Transitioning to whole energy system thinking

Capgemini is in full support of BEIS raising the Review of Energy Market Arrangements (REMA) in recognition of current market arrangements needing to be adapted and changed for a net zero future. However, we view the approach to undertake a wholesale review in silo to other key system features and other market consultations as too limited and unlikely to result in the right set of changes to meet the objectives.

However, we are concerned that the review structure reflects the internal organisation of BEIS, rather than what the market needs. A whole energy market approach is vital and must work across government and industry, and consider how energy is used at home, work and in transport. It must define whether responsibilities will be owned by government or industry. The current lack of clarity in the energy transition plan is sowing confusion in the markets and disincentivising investment.

In this article, we provide key observations and recommendations on the following subjects:

• Vision definition
• Whole energy system thinking
• Consumer behaviour and protection
• How to move forward

Vision definition

It is critical that a clear vision is established. We suggest BEIS defines the central use case for the future of energy, which includes:

• How will energy be used?
• How much energy is needed?
• What forms will this energy take, for example, how much electricity is needed?
• What are the seasonal variations?
• What will supply the required energy?
• What are the lead times associated with asset builds?
• What locations will energy be supplied from?
• How much energy can be supplied from the UK from renewables, and how large is the gap to our energy needs?
• How will energy be transported and in what forms?
• How do the future supply and demand profiles meet our net zero carbon obligations?
• What are the characteristics of the economic and market systems that we want to operate?
• What role will government play and what will the market perform?
• How will the future system be implemented?
• What are the interventions and programmes that will deliver it?
• What technologies do we need to support our energy needs, and what do we need to progress their development?
• What are the key strategic risks in delivering net zero carbon by 2050?

Whole energy system thinking

It is essential that we design a market on a whole system basis to ensure that we meet the demands of the future energy system. There are areas where we can retain what we have today, but many areas of the system will need to undergo massive change ahead of a net zero future.

Below we list some of the areas that should be considered:

Flow of money through the system – Current retail and wholesale markets were constructed to suit the needs of a centralised fossil fuel-based energy system. With this model changing, the existing arrangements should not be viewed as system requirements or needs. To fully understand how money flows through the market, we must consider the entire system from the bill payer to the producer with many steps between.

Flow of energy through the system – The review of energy markets should be undertaken in the context of decarbonising the economy. Electricity use only accounts for approximately 20-25% of the UK’s total energy consumption, as such the scope must be widened to include gas markets and other fuels consumption (oil, diesel, petrol). We also need to place focus on understanding the winter demands, where peak power is needed and renewable outputs lower. Finally, the available land and sea areas for renewable electricity generation must be factored into the equation.

Data is at the heart of the new system – The future system will have millions of potentially automated actors interacting and balancing the system in real time. This will require a wholly digitised system capable of moving vast amounts of data in near real time. A resilient, flexible energy system must be supported by a free flow of standardised open data to enable automation and coordination of interoperable assets. Therefore, we must deliver change initiatives which ensure a consistent, open approach to data sharing.

Sophisticated metering across the electricity system – Future data will need to be supported by a sophisticated network of metering infrastructure at all levels across the electricity system. The future energy market needs to support multiple suppliers and contracts, with devices able to send and receive accurate signals, without the need to install new wiring. Smarter metering is not enough on its own. Our future energy system will require a smart connected grid that extends to building control, through service providers, for commercial and domestic environments.

Investment is at the heart of the issue – It is becoming increasingly clear that net zero carbon is, in reality, an investment problem. The CCC estimates £1.5tn of investment is needed. This is an average of £50bn per year for 30 years, but we know more is needed sooner to hit 2030 targets. We must design a market that attracts and develops this level of investment.

Regulation and agreements – To be blunt, our market regulation and agreements need to be, firstly, simplified and streamlined and then moved to a more sustainable principles basis.

International market dependencies – The context of how the UK energy market interacts and is impacted by international markets must be considered. DUKES numbers suggest that as much as 50% of UK energy is either imported or exported. As such, the future market must be able to react to shifting external developments.

Energy technologies – The consultation emphasises the importance of unproven technologies playing a significant role in the future energy system. Whilst CCUS and Hydrogen may have a role to play in the future mix, there is still a high amount of uncertainty associated with their fledgling maturity and will likely absorb a high volume of research and development costs. As such, the focus must be on proven technologies (Nuclear, Wind, Solar) to make an impactful change by 2035.

Domestic heat programmes – Implementing a domestic heat programme which includes new and improved heating technologies, insulation and efficiency that matches the reality of the UK housing stock should be actioned now with no regrets.

Building a bigger network – The reality is that we have 10 years to build a much bigger electricity network and to date, there has been a frustrating lack of investment in physical infrastructure at all levels in the electricity system. The brakes must be released and a network that is three to four times larger with the necessary digital characteristics to enable full chain flexibility built in the next decade.

Role of Government – We must provide investors with clarity to unlock the investment needed to drive the energy transition. Consistently changing the rules is extremely damaging and deters investment.

There needs to be a clear message to the market on where the government will intervene and where it will let the market operate. There are several areas where BEIS needs to be clear on how the government will operate:

1. In large nuclear build
2. In stimulating new low-carbon technologies such as hydrogen
3. In addressing skills gaps
4. How will taxation be used to drive behaviours?
5. When will primary legislation be used?

Consumer behaviour and protection

Consumer protection must be the priority in designing the future market arrangements. Whilst we appreciate the review did not factor in consumers, we believe discussing local pricing signals without mentioning vulnerable and poor customers was an unfortunate oversight.

Most consumers will not engage in the energy system other than as price takers – these consumer behavioural characteristics must be intrinsic in the future market design. To expect large numbers of people to change behaviour quickly is unrealistic and the pace of consumer change is a limiting factor in our move to net zero carbon.

How to move forward

The realisation of the future energy system will require government intervention to ensure the effective delivery of the desired outcomes. Whilst some interventions require further consideration and definition, there are several no regret interventions that can, and should be, actioned now.

Through our Energy Markets 2030+ working group, we are in the process of finalising a clear set of actionable recommendations, which we hope to share with BEIS in the coming months. However, we have outlined three recommendations which should be taken into consideration in the immediate term:

1. Put in place the right bodies, the right programmes, and the right market structure
2. Accelerate no regrets investment, remove red tape, and drive economic growth
3. Accelerate innovation for hard-to-reach areas where there are no easy choices

Whilst we are in full support of BEIS raising the REMA consultation and the efforts made to get to the root of the challenges, we believe more work is required in defining the whole system challenge.