Ofgem – Sustain a Future

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It’s been a busy week for the British clean energy industry.

On Monday, the business secretary, Greg Clark, announced the launch of phase one of a £246 million four-year Government investment in revolutionising the UK energy grid through the development and improvement of battery technology and storage. Phase one includes the creation of a £45 million “Battery Institute” competition to establish a centre for research into making battery technology more affordable and accessible. One of the longterm goals is the creation of giant battery facilities around the National Grid which would store excess wind and solar energy to be deployed at times of peak energy demand.

The investment, known as the “Faraday Challenge”, is part of the Government’s Industrial Strategy. It is split into three streams of research, innovation and scale-up and is being seen as a “game-changer” for the UK, enabling the UK to be a world leader in clean energy and transportation.

Responding to the announcement, Professor Philip Nelson, Chief Executive of the Engineering and Physical Sciences Research Council (EPSRC), said: “Batteries will form a cornerstone of a low carbon economy, whether in cars, aircraft, consumer electronics, district or grid storage. To deliver the UK’s low carbon economy we must consolidate and grow our capabilities in novel battery technology.”

Another aspect of the announcement is the introduction of new rules over the next year to enable households with solar panels to generate and store their own electricity with the help of new battery technology and to sell this electricity back to the National Grid. The rules would move away from the traditional tariff model which solar panel owners currently have to pay to import electricity from or export electricity to the National Grid. The new rules would also reduce energy costs for people and businesses that agree to use less electricity during peak times. Overall, the intention is to provide for greater flexibility in the electricity system. The Government and Energy regulator Ofgem estimate that consumers could save between £17 billion and £40 billion by 2050.

These developments will be facilitated by the roll-out of smart meters and the development and installation of smart gadgets and appliances, enabling a washing machine to be turned on by the internet during a period of high energy supply or a freezer being turned off for a few minutes to regulate demand. Tech companies, such as Google and Amazon, are already eyeing up opportunities in this new market to act as energy suppliers on the back of Ofgem agreeing to relax licencing and data sharing rules. This would give such companies direct control over appliances in a customer’s home, which has raised some serious concerns over privacy and security.

In other developments, earlier this week, the world’s first floating wind farm began trials off the coast of Scotland. Using revolutionary technology, this trial if successful, would enable wind energy to be generated in waters that are too deep for bottom-standing turbines, opening a new frontier for wind energy. Although currently much more expensive that traditional wind turbines, producers are hopeful that the cost of floating turbines will fall, just as it has for traditional turbines.

Finally, the UK has made a bold announcement to ban the sale of new petrol and diesel cars from 2040, following on from a similar announcement made by France earlier this month. Perhaps somewhat fortuitously, this announcement was followed by BMW announcing that it would start developing a fully electric Mini car at its plant in Oxford, UK.

After years of ignoring clean energy and environmental issues, it looks like the UK Government is finally starting to sit up and take notice. This week’s developments are an excellent step forward. However, much more investment and innovation is still needed for the UK to meet its 2030 Agenda commitments.

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Yesterday, I attended a conference at the Cambridge Judge Business School on the topic of clean energy. The conference was entitled “When small means big: bringing clean energy mainstream”.

The conference was kicked off with opening remarks from Dr David Reiner and proceeded with a panel discussion. The panel consisted of Dan Barry, Global Head of Environmental Products, BP; Giovanni Terranova, Co-Founder and Managing Partner, Bluefield Partners; Peter Bance, CEO of Origami Energy; Martin Schoenberg, Energy Efficiency Finance Consultant, UN Environment Finance Initiative; and Pamela Taylor, Partner Enforcement and Innovation Link, Ofgem. The closing remarks were delivered by Ilian Iliev, CEO of EcoMachines Ventures.

The main focus of the discussions was what role clean energy would play in our electricity mix in the future and how to ensure that there is a supportive regulatory framework and sufficient finance to encourage the proliferation of clean energy supply.

A few key themes emerged from the discussions:

1) Unpredictability:

Every speaker alluded to the fact that we are notoriously bad at forecasting. For example, oil price fluctuations have, in the last few years, caught many off guard and no-one expected the cost of renewable energy to fall so dramatically. Another more specific example provided by Pamela Taylor was the projection made in 2012 for the uptake of solar photovoltaic in the UK. In 2012, it was estimated that it would take 18 years to reach 6GW of generation capacity. In reality, it only took four years to reach 10GW!

The good news is that, based on the panel’s experience, regulators (in the UK), companies and financiers are aware of this unpredictability, especially in relation to clean energy technology, and are responding.

Ofgem has launched a new initiative called the “Innovation Link” which advises new and alternative energy companies on their regulatory requirements and provides a service called a regulatory “sandbox” which enables new products and technologies to be trialled with fewer regulatory barriers. By March 2017, Ofgem had received 29 sandbox applications and over half related to local energy models. The intention behind the Innovation Link, and especially the regulatory sandbox, is to enable regulators and companies to work together to develop a stable and supportive regulatory environment for clean energy.

The BP Environmental Products team is responding to the unpredictability challenge by researching and helping invest in and develop a broad spectrum of new energy technologies, without, at this stage, committing to any one in particular. BP’s logic is that it is still unclear which technologies will be sufficiently stable and scalable to engender a systemic shift away from oil and gas.

2) Investment:

Giovanni Terranova of Bluefield Partners outlined the ideal investment framework for energy technology – a stable regulatory regime and technology which is both proven and scalable. This prompted me to ask, what about funding for early stage technologies where there is no established regulatory framework (Ofgem sandbox companies, for example)?

According to Giovanni, there is plenty of appetite from PE houses, VCs, hedge funds and family offices for investment in early stage clean energy technology. The incentive is obtaining first mover advantage in respect of a particular product. However, the downside is a high cost of capital. But, just like the solar and wind power industries, costs of capital will come down as the technology becomes more stable and better researched.

However, in his concluding remarks, Ilian Iliev lamented the lack of, especially, VC funding in clean energy. He even provided anecdotal evidence of his company playing down the clean energy aspects of certain products they invested in. At the same time, Ilian noted that project finance and corporate finance in clean energy was steadily rising. Perhaps therefore the model adopted by BP’s Environmental Products team is the most effective at providing funding for early stage clean energy technology.

3) Blockchain and other technology innovations in energy:

The use of blockchain technology in the energy sector was mentioned a number of times.

BP predicts that blockchain technology will enable real-time peer-to-peer energy transactions. Peter Bance of Origami noted that blockchain can be used to generate audit trails.

The panel also discussed potential future technologies that could assist the clean power industry, from an app which enables a consumer with solar panels on their roof to buy and sell energy from the main grid to the use of API technology to prevent excess demand failures.

The conference raised many questions about the future of clean energy but what was clear is that whatever form it takes, clean energy is already a substantial component of worldwide energy generation and its impact is only going to grow.