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Written for Bloomberg New Energy Finance, click here to read the full white paper online
The world is entering an era of “base-cost renewables”, when the cheapest source of incremental power generation in most countries will be ultra-cheap renewables. Does that doesn’t mean policy-makers can step away and the unfettered free market will deliver the rest of the clean energy transition? Unfortunately not!
In this White Paper I argue that while clean energy will certainly continue to grow for some time, the transition will then either stall or become unaffordable unless there is fundamental reform in the world of power regulation. I go on to postulate six underlying principles around which the future power regulatory framework needs be built.
First of all, we need to stop thinking of all electrons as equal. Power markets have to recognise that a kWh of power which is firmly dispatchable is more valuable than one which is variable. The value of power varies by its reliability, carbon content and location. We need markets which reveal the spot and forward prices for different sorts of power, so that innovators and investors can arbitrage between them. In particular we need transparency around the Firm Spread, the premium the market is prepared to pay for flexibility.
2. Towards a demand-led system
Current power market regulation is mainly targeted at generators. We need to flip that, and target it mainly at power retailers. We need them to innovate and source power the best way they can in order to meet their customers’ demand, including through aggregating demand response, which will become ubiquitous. The role of the regulator will be to ensure the resilience of supply and the liquidity of markets, and to ensure that market participants meet all costs incurred anywhere in the system as a result of their decisions.
3. Cleaning up
Super-cheap renewables will penetrate the market, driving fossil-fuel-based power back to those times and locations which variable renewables find hard to serve. At that point there will be détente between clean and fossil power; the best way to break it will not be to subsidise clean power, but either to subsidise those technologies which can help it to meet firm demand, or to force unabated fossil fuel off the system. The latter will be much lower cost. It can be done via carbon prices, carbon tax, intensity limits or forced closures – but if none of these is politically acceptable, don’t expect fossil power to disappear any time in the next few decades.
The regulatory framework of the future must also provide for remuneration for both transmission and distribution networks. In the white paper I postulate that blockchain technology will allow every power retailer to contribute towards the cost of every wire used to meet every unit of demand. There may be simpler ways of doing it involving congestion charging, but the principle has to be met.
5. International affairs – interconnect, but verify
While a power system with very high penetration of renewables could, in theory, be kept in balance with just power storage and demand response, in practice this becomes extremely expensive. Some level of interconnection with neighbouring systems will almost always make sense. But any imported power must also conform to local rules for carbon content, and that means certificates of origin. Once again, the blockchain beckons.
Implementation of the first five principles can only be achieved in a fully digital system. The power system of the future will have to be run by sensors, bots, big data and smart contracts, with humans relegated to the role of designer. The regulatory framework has to enable this. It also has implications for resilience – we had better get this right – and for the types of players who need to be round the table as the future of the world’s power markets is designed.
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My intention with this White Paper was to spur discussion. It was not intended to be a template, ready to roll out immediately. Many countries and systems have already implemented parts of it. It will look different in different geographies and political economies. And it will take many years. But without a road map we have no chance of reaching our destination. Let the debate begin!
You can download the full White Paper (pdf) here.
June 15, 2017