Our electricity system needs innovation, not subsidies
Secure supply of electricity is a cornerstone of modern, developed economies. Unreliable electricity supply is not an option - the damage that blackouts do to businesses and individuals is seen as unacceptable.
There is a perception that a key problem in market based electricity systems is the 'missing money problem'. Political sensitivities lead to most electricity markets operating with price caps that distort the market and prevent proper price discovery. Lack of demand side flexibility means that system security rests on utilising expensive and dirty marginal generators for only a few hours each year.
Compensating these generators for their high variable costs makes peak demand electricity expensive for us all. But it's not just their high variable costs that we all need to pay - we also pay for all their fixed costs incurred during the rest of the year.
Because the marginal generator generates such a small amount of electricity, recovering their fixed and variable costs across these few MWh’s would lead to unacceptably high electricity prices. This is the missing money problem - the inability of price capped wholesale electricity markets to properly compensate the marginal generator.
The marginal generator is like a lazy taxi driver. His fuel inefficient taxi makes him expensive and dirty, so he only gets a few customers a year. Because desperate customers refuse to be flexible and wait until a cheaper taxi is available, they demand that our lazy taxi driver sits in the taxi stand for the entire year.
Since our lazy taxi driver can't afford to sit around all year, both he and our inflexible customers need the government do something about it. The government decides to give our lazy taxi driver free money to sit around all year, waiting to charge customers to ride in his expensive and inefficient taxi.
Seems crazy? This is exactly how the UK government is choosing to solve the missing money problem. The Capacity Market is an auction set to secure enough supply to meet peak demand. Through the Capacity Market the government can make sure that the marginal generator who only generates for a few hours will be around when needed.
The problem with the Capacity Market is that it makes electricity expensive for us all. Marginal generators who would have been uneconomic in the wholesale market are subsidised. As the UK Capacity Market subsidises total demand, even generators who were already making money now get an additional cash flow without doing anything different.
There is a smarter solution to the missing money problem. By making demand flexible when electricity is expensive, we won't ever need the expensive marginal generator. We won't need their dirty & expensive electricity, and we won't need to pay them to sit around all year just in case. When prices are high flexible demand will respond to reduce load on the system - reducing the price of electricity for us all.
Flexible demand is like the passenger that is willing to wait a bit longer for a taxi. It's what we recognise as common sense - no one would demand a capacity market type subsidy for our taxi driver. Yet that is what is happening in our electricity system.
Two things are needed to enable demand flexibility to solve the missing money problem. First is a properly functioning wholesale market - the use of out-of-market subsidies like the Capacity Market kills the opportunity for demand flexibility to fairly compete. The second is a platform for customers to utilise their ability to be flexible.
The need for a true wholesale market is why we legally challenged the UK Capacity Market on behalf of both electricity customers and the planet. It’s a crucial first step in solving the missing money problem using demand side flexibility.
The second step is the platform, which we offer at Tempus. We allow previously passive customers to utilise their capacity to be flexible - and get paid for doing so. We use artificial intelligence to learn what the correct action is for your flexibility asset at every hour of the day.
We allow consumers of electricity to become active participants in the electricity system, supporting the grid, the deployment of renewables and their own bottom line. It's a win/win/win – but demand side flexibility first requires a properly functioning market to compete fairly.