Centrica’s chief executive Chris O’Shea has warned that the UK government must avoid “perverse incentives” that encourage grid operators to leave power capacity unused.
“I think we’ve got to be careful we don’t give perverse incentives,” O’Shea said while speaking in London last month. “We’ve simply got to make sure that it’s as easy as it possibly can be to build and connect power generation systems.”
On Tuesday, the National Energy System Operator (NESO) called for greater grid flexibility as part of an independent analysis into how the government can achieve its Clean Power Mission by 2030.
O’Shea described the work being done by the energy system operator to accelerate grid connections as “absolutely essential”.
“We’ve got to ensure that things can connect to the grid quicker,” O’Shea said during a panel discussion at the recent FT Energy Transition Summit. “I know there is work being done by the energy system operator on that, but that’s absolutely essential.”
Ed Miliband, Secretary State for Energy Security and Net Zero, asked the system operator to conduct an independent analysis into how achievable it believes the government’s target to decarbonise the grid by the end of the decade is.
Today it concluded both that the clean power target is “achievable” and that clean energy sources can produce “at least as much power” as the UK consumes in 2030, while overall system costs should not increase.
‘Stretching’
O’Shea said that while the government’s clean power target is not impossible, it is both “ambitious” and “very stretching”.
“I love the ambition,” O’Shea said. “I think that if you talk to people in the government from the secretary of state downwards they generally think it can be achieved.
“I think anything’s possible and so I don’t think it’s an impossible target. I think it’s a very stretching target some might say it’s a very brave target.”
However, O’Shea warned that the government must ensure monetary incentives do not disincentivise operators from connecting available power capacity to the grid, calling some demand flexibility services “wrong”.
“We’ve got to make sure that there’s no incentives for things not to be connected to the grid,” O’Shea said.
“Grid operators were allowed to participate in flexibility services. Personally, I think that’s wrong, because a good operator running a regulated business should have no interest in having an intermittent system. They should have an interest in having a system that is completely flat.”
Over the winter of 2022, the electricity system operator launched demand flexibility services to balance the network at peak times and avoid blackouts.
The National Grid ESO’s demand flexibility service ran at certain times last year from October to March 2024, during which electricity suppliers paid consumers a bonus for using less electricity than usual.
According to a study published by the European Journal of Operational Research in 2020, the increased injection of renewable energy into the grid “is forcing the distribution network operators to seek participation in emerging service markets” to balance the system.
NESO said today that more clean power will require “growth in demand flexibility” and the development of flexibility markets.
Demand flexibility must rise by at least five-fold from just 2 GW in 2023, to 10-12 GW by 2030, as more renewable energy is added, it said.
NESO warned that to meet the clean power target, “the right supply, demand, networks and flexibility” need to be developed.
It has proposed greater digitalisation of demand services through tools such as artificial intelligence (AI), and processes for reducing queues for grid connections in order to prioritise projects that are ready to connect.
Gas as ‘strategic reserve’
Existing gas-fired generation is only envisaged as a “strategic reserve” under the NESO’s clean power pathway, which would be running at a reduced rate of less than 5%.
The grid operator said that if gas production remained at last year’s levels and gas prices rose to the peaks witnessed in 2022, of 300p/therm on average, it would add £12 billion to annual electricity system.
These costs would be “significantly reduced” under its clean power pathway if gas was used only as back-up capacity, according to the grid operator.
“If you look for the period before the Russian invasion, we had really quite low energy prices in the UK for quite some time,” O’Shea said. “They more than doubled prior to the Russian invasion, not in anticipation, just due to market forces.”
O’Shea expects that energy prices are likely to increase in the short term as more renewable power is connected to the grid, but for prices to fall in future.
He said energy prices are now “about twice the long-run average”, at 90 pence per therm, or £80 per megawatt-hour for electricity.
“Will they reduce from that? I’m not sure,” said O’Shea. “I think they’ll probably go up for a bit. They could come down at some point in the future because the marginal cost of generating wind or solar is almost zero.
“So, therefore you should see lower electricity prices but as to whether that comes quickly, it really depends on the pace of the world.”
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