Managing renewables subsidy uncertainty would help UK move to smart energy system, says expert

On Thursday the Department of Energy and Climate Change (DECC) published a new report which highlighted the potential for "smart energy solutions" to help the UK meet its energy supply needs whilst at the same time delivering low-cost energy bills to families and businesses and reducing carbon emissions. It also separately outlined new changes to renewable energy subsidies through the Feed-in Tariff and Renewable Obligation schemes.

In its smart energy report (21-page / 726KB PDF), DECC said: "Over the period to 2050, [a smart energy system] could help us build less power generation, turn off generation less when it exceeds demand, and avoid significantly reinforcing our energy networks. It could also reduce the cost of balancing our energy system in real time. These smart solutions include demand side response (DSR), storage and smart networks. Interconnection also plays an important role."

"Together, these solutions would help reduce overall system costs and move us towards a more flexible energy system. Under a smart, flexible system, external estimates suggest that overall system costs could be reduced in the order of tens of billions (£) in the period to 2050," it said.

DECC said it plans to take a number of steps over the next year to aid the move towards a smart energy system in the UK, including "removing regulatory barriers to smart solutions" and supporting innovation through funding.

Lindsay Edwards of Pinsent Masons, the law firm behind Out-Law.com, said that good progress has been made with the deployment of renewable and decentralised energy solutions in the past few years but that "the challenge now is integrating the renewable generation that has, and will continue to be, deployed". 

"The holistic approach that DECC takes in the report is welcome: incentives and market mechanisms that are joined up will be crucial to integrating renewables and creating a smart energy system, and this has not always been the case to date," Edwards said.

"DECC identify their key next steps as removing regulatory barriers, delivering clearer price signals and catalysing innovation. Each of these are absolutely necessary, but I would also add to the list the need to manage uncertainty in the market – for example around the likely future profile of government subsidies and the timeline for the smart-meter roll out – so that businesses are able to plan ahead and secure the funding they need, and the need to better engage customers and encourage them to participate in the smart energy agenda. This is particularly important to ensure the widespread adoption of smart meters, for example, which can only be offered to consumers but not imposed on them," she said.

The UK government has faced criticism from industry for its plans to reduce subsidies for renewable energy initiatives.

On Thursday, however, it set out its intention to revise the Feed-in Tariff scheme (115-page / 1.36MB PDF) for solar, wind and hydro power projects, with subsidy levels reducing significantly on 8 February 2016 and there being a hiatus on accreditation for that subsidy in the meantime. It also confirmed that the Renewable Obligation (RO) scheme for solar PV with a capacity at 5MW and below will close to new applications from 1 April 2016 (30-page / 358KB PDF) subject to certain exceptions.

A reduced level of subsidy under the RO scheme is proposed for some of the projects which remain in the scheme and "grandfathering" – a principle which ensured developers received the same level of support through their project's life post accreditation – has also been removed from solar projects, save for those which can demonstrate, against defined criteria,  that significant financial commitments were made to bring them forward prior to 22 July 2015.

Energy specialist Nick Shenken of Pinsent Masons, the law firm behind Out-Law.com, said: "The general feeling in industry is that, while the position is better than it might have been, the government hasn’t taken on board the totality of their concern. Even at the rates proposed, the likelihood of 'free domestic rooftop solar' – being free installation and supply of solar power to residential premises – remaining available is unlikely. Instead it will need to be replaced by a model which sees residents paying for their solar power. That seems a real shame in the context of the fight against fuel poverty – a stated government policy objective."

Shenken said many would have liked the government to have announced special support for the deployment of solar panels on social housing to ensure that those affected by the results of the cuts would not be those who struggled most with energy costs..

Shenken said it is possible that some in the energy industry may be "considering the legality" of the freeze the government has placed on existing eligibility criteria for solar subsidies in the run up to 8 February 2016 when the new FiT regime will kick in. He also said that the government's latest announcements could hit investor confidence.

"I think there is a real possibility that the manner in which the policy changes are implemented, possibly even more than the changes themselves, risk an adverse effect on investor confidence," Shenken said. "There is a general unease in the industry about whether the government will remain consistent with its policies or allow a seemingly shifting policy environment to continue."

"The issue, as before, is that if changes like this can be threatened or implemented with little notice in the past, then it can happen again and investors simply can’t ignore that in assessing where to deploy their capital," he said.

Edwards said there is an increasing appetite in the commercial sector to take advantage of new market opportunities that a smart energy system might bring.

"We are seeing an increasing number of ‘non-traditional’ players in the energy market express an interest in new opportunities such as smart metering, aggregation and new models of energy supply," Edwards said. "That DECC have published a report outlining a series of clear next steps to improve the market environment for this sector will provide welcome encouragement. The challenge now will be to back this up with some key deliverables in 2016 to give the market the confidence it needs."

"Of key importance is the need to ensure that the benefits of a smart energy system are realised right across the energy value chain, from generation, through transmission, through distribution and supply to the end consumer," she said. "The difficulty of passing benefits realised high up the value chain, for example in transmission or distribution, to the end consumer has hindered the development of a smart, fully integrated energy system to date."

"This in turn will require greater communication and integration between generators, transmission system operators, distribution system operators and suppliers. DECC and Ofgem will need to play a central role in facilitating this," she said.

Edwards said that DECC and Ofgem will also need to ensure that the regulatory regime keeps pace with the rate of change in the energy system to make sure that it does not inhibit innovation.

"This may mean that current licence exemptions need to be broadened to enable innovators and new players in the energy sector to find their feet, for example," she said.