year (2011/12) constraint payments worth £324m were paid to generators by National Grid to reduce or increase their output, with the vast majority of these payments made to coal and gas plants. These payments represented an addition of around 40p on consumer bills for this period.
3. Over the coming years there will be significant upgrades to parts of our electricity network – these will improve the capacity for electricity to flow between regions, and significantly reduce transmission constraints and therefore the likelihood that National Grid will have to call on generators at short notice to either increase or decrease their planned generation. 
4. Until these upgrades can take effect, the Transmission Constraint Licence Condition should reduce unnecessary constraint costs to consumers.  We believe it could save consumers between £115m and £300m over the five year period. 
5. The Electricity Demand Reduction Assessment, and supporting analysis completes a commitment in the Electricity Market Reform White Paper published in July 2011 to: “undertake an assessment over the coming year to determine whether DECC should take further steps to improve the support and incentives for the efficient use of electricity”.