BRIEFING PAPER Number 8472, 8 January 2019 By Suzanna Hinson Electricity Grids Contents: 1. Background 2. Electricity Trading 3. Balancing the Grid 4. Changing grids 5. Smart Grids 6. Government policy on grids 7. Additional political views on grid issues www.parliament.uk/commons-library | intranet.parliament.uk/commons-library | [email protected] | @commonslibrary 2 Electricity Grids Contents Summary 3 Glossary 4 1. Background 7 1.1 The GB Electricity Grid 7 The Transmission Network 7 The Distribution Network 8 1.2 Ofgem 9 Price Controls on the Network Owners 9 1.3 Grids in Europe 10 2. Electricity Trading 12 2.1 Structure of the Market 12 2.2 How Trading Works 12 3. Balancing the Grid 14 3.1 Balancing services 15 Inertia 16 3.2 Constraint Payments and Curtailment 16 3.3 Capacity margins and market 17 4. Changing grids 19 4.1 The changing electricity mix 19 4.2 Embedded generation 19 4.3 Future balancing 21 4.4 Renewable integration costs 22 4.5 The DNO-DSO Transition 24 5. Smart Grids 25 5.1 Smart Meters 25 5.2 Time of Use Tariffs 26 5.3 Electric Vehicles 26 5.4 Blockchain trading 27 6. Government policy on grids 29 6.1 Flexible grids 29 6.2 The Helm Review 29 Government Response – Greg Clark’s speech 31 7. Additional political views on grid issues 32 7.1 Nationalisation 32 7.2 Network costs 32 Contributing Authors: Paul Bolton Cover page image copyright: National Grid (Image cropped) 3 Commons Library Briefing, 8 January 2019 Summary This briefing introduces the electricity grid in Great Britain, how it is operated and balanced, and how it may change to meet future energy needs. The grid The electricity grid is a network of wires that connect electricity generators and consumers. The GB grid is formed of two networks: the high voltage transmission network, that connects large power stations to substations with the lower voltage distribution network, that connects to consumers and also integrates smaller power generators. The GB grid is owned by a series of transmission and distribution network operators, all monopolies of specific areas, and covers England, Scotland and Wales. There are electricity interconnectors to the island of Ireland, and to mainland Europe, allowing electricity to be traded on a continental scale grid. Energy trading Electricity is traded from years in advance to an hour in advance of when it is consumed. Energy suppliers, such as the ‘Big Six’, purchase electricity from generators and sell to consumers. There are also third-party traders buying and selling electricity. Bills for consumers include the overall wholesale costs of electricity as well as the costs of using the grid (known as network costs), policy costs (such as energy subsidies), operational costs and supplier profits. Balancing the grid Electricity supply and demand must be balanced to ensure they match at all times. If there is a deficit of electricity, there may be power cuts; if there is a surplus of electricity, the frequency on the grid may rise and appliances consuming electricity can be damaged. National Grid is the transmission system operator, ensuring the transmission grid remains balanced at all times. Energy suppliers undertake extensive forecasting to purchase sufficient power to cover their predicted supply. In addition to this forecasting, there are a series of mechanisms which National Grid can utilise to ensure the grid remains balanced. As more small generators, such as renewables, connect to the distribution grid, there is an increasing role for distribution system operators to balance the distribution grid. The future of the grid Historically power was supplied by a small number of large power stations, such as coal or nuclear. Increasingly, there are a greater number of generators, including smaller scale and domestic generation, and a greater diversity of generation technology, such as renewables, that are introducing more variability in supply. The need to balance both varying demand, and now more varying supply, is an ongoing challenge for system operators. Increasingly, the grid is transforming to be more flexible, capitalising on smart appliances, and integrating new technologies such as electric vehicles and battery storage. Policy As the grid evolves and new technologies emerge, numerous consultations and reports have been conducted on the future of the grid. In November 2018, the Secretary of State Greg Clark made a speech about the future of the energy market, announcing several policy plans, some of which will impact the future operation of the GB electric grid. The Labour party support the renationalisation of grid infrastructure. Other parties have made calls for additional reforms, such as changes to network charges. 4 Electricity Grids Glossary • Balancing: The process of ensuring supply meets demand at all times on the grid. If supply and demand do not meet, there is a risk of power cuts or a change in the frequency of the grid, which can damage appliances using electricity. • Balancing Mechanism: a tool that National Grid, the system operator, use to ensure electricity supply meets demand at all times. It involves generators and consumers changing their respective output and consumption. • Baseload power: the permanent minimum load that a power system is required to deliver. Historically supplied by fossil fuels and nuclear which are sometimes described as “continuous power” (though all generators are prone to outages). • Block chain trading: a novel form of digital technology based on a database of linked ‘blocks’ of data. The technology has many applications in different sectors and in energy could offer a new form of trading. • Capacity: the maximum electricity output of an electricity generator (in Watts). For example, the projected capacity of the Hinkley Point C nuclear power plant is approximately 3.2 Giga Watts (GW). The infrastructure of the grid also has a capacity meaning the maximum Watts any specific wire connection can transport. • Capacity Margin: the excess of installed capacity over peak demand. • Capacity Market: a Government policy created as part of the Electricity Market Reform in the Energy Act 2013. The market involves a competitive auction and successful bidders are paid to provide extra capacity to the grid if necessary. • Curtailment/Constraint: when in times of high demand, generators can be removed from the grid to help balancing or prevent electricity congestion in one area. Renewables can be paid ‘constraint payments’ when they are removed. • Demand side response: to help balance the grid at times of peak demand, consumers can reduce their consumption of electricity. This is usually large consumers who are paid for reducing consumption, but time of use tariffs mean domestic consumers may also be able to engage with demand side response. • Distribution Network: the lower voltage network that connects substations with the transmission network to consumers, and also includes smaller generators. • Distribution Network Operator (DNO): owners of the distribution network infrastructure. There are 14 DNOs each operating in specific regions. • Distribution System Operator (DSO): the role of DNOs are transforming to have a greater emphasis on operation. Small scale generation is making the supply and demand on the distribution network more complicated, requiring the DSO to act as an operator to balance the grid. This is similar to the work of National Grid System Operator on the transmission network. • Embedded generators/generation: power generators that connect directly to the distribution network rather than the transmission network. These are mainly renewables and are smaller generators than those on the transmission network. • Embedded benefits: connecting directly to the distribution network can give embedded generators advantages over transmission connected generators as they may not pay charges relating to the use of the transmission system. • Gate Closure: the time when trading of electricity stops; one hour before the ‘Settlement period’ when the electricity will be supplied. 5 Commons Library Briefing, 8 January 2019 • Generation/generators (also referred to as supply): power plants produce electricity. This is known as generation and the power plants are sometimes referred to as generators. • Grid (also referred to as network): the infrastructure of wires that connects generators of power to consumers. See also Transmission and Distribution. • Internal Energy Market (IEM): the European Union (EU) energy market allows tariff free trading of energy across Europe. This future of the UK within the IEM will be decided as part of the Brexit negotiations. For more information, see the Library briefing on Brexit: Energy and Climate Change. • National Grid: Owner of the transmission system in England and Wales and operator of the transmission system in GB since privatisation of the energy system. Now legally separated into National Grid plc (owner) and National Grid System Operator (SO – operator). • Ofgem: the energy regulator. • Offshore Transmission Owner (OFTO): The transmission network for offshore wind is owned by an offshore transmission owner (OFTO). When new transmission infrastructure for a development, such as an offshore wind farm is built by the developer, an OFTO is competitively appointed by Ofgem through a tender process. • Peak load power: the maximum electricity demand. (see also Baseload power) • Renewable penetration: the proportion of power on the grid supplied by renewable generators. Expressed as a percentage. • RIIO (Revenue = Incentives+Innovation+Outputs):