Consumers could save £2.5bn in 2025 with new energy efficiency feed-in tariff

Tuesday 20 October 2015
Amy Mount Amy MountHead of Greener UK Unit020 7630 4515amount@green-alliance.org.uk

The UK’s electricity market is distorted in favour of supply rather than cheaper demand management and reduction measures. New research has found that British consumers and businesses could save around £2.5 billion by 2025, and avoid the need for eight new power stations by 2030, if power stations were made to compete against electricity saving.

Demand-side response, which involves shifting appliance demand to different times of the day, has already grown four-fold in the past two years. It has the potential to scale up even further and could cover most of the electricity capacity deficit that will be created by the prime minister’s pledge to phase out unabated coal.

A new ‘negawatts’ strategy, proposed by think tank Green Alliance, would create financial incentives for electricity saving at less than half the cost of building new power stations. It would enable businesses to compete to deliver savings on the most cost effective basis.

The report, Getting more from less: realising the potential of negawatts in the UK electricity market, shows how the UK’s electricity market is distorted in favour of supply side measures at the expense of cheaper demand side measures.[1] Businesses and consumers spend too much on electricity supply because they are not investing in efficiency.

Electricity demand reduction measures are available at £30 per MWh saved, and can compete with new power stations, which cost a minimum of £76 per MWh.[2] Substantial cost and carbon savings have been achieved using these policies in Texas, California and New England.[3]

The report proposes two changes to the electricity market:

1. Create a negawatts feed-in tariff, paid on the basis of avoided energy consumption, with recipients competing in an auction to deliver electricity saving, eg installing LED lighting in homes or more efficient electrical motors in manufacturing businesses. This could reduce electricity demand by 6.4 GW by 2030, equivalent to the capacity of eight 800 MW combined cycle gas turbine power stations. The ensuing investment in electricity demand reduction alone could yield net savings to British consumers of £2.4 billion by 2025.[4]  

2. Open the UK’s capacity market to competition from demand-side response and energy demand reduction on an equal basis with electricity generation. This could bring forward 6 GW of additional load shifting and reduction by 2023, covering most of the coal capacity deficit created by the prime minister’s February pledge to phase out unabated coal.[5]

Amy Mount, lead author of the report, said,
“Negawatts are a no-brainer for consumers. Not only are they the cheapest way to reduce carbon emissions. They also reduce the pressure on the electricity system by reducing peaks in demand. These policies would save the UK huge amounts of money, by avoiding the construction of unnecessary power stations. If government wants to reset energy policy for the  benefit of consumers this is where they should start.”

Sonny Masero, chairman of award-winning energy management business Demand Logic, said,
"If the UK were to adopt an efficiency strategy like the one proposed by Green Alliance it would not only save businesses and consumers £2 billion a year, but also create top line revenue growth opportunities for businesses like Demand Logic to contribute even more to the UK economy. And the overall value created would be greater still, because efficiency services are exportable and in significant demand in international markets. Clean energy economics is overtaking environmental regulations and this strategy would be a timely initiative aligned with the government's economic policies for growth. With government support, efficiency services could be an important growth sector, increasing the return for UK plc from investment already made by InnovateUK in efficiency innovation."

Yoav Zingher, CEO and Co-Founder of KiWi Power, said,
"Demand side balancing mechanisms are the greener and most cost effective grid balancing solutions. As outlined in Green Alliance's report, the current market is structured in such a way that limits the ability of demand side solutions to compete with the higher polluting and expensive supply side alternatives. KiWi Power fully supports new policies advocating creating at least, a level playing field for demand side response to compete with supply and generation in meeting the needs of the UK power grid.

“Examples of how demand side response is keeping the lights on in the US are proof that DSR is not only a credible reserve function but should be prioritised as a core grid alternative to supply/generation. Aggregators such as KiWi Power have the scalable technology to increase our reach and operations exponentially, but limiting factors such as short term one year contracts in the capacity market act as disincentives for large commercial energy users to take up this credible alternative. We believe an urgent change to the Electricity Market Reform is needed to secure the future of the UK power grid.”

Notes

[1] Green Alliance is a charity and independent think tank focused on ambitious leadership for the environment. Since 1979, Green Alliance have been working with a growing network of influential leaders in business, NGOs and politics to stimulate new thinking and dialogue on environmental policy, and increase political action and support for environmental solutions in the UK.

[2] How cheap are watts and negawatts? Recent Bloomberg New Energy Finance analysis found the levelised cost of a new combined cycle gas turbine is £76/MWh (including carbon costs), see http://about.bnef.com/press-releases/wind-solar-boost-cost-competitiveness-versus-fossil-fuels/. The £30/MWh figure is based on analysis of electricity efficiency programs, domestic and commercial, in 20 US states from 2009-13, by Berkeley Lab, April 2015 http://emp.lbl.gov/sites/all/files/total-cost-of-saved-energy.pdf 

[3] What can we learn from the US? The US experience proves that demand side response (DSR) is an effective means of keeping the lights on. In the PJM market on the east coast of the United States, a market with three times the electricity demand of the UK, 15GW, or nine per cent of total capacity in 2015-16, will be provided by DSR. Demand response kept the lights on during last years’ ‘polar vortex’ in the US, when old coal-fired power stations stopped because their coal stacks had frozen solid. In New England, negawatts and DSR have proved so reliable that the system operator was confident enough to avoid investing $260 million (£156 million) in grid upgrades.

[4] How would the feed-in tariff be funded? An electricity efficiency feed-in tariff (FiT) would require extra spending under the next levy control framework (LCF), but this investment would more than pay for itself by reducing the amount of electricity that consumers and businesses purchase. Based on the conservative assumption that, of the potential savings by 2030, an electricity efficiency FiT results in just half being realised by 2025, that still represents a net saving of £2.4 billion off consumer bills by that time.

[5] How can negawatts improve the capacity margin? The capacity mechanism was created to provide payments for guaranteed sources of electricity capacity, to ensure a healthy margin between available capacity and peak demand. Demand side response (DSR), which temporarily brings down power demand at peak times, would reduce the need for coal-fired power stations dramatically if it were given fair access to the capacity mechanism. DSR has already grown four fold in two years, encouraged by new auctions, showing it can scale up much faster than new power stations. Evidence previously presented to the Energy and Climate Change Committee suggests that, if DSR were allowed to compete on equal terms in the capacity market, it would save bill payers up to £359 million in the first year alone.

[6] What are negawatts? Read our infographic report here.

 

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