Towards a smarter electricity future

Global efforts to address climate change will involve the massive roll-out of existing low carbon energy technologies as well as the development of new technologies, together with increased energy efficiency, fundamental behavioural shifts, and processes that will reduce carbon emissions, all on an unprecedented scale. Such change requires smart engineers, willing industries and green consumers. But it also requires getting the regulatory framework structures and policies right at national and international levels.

A better understanding of these incentives and policies forms part of the work of the Electric Policy Research Group (EPRG), along with analysis of liberalised energy markets, and pricing carbon via taxes or emissions trading.

This joint research programme between the Faculty of Economics and Judge Business School was launched in 2005, when the EPRG was awarded a five-year, £2.38 million grant from Research Councils UK (RCUK), expanding on the work of the Cambridge-MIT Institute Electricity Project.

Professor David Newbery, Director of the EPRG, leads a group that now numbers more than 30 researchers, including a team of 12 faculty and senior research staff, together with PhD students and Associates from departments across Cambridge and other leading institutions. The research team is built around core expertise in economics and policy, with active collaboration between experts from different academic traditions, and draws on insights from engineering, political science and law. The group is also supported by the industry and government sponsors of its Energy Policy Forum, which helps leverage research funding and enhances the EPRG’s ability to respond to important research questions as they arise.

Two recently completed EPRG research projects exemplify the types of analyses that are helping the electricity industry evolve: the risks and incentives for taking forward carbon capture and storage (CCS), and the opportunities for increasing energy efficiency through smart metering, both of which are key elements in the UK’s new Low Carbon Transition Plan.

CCS: risks and incentives

A study sponsored by the UK Department of Energy and Climate Change has analysed the incentives needed to reduce emissions from fossil-fired electricity generation.

The idea behind CCS is to capture the CO₂ emitted from power plants burning fossil fuels and to store it safely in geological formations such as depleted oil fields. By 2015, the European Union (EU) aims to have up to 12 commercial-scale CCS demonstration projects deployed across Europe, but as of today there are still no commercial projects operating and each project is expected to cost hundreds of millions of pounds.

With so much at stake, a competition has been launched by the UK Government to build one of the world’s first commercial-scale CCS power plants in the UK. This was followed by recent announcements of support for CCS at the level of the EU, and a UK Government commitment of up to four demonstration plants. But how to select the projects? A study led by Dr David Reiner and Professor David Newbery set out to identify the key risks in designing the project selection process and to examine the interactions between incentives for CCS at the EU level and those at the national level.

Bringing together experts on auction design, game theory and R&D policy, the study examined European support schemes in greater detail. In addition to stimulus spending of over €1 billion (up to €180 million per project), the EU has earmarked 300 million allowances under the EU Emissions Trading Systems to support CCS and innovative renewables technologies (up to 45 million allowances per project). Several risks were identified in designing the project selection process, including the carbon price risk, the variable cost risk, the technological risk and inefficiencies such as the effect of firms colluding or possessing information unavailable to governments. To overcome these concerns, a Technology Category Auction was proposed that would deliver learning from diversity (validation of the main available technological options) rather than learning by doing.

The hope is that research such as this can help governments put in place policy frameworks at national and international levels that will enable the CCS demonstration phase to be conducted in a manner that is both effective, by demonstrating a range of CCS technologies across Europe, and accomplishes it at least cost.

Examining the prospects for smart metering

Could smart meters be the answer to promoting efficient, flexible and sustainable energy consumption?

Decarbonising the electricity system is just part of the story. Achieving the UK’s target of an 80% reduction in greenhouse gas emissions below 1990 levels by 2050 will involve perhaps as much as a 50% or more improvement in energy efficiency relative to business as usual. A key part of any climate change strategy therefore is to change the nature of the relationship between the energy services that people need and the amount of energy that is supplied. One mechanism for delivering this is the so-called smart electricity meter – a two-way real-time communication between the household and the electricity grid that enables demand to be varied in response to available supply.

The UK Government is currently in a two-year consultation period prior to announcing its strategy for how to roll out smart meters to all households by 2020 in line with the EU Energy Services Directive. Dr Michael Pollitt and colleagues Dr Tooraj Jamasb and Aoife Brophy Haney in the EPRG have been examining the prospects for smart meters in the light of international roll-outs that have already occurred.

Currently, we have an electricity system in which supply is largely driven by demand. At the household level, most homes have a ‘dumb’ electricity meter that records cumulative consumption to date. Individuals have very poor information about their instantaneous electricity consumption, and hence may be consuming more energy than they need. It also means that individual electricity demands are unable to respond to the situation of the electricity system as a whole. A ‘smart’ electricity meter would address both of these problems and be an essential part of delivering an electricity system based on the concept of energy services rather than consumption.

The EPRG study is providing a comprehensive framework for assessing the costs and benefits of smart meters. Data from Ontario and California show that the introduction of smart metering can have two immediate impacts on the electricity system. It might reduce electricity consumption by 5–7% simply by giving people real-time information on their electricity use. It can also allow for the variation of electricity prices across the day to better reflect the costliness of the generation required at that time. Such real-time pricing can result in shifts in peak energy consumption of 8–13% of total electricity demand.

However, these two effects are only the start of the possibilities that smart meters offer. Smart meters are central to the use of information technology to seamlessly manage household energy consumption and production. A smart meter can also ensure that any electricity produced by the household (via micro-combined heat and power or solar panels) can be sold to the grid at a price that reflects its real-time value.

Smart metering research is part of the work that the EPRG has been carrying out for the past three years in collaboration with a consortium of nine universities under the FlexNet project. Funded by £7 million from the Economic and Physical Sciences Research Council (EPSRC), the project as a whole is looking at the evolution of the UK electricity system to 2050. The research on smart metering has been submitted to the UK Government to assist in its assessment of the best way to roll out smart meters.

For more information, please contact the authors Dr David Reiner (d.reiner@jbs.cam.ac. uk) and Dr Michael Pollitt (m.pollitt@jbs.cam.ac.uk) at Judge Business School and Professor David Newbery (dmgn@econ.cam.ac.uk) at the Faculty of Economics or visit www.eprg.group.cam.ac.uk/