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Utility Week 22nd September 2017

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UTILITY WEEK | 22ND - 28TH SEPTEMBER 2017 | 15 Policy & Regulation Laura Sandys, chief executive, Challenging Ideas Opinion W hen one or two energy geeks meet it is rare that "security of supply" isn't mentioned. It is one of the commandments of the energy system – keep those lights on! And like a command- ment it means different things to different people and is employed to justify all sorts of interventions, actions and business models. It is also very difficult to critique a core tennet of the energy system unless you welcome the wrath of the priests if you question its centrality in policymaking. I am not in the business of questioning interven- tions that protect the security of our system, nor would I promote any policy that could possibly impact keeping those important lights on. However, we have become very sloppy in how we use this emotive term. As the energy sector's catchphrase for everything from a mildly inconvenient service slip through to a total system failure, it is time that we examine what sort of security we are looking for – and how best to plug that risk. This means unpicking the term and analys- ing much more precisely the different levels of risk and costs sitting beneath it. It would be good to start with distinguishing between "service" risk and "system" risk. These are distinctly different things and form the bookends of the catch-all security of supply phrase. Practically all of the power cuts experienced by consumers today are the result of faults, or planned maintenance, on the low-voltage distribution system. The debate over security of supply, however, is domi- nated by questions over generation. Policy believes that it must deliver a 100 per cent energy service at any time to all consumers from the central system. While the capacity market offers oppor- tunities to other services, it is primarily focused on providing centralised generation capacity. To a much lesser extent does policy calculate the energy supply that is not on the system. Nor does it anticipate the technological interventions that could help us deliver that 100 per cent service without drawing all of this from the central system. With distributed energy, storage, pro- sumers, industrial energy capacity, and storage beyond the plug, new service shortfall options are increasingly available and should be encouraged. Actually, during the year we are oversupplied with generation and undersupplied with flexibility services. So as a consumer I might contract with a supplier for 80 per cent system service, using my electric car, my local authority storage capacity or my in home battery for the remaining 20 per cent. Current calculations are that we need back-up for 2 hours at a time, totalling 5GW across the system – it is not at all insurmountable for much more of this to be covered by new services. This would mean that we can take the certainty of a 100 per cent system service out of the security of supply paradigm and redefine it as a shortfall delivered from the system with other top-up options available. It is not that 100 per cent service isn't important, but it can be delivered through non-system interventions and be hedged through technology. In addition, are we calculating the most important risk to the security of the system accurately or appropri- ately? Currently this is calculated with very superficial data, which will obviously improve with smart meters. But the "SOS" risk is predicted using an old- fashioned and data-poor metric – derated reserve margins. As Edmund Reid, from Lazarus, points out in his excellent security of supply paper, reserve margin is by definition subjective, and is "not telling us that there is insufficient generation capacity in general; it is telling us that in a scenario where it is dark, still, dry and cold there may be insufficient generation capacity". In fact, wrote Reid "during 2015/16's supposedly 'tight' winter, when a number of commentators claimed a high risk of supply interruption, we have had 37 negative balancing price periods". In short, the power system was so long on power that winter that it needed to constrain it off 37 times more oen that it had to ask for more. Even the International Energy Association says the reserve margin metric "is not well suited to taking into account the capacity of variable renewable energy". We compound this by having supply standards that are among the most demanding in Europe. Some say that with this level of margin we will never demand greater productivity gains from the system – the market won't stimulate it. Some national regula- tors believe that countries across Europe have become captured by a capacity paradigm that seems more like a fear policy rather than a real need. It is time for an encyclical from ministers – security of supply as a term should be banned and we need to be designing polices that distinguish between service risk and system risk, whose different characteristics and needs are conveniently disguised by our sector's favourite catchphrase. We will then be able to identify the most cost-effective and system efficient measure- ment and responses to where risk really lies. Slaughter some sacred cows Security of supply concentrates on generation capacity when in reality it should differentiate between 'system' risk and 'service' risk – it's time to think creatively.

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