Market magic in the energy and water sectors: all that glitters is not gold

Sustainability First’s New Energy and Water Public Interest Network (New-Pin) has been exploring how far market-led approaches can deliver our desired long-term public interest outcomes in energy and water.  Sharon Darcy shares some of the thinking from the recent New-Pin workshop on this topic.  Although energy and water are at different ‘moments’ in terms of their experience with markets, many of the lessons from the workshop are generic across the sectors.

Markets can deliver many benefits – they can reveal new information and bring in new skills and partners leading to innovation, efficiency, and more responsive and flexible services.  However, they are not risk free.  Markets by their very nature create winners and losers; whether this is individuals (who may or may not be vulnerable) who are expensive to serve and therefore less likely to be targeted by marketing departments or companies that in a dynamic competitive environment may quickly find themselves with stranded assets.

The New-Pin Network has identified six possible desired long-term public interest outcomes for the energy and water sectors: value for money; quality services; cleanliness; resilience; ‘place;’ and fairness.  Market-led approaches can deliver against most of these outcomes but not necessarily all of them.  And even when they can be beneficial, in these sectors, along with many others, they need clear frameworks and rules if their effectiveness is to maximised.

Working out how to capture the beneficial ‘magic’ of markets whilst also being prepared for the potential pitfalls requires clear thinking and careful communication. Given the fact that markets are unlikely to emerge spontaneously in these sectors, and will require some degree of oversight and planning, it is clearly important that market-led approaches are focused where there is a need, and opportunity, to do things differently.  Being clear about whether there is a case for change (such as new technologies coming on stream), and if there is consensus that there is a problem and what the possible solution is, is a first step.

Focusing market-led approaches where the net benefits are greatest is also important.  Although markets can have beneficial ‘trickle down’ and indeed ‘trickle up’ impacts, and can drive wider behaviour change across the sectors, not all ‘knock-on’ impacts will necessarily be beneficial.  And introducing market-led approaches can be tremendously time-consuming.  There is likely to be an opportunity cost involved.  Paying heed to where the greatest costs in the sectors lie would seem sensible when deciding where to target activity.

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Being fair to ‘sticky’ energy customers – both now and in a ‘smarter’ future

Thursday’s backbench Commons debate on energy prices has prompted politicians and others to consider a number of possible alternatives to the remedies made by the Competition and Markets Authority (CMA), following their investigation last year into electricity and gas prices.  Around 70% of domestic energy customers remain on energy companies’ Standard Variable tariffs (SVTs) and could save up to £200 by switching to a cheaper deal, but nevertheless decline to switch. 

In a new Sustainability First paper, I have argued that any potential solution to customer ‘stickiness’ needs to be measured against two key objectives  designed to ensure that any remedy adopted is fair to all customers.  My two ‘tests’ are:  (1) that the arrangements encourage companies to price competitively and to innovate to meet the changing needs of the market, and also (2) that they avoid particularly unfair pricing for any domestic customer or group of customers.

The CMA remedies broadly deliver on the first of my two objectives by removing some previous barriers to increased tariff innovation. But the CMA only delivers on the second to the limited extent of providing protection through a price cap to customers on prepayment meters.  For the roughly 50% of households that are able to engage in principle - but for whatever reason choose not to - the main CMA remedy is to provide those customers with more information about energy pricing and switching.  The CMA does not seem to have looked across to thinking from the Financial Conduct Authority, who recently said, in its Future Mission Statement: ‘Public policy makers have traditionally assumed that people will make the ‘right’ choice for their needs if they are given as much information as possible… Our own research has also shown that that too much information can confuse consumers’.

Customers are being encouraged by the Government and regulators to become more engaged not just in their energy bills, but in choosing their retail bank and making financial provision for their retirement, to mention just two.  But is this the right approach?  Each of these activities takes time and effort, and many people will want a ‘good enough’ solution, not necessarily the absolute best.  If people choose not to make the effort, does this mean we leave them to the consequences of their inaction, particularly where essential services are concerned? Or do we seek to avoid anyone being particularly unfairly treated or exploited?  This is why both of my key objectives are important  – both to encourage competitive pricing and to avoid unfairness.

None of the  solutions proposed so far to tackle customer ‘stickiness’ – either by the CMA or others -  fully meet my two objectives.  One that seems to me to come closest, assuming there are no radical changes in current market arrangements, is in two parts.  First, as proposed by Dieter Helm, energy suppliers offering an SVT should make public for scrutiny by customer watchdogs and other commentators the margin they anticipate making on it.  This would seek to deter companies offering cheap deals to engaged customers at the expense of those on the SVT.  Second, the evidence suggests that in reality many customers actually prefer an SVT and, if switching, would opt for their new supplier’s SVT.  But, in contrast to switching to a 12-month fixed price deal, no price protection is afforded in moving to a new SVT.  As we have seen in recent weeks,  price increases by one energy company tend to be followed fairly quickly by the others. It is possible for a customer to get caught out by switching to a company that has not yet put up its price but is about to.  In my paper, I therefore suggest that price comparison sites should also start to include the date on which the SVT was last changed.  Although far from perfect, it may, by  requiring transparent information on the last price increase, at the very least offer the consumer bodies some insight into whether a new price increase might be in the offing – and so might help confidence in the switching process. There are also lessons for the future.  The Government’s plans for a new ‘smart’ energy world with smart meters and greater customer flexibility assumes that customers will respond to better information and greater price differentiation by changing their energy purchasing and usage patterns in response to time-of-use or other ‘smart’ tariffs.  If the experience of stickiness in today’s domestic energy market is anything to go by, this could be a hard sell with many customers.  More research is needed on the likely response of typical customers, and not just the enthusiastic minority.

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It’s time to talk: why GB household demand-side flexibility needs a high-level standing group

For the past two years Sustainability First has provided support for a major demand-side initiative, designed to encourage industrial and commercial (I&C) customers to understand more about the opportunities that their flexibility could unlock and how to set about it: whether to save money from active peak avoidance, or to earn potential new revenues if they can successfully offer services to the GB balancing or capacity markets. From time to time, business customers might be paid to export generation or to flex their power off-take to respond to the wider needs of the overall power system.

Power Responsive is a collaborative effort led by National Grid for I&C electricity customers to raise awareness, improve understanding and support development of sustainable markets for GB demand-side flexibility. The initiative is delivering a systematic work programme alongside active outreach to business customers, coordinated by a steering group whose main task is to get to grips with the major enablers and blockers for future demand-side market development:

What factors will drive forward market development?From a customer viewpoint, what still stands in the way of successful demand-side delivery for GB ?

The group is high-level but also has the experience to flag up potential problems and to anticipate developments, focusing on matters that risk stalling wider development of GB flexibility markets before these get the chance to grow, including potential issues of trust and reputation. The group draws from a mix of market actors - retailers, aggregators, brokers, networks, the system operator - together with I&C customer representatives, including distributed generators and storage operators, and Ofgem and BEIS. The group’s job is to take a strategic look out to 2025 at what demand-side success might look like – both for the market and for industry customers. The group does not shy away from difficult or complex topics. There is a strong focus on landing outcomes and on delivery.

One important output has been the Power Responsive annual report for 2016, just published, written for the group by Sustainability First. The report offers a good overview of the current patchwork that makes up the GB demand-side flexibility markets and a useful snap-shot of the current views of both market actors and I&C customers. There is also a good ‘state-of-the-market’ infographic.

But perhaps most important, the simple fact that a group was charged with looking right across the demand-side markets for I&C customers meant that it was possible to start a productive conversation about metrics needed for these markets:

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Civic pride, the public interest and paying the bills: what does fairness look like for our water supplies?

On hot, sultry summer evenings tourists unsurprisingly flock around the Trevi Fountain in Rome.  There is no better place to enjoy the beauty of the city, an Italian ice cream and dream.  Whilst throwing coins into the Fountain, what few may realise is that the water they are looking at is being transported through an ancient Roman aqueduct. Infrastructure that the far-sighted Romans recognised could help provide one of the foundations for the prosperity of the city  – and indeed empire - for generations to come.

From fine art and the flowing waters in Rome, take an about turn and move on literally to what was London’s dirtiest hour: the Great Stink of 1858.  Sewage on the banks of the Thames had accumulated to such an extent that cholera outbreaks were rife and thousands were dying.  Step forward one of the greatest of the Victorians, Joseph Bazalgette.

Joseph, London’s Metropolitan Board of Work’s Chief Engineer, realised something needed to be done – and at scale.  He designed London’s sewer network, in the process reducing the risk of future cholera outbreaks and cleaning the water in the Thames.  His vision was such that he ensured that the diameter of the sewer pipes being built was considerably wider than what was needed at the time.  This enabled the network to accommodate the extra demands of the growing city and keep the river clean – without the need for digging up roads and knocking down buildings to build more pipes.

As these examples illustrate, the benefits of any new water related investment extend beyond the individuals that use it to wider society and can often be enjoyed both today and way into the future.  Having a long-term vision for such as essential service that can deliver multiple benefits, along with civic pride, would therefore seem important.

But here’s the rub. The future is uncertain.  No one knows exactly how much water will be needed in the years to come, where it will be needed and whether new technologies will emerge that will change the way it is delivered and used.  In addition, the coming generations that may benefit from such far-sighted investments and infrastructure aren’t around to speak up.

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A world of multiple-choice

  A view by Sharon Darcy, Sustainability First Associate When I was working in China in the 1980s I was lucky enough to be able to afford to buy a bicycle; the main way to get around at the time.  At the small town’s only bike shop, I looked at the array of gleaming machines.   All identical.  Still enthused by the idea of my own transport, I thought this was a minor inconvenience and tried one for size.  Just right.  It was only then that I realised the nervousness of the on-looking staff.  Neither that bike – nor any of the others in the shop – actually worked.  The choice was in effect zero.

Since that time, I’ve realised just how important choice is.   Most of us don’t like it when we have no choice.  Being able to choose between different services and providers can help create thriving markets, drive innovation and ensure that what we buy meets our needs.

In recent years there has been an increasing shift in public policy to get people to take more personal responsibility and to make more choices for themselves.  Just as we have long shopped around for groceries, so too can we choose between energy, insurance and communications providers.  The boundaries of choice are now being pushed further to include services such as pensions.   And to help reduce the impacts of an aging population on a stretched public purse, there may well be increasing pressure on us to make choices in areas such as social care.

All this choice sounds well in theory, but what does a world of ‘multiple-choice’ mean in practice? We all know that not all choices are the same.  And we clearly all start from different points in terms of the choices we make.  There are lots of areas where we don’t always have a choice.  The table below provides a high-level categorisation of six different types of choice. 

 Type of choiceWhen choice is madeExamples of areas in which choice is made1Consumer choicesAt time of individual transaction·         Consumer goods2Essential or 'foundational' service choicesAs services are normally used continuously, choices can be ‘rolling’EnergyCommunicationsInsuranceBanking3Life-stage choicesAt key life stagesEducationHousing: renting / buying & mortgagesRetirement planningSocial care4Distress choicesIn response to problemsKey equipment eg boilersHealth services: physical & mentalExternal shocks: accidents; crime; terrorism; flooding etc5Personal choicesOver time and cumulativelyWell-being: physical; mental & spiritualCommunity6Ethical and moral choicesOver time, cumulatively. Can be instinctiveTreating others fairly and with respect

  Decision makers in government, regulators and companies spend much time looking at the costs and benefits of choice in their particular areas and at how some groups of people may find it more difficult to make choices.  There is also a growing acceptance that the insights from behavioural economics can be used to maximise the effectiveness of choice.  However, there has been less attention paid to understanding the cumulative impact of choice and how different types of choices interact.

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Public engagement in energy and water – more than window dressing

Most people would agree that public engagement in the energy and water sectors is generally a ‘good thing.’  However, like motherhood and apple pie, there can often be quite different ideas of what ‘good’ looks like.  Sharon Darcy summarises the latest New-Pin discussion paper on Consumer, citizen and stakeholder engagement and capacity building which explores whether the long-term public interest is being sufficiently represented through current approaches to engagement in the sectors.

Engagement in energy and water has been primarily driven by the drive to address market failures and develop more customer-centric services. There has also been a desire to give consumers a greater voice in how decisions are made, helping to improve the quality and comprehensiveness of decision-making, reduce regulator involvement, and increase the legitimacy of the process (potentially to the extent of having consumer or stakeholder representatives on boards).

There has been a growing interest in how engagement can also lead to culture change in companies.  Helping them in the move from being commodity to service providers that actively engage and collaborate with their customers is important in an era where in both sectors expectations on the demand side are increasing.

There is no single best approach to engaging consumer and citizen representatives in long-term decision-making.  However, greater clarity is needed about who owns the decision to engage, what the purpose of the exercise is and what the ‘red-lines’ of decision-making are.  Without clear objectives, it can be difficult for the public to understand why they should take part and for decision makers to measure the impact of the activity.

Company-led engagement undoubtedly brings many benefits.  Companies are best placed to feed the rich insight from engagement into their business plans.  Having a ‘golden thread’ that links engagement activity at the operational and strategic levels is vital.  However, given the significant social and environmental externalities in both energy and water - and the associated distributional and systemic impacts - a wider perspective which includes government- and regulatory-led engagement may also be needed for long-term issues.

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Smart and fair domestic electricity pricing

In an article first published in New Power (Issue 90, August 2016), Jon Bird, Sustainability First Associate, looks at the result of time-of-use charging trials in energy and water and finds there are winners and losers in making the transition.  It may be impossible to make it fair for everyone, but we must tackle the extremes. Elective and mandatory half-hourly settlement (HHS) for domestic electricity customers, locational pricing for transmission losses, distributed generation embedded benefits, the future of distribution use of system charges – these are all currently being discussed as we head to a world of smart meters and smart electricity pricing for domestic customers.

What they all have in common is the aim of making different elements of the final electricity price more reflective of the actual input costs that go to generate and deliver the electricity to a particular customer.  Economic theory tells us that cost-reflective pricing provides the most efficient system as a whole, as well as the best incentives on retail customers to change their behaviour to keep their own costs as low as possible.  But does this work in practice and is it fair to all customers?  This is the subject of a recent paper by Sustainability First Associate, Jon Bird[1], and topic for a Sustainability First roundtable held on 13 July 2016.

Whilst these initiatives will increase cost-reflectivity for suppliers, their impact is diluted by the increasing proportion of the bill that goes to cover the social and green levy costs.  End-prices might also need to become more location-specific if they were to reflect the actual costs of dealing with a more decentralised electricity system.  Moreover, they are all costs faced by an electricity supplier – and not directly by the electricity customer. How the supplier turns these into a final retail tariff for the customer will be up to it and will depend on its own marketing priorities.  One major retailer is offering a new FreeTime tariff - with free electricity on Saturdays or Sundays. This is not strictly cost-reflective, but nevertheless aims to reduce weekday peaktime load.

Several recent trials of a time-of-use (ToU) tariff in the UK and Ireland have shown, on average, a positive response in terms of a reduction in peaktime use of electricity.  But more work is needed to see if bill reductions from peak-shifting can be replicated amongst all electricity users (not just trial customers) - particularly given the CMA’s concerns that many customers currently do not react to a much larger bill saving they could achieve by switching tariff.

Any change in approaches to pricing creates winners and losers.  This has occurred in the water industry, when water metering and charging by volume was introduced in water-stressed parts of the country.  Using data from the ToU trials shows that, whilst on average for each demographic group, the potential impact of introducing ToU tariffs (leaving aside any possible behaviour change) is small, there can be wide variability within demographic groups.  This needs exploring in more detail and indeed Ofgem has recently commissioned some work to explore just this.

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New-Pin : Governance and the Public Interest in a post-Brexit World

As summer turns to autumn, the size of the task following the Brexit vote has come into sharp relief.  It will be some time before there is another ‘natural break’ to step back and take stock.

The new government has multiple and pressing issues to deal with.  Negotiating Brexit is clearly top of the agenda.  Continuing to align UK climate policy with the 2015 Paris agreement provides an opportunity to strengthen our position as a world leader in sustainable energy policy and environmental protection.  However, from a sustainability point of view, addressing the issue of why people voted as they did is also crucial.

Understanding why people felt left out and left behind, and then working out what to do about it, will be important if the Brexit negotiations and the new Government are going to meet raised public expectations.   Bridging the divide between communities, regions and nations – as well as between the young and the old – will be a long-term and difficult process.

Early indications suggest a certain pragmatism by the new Government. Concrete steps that start addressing social divisions will be needed.  Similarly, practical changes that can start to genuinely empower citizens and communities will be required.

June’s referendum delivered a strong signal on the need we all often feel for more ‘control’ in our lives.   This extends beyond the desire for a political voice in our communities but also to having a say in how corporations are run and behave.

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Resilience: time for a new approach?

  No one wants power cuts, water restrictions or sewer flooding.    Equally, a one-hundred per cent service guarantee is neither feasible nor affordable. Drawing on the latest New-Pin discussion paper on Long-run resilience in energy and water, Sharon Darcy explains why approaches to resilience that focus on risk management and adaptive planning are becoming increasingly important.

Until recently, most discussions about resilience in energy and water were largely focused on the reliability of infrastructure and the security of big bits of kit.  This mirrored the frequently traditional approach to ensuring resilience through supply side solutions where ‘hard’ engineering interventions were able to bring a degree of certainty to service delivery.

Led by the energy sector, ‘softer’ demand side approaches are now getting more traction, along with an increasing focus on consumer and commercially led solutions that can help to address the supply / demand balance in a sustainable way.  Some people argue that demand-side measures may turn out to be less dependable than those on the supply side. But, faced with uncertainty about the future, demand-side developments may also offer diversity and flexibility for both sectors.

As approaches to resilience have evolved, so too has the way in which the issue is ‘framed’ in discussions.  There is now broad agreement that as well as having a technical dimension, resilience also has social and environmental dimensions, for example, which recognise that energy and water are part of wider services and systems.

Climate and technological change, and the significant unknowns these bring, are driving new ways of thinking about resilience in energy and water.  Most visibly, this can be seen through the impact of extreme risks - such as intense rainfall leading to flooding, or thinking on cyber crime. Responses to each are highly dependent on effective approaches to public communication.

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‘Public interest’ use of household smart meter energy data

Sustainability First launched a short ‘research challenge’ last year, together with the Centre for Sustainable Energy in Bristol and the academic network, TEDDINET.  We asked two university researchers – Simon Elam from UCL and Jess Britton from Exeter University- to look at the ‘public interest’ agenda for smart meter data.

Most current thinking about smart data is focused on commercial innovation by energy companies and others - but we may miss an opportunity. For the first time, in every home, accurate time-related energy-use data will be recorded at the meter (half-hourly for electricity and daily for gas).  Smart meter data could clearly serve a wider ‘public interest’ agenda in many helpful ways. But, with much effort rightly being devoted to getting the smart-meter roll-out ‘right’, a wider public benefit dimension does not currently get the attention it deserves.  That is why we launched our challenge.

We have now published the excellent papers that Simon and Jess have written.  Here is a taster of their findings.

What might an improved energy usage evidence base deliver for different actors?

Better targeted advice - nationally, locally - for consumers & households.For government: improvements to energy models and demand-side inputs, to evidence-based energy policy; to better targeted interventions. Better evaluation of outcomes: for the fuel poor, for energy efficiency, heat, self-generation, including the distributional impacts of policy.For energy companies, networks and regulators: better-targeted investment for smart grid and smart energy systems and community energy projects.For cities: better evidence to support local energy schemes, to target energy efficiency, to plan and develop infrastructure for electric cars, for heat, for housing development.Better-targeted local services for the elderly, the fuel poor, young families, students; and better-informed partnerships - with social landlords, the health agencies.Better insights from academic research and the not-for-profit sector.

Today’s official data for energy consumption remains fairly basic, being derived from customers’ anonymised annual consumption figures. Local-level data, and some limited half-hourly data from trials, is also available. Today’s annual consumption data can also link to other data sets: for example, on the housing stock, demographic or deprivation data.

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Trust: on tap and down the pipes and wires?

It’s an old adage that trust is hard won and easily lost.  But what does this mean in the energy and water sectors?  Sustainability First’s lead associate on the New-Pin project, Sharon Darcy, summarises a major new policy paper and the Network’s February workshop on trust and confidence in energy and water.

Trust is a relational concept.   Based on an assessment of ability, motivation and integrity, it is built up over time.  It is not something mechanistic or transactional that can be dictated or reset at the behest of a single actor. In energy & water, trust is built on a complex web of dynamic relationships between consumers / the public, companies, investors, government and regulators.  There are strong inter-dependencies here.  Problems with trust in one area can have knock-on impacts on trust in the ‘system,’ creating a context where confidence can easily be undermined.

Trust can mean different things to different stakeholders. To have trust in energy and water companies, consumers generally want quality and resilient services and value for money; getting these right first time is important.  Given the long-term social and environmental impacts the sectors can have, the wider public may also expect a voice in these services and the systems that they are part of.

People understand that problems with services can sometimes happen. How companies and others respond to events is key.   Being proactive, open and honest in the face of unplanned disruptions, for example, can actually build trust between companies and customers.

If service providers handle these things badly, however, the public may take a greater interest in ‘aggravator’ factors such as lack of choice or poor market behaviour.  Whilst competition can help build confidence by putting a downward pressure on costs, the complex disaggregated value chains in energy retail markets, for example – and different views on profits and costs – can erode trust.

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Keeping future energy and water bills affordable

Following a workshop of New-Pin sponsors and supporters in October, Sustainability First has published the first of its major New-Pin policy papers, on long-term affordability.  Sharon Darcy, Sustainability First’s lead associate on the project, summarises the paper below.

Robust energy and water services are essential for individual and environmental health and vital for a strong economy.  Although a significant minority of people currently struggle to pay their bills, we all have an interest in ensuring bills are affordable, fair and acceptable – both for today and tomorrow.

In the coming decade, two thirds of the projected investments in the energy sector and nearly all of the projected investments in the water sector will be met through consumer bills.   At the same time, some are predicting that households in low-income groups may see their incomes decline.

Looking ahead, the energy sector faces a step change in costs as it seeks to cut its climate emissions and weather proof its services.  There is significant uncertainty around future wholesale costs, the price of carbon, and the effectiveness of energy efficiency measures that are designed to offset these. If this uncertainty leads to a delay in low carbon investments, risks and costs could increase, potentially making energy even less affordable for future generations.

In water, costs are likely to increase more incrementally and be driven by the need to adapt to both droughts and floods.  However, the ‘unprecedented’ weather of recent weeks is a sobering lesson that the future is not always the same as the past. Key uncertainties are around the scale of future sewerage costs and the quantity and quality of water resources.

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Good Reasons for Sceptics and Deniers to Support Renewables

A perspective from Sustainability First’s Chair of Trustees The vast majority of the thousands of scientists around the world who have studied climate change confirm that man is by far the most likely culprit and that the problem has to be addressed as a matter of urgency. The 2015 Paris Climate Summit with around 200 nations represented also accepted this position, and the pressing nature of the threat.   Despite the now high level of agreement, there are still a number of sceptics and deniers who are often given airtime for views that often have little basis in scientific evidence.

However, there are good reasons to support a shift to renewable energy and cutting emissions, which should convince even the most contrary of the contrarians to support a new approach to energy supply. An economy based on renewables would herald wider changes, especially by giving communities more control.

A shift to renewables has a number of collateral benefits:

First, renewable energy not only produces fewer greenhouse gases, but is also far less polluting at local level. Smog in China and the levels of nitrous oxide and particulates in urban environments across Europe have recently been recognised as real threats to health. The simple fact of the matter is that burning of fossil fuels adds to the pollution of all environments to a greater or lesser extent and increasingly poses a real threat to human health.

Second, a switch to renewables also changes the whole nature of power distribution and depends upon much more localised production. This shifts us away from the top down grid system and gives power back (literally) to individuals, social enterprises and communities. This is especially important in developing countries and rural areas where power grids either do not exist or connection is prohibitively expensive. Renewables can actually become part of the local economy. It also engages people in their local environment and begins to reconnect them to natural processes which have been lost in much of our recent development.  A lot of the sceptics and deniers seem to disapprove of state intervention and support calls for a ‘smaller state’ – well here is their chance to commit to the devolution of power.

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Looking over the horizon - together

Sustainability First’s New Energy and Water Public Interest Network (New-Pin) has been set up to explore the long-term public interest in the energy and water sectors.   This rather begs the question: what is the public interest and how can such an amorphous concept be of any use when making real decisions?

Discussions about energy and water services in GB have frequently focused on consumer interests.  In the early days following privatisation, these tended to be interpreted as the interests of current consumers and were often viewed as short term and transactional.

Things have changed in more recent years with regulatory duties being extended to include the interests of future consumers, sustainability and most recently in water, resilience.   Unlike in Ofcom, however, the remits of Ofgem and Ofwat have not been extended to include the interests of citizens.

Several trends are now starting to blur the differences between these different groups.  As policy costs are increasingly met through bills rather than taxation, what is a consumer versus citizen issue may become less clear-cut.  Digital technologies are also changing boundaries.  With social media, you no longer need to be a customer of a company to express your views and have a direct impact.  An increasing interest in localism, regionalism and nationalism is raising questions about identity and what sort of services different communities want.  This is coinciding, particularly in the energy sector, with the emergence of new technologies that enable people to join together to generate their own supplies or to become individual ‘pro-sumers’.

Given these changes, thinking of the public interest as an amalgam of consumer, citizen, environment and investor interests may be sensible.  The timescale over which the public interest is viewed would also seem important.

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Sustainability First is fifteen

Sustainability First celebrated its fifteenth anniversary in 2015 with a reception at the House of Lords, kindly hosted by Lord Teverson.   We were delighted to see so many partners and colleagues join us for this event.  As part of the proceedings, we asked five key players in the sustainability arena (Simon Roberts, Cathryn Ross, David Baldock, Simon Anderson and Pip Roddis) to give us one big or new idea on what is needed to tackle sustainability over the next fifteen years, which those attending voted on.  We have now published a pamphlet (also available at containing their contributions as a way of sharing these thoughts with colleagues who were not able to be present.To whet your appetite, here is a shortened version of the introduction to the pamphlet by the Chair of our trustees, Ted Cantle:“At Sustainability First we like to think of ourselves as a ‘think-tank’s think-tank’. Whilst we don’t shout from the roof tops, we continue to have credibility and influence, driven by our expertise and the substantive contribution we make. We provide authoritative, in-depth research that helps shape ideas early on, often choosing areas that are overlooked by mainstream policy circles or that require substantial thought to progress. We have been at the forefront of thinking in some key areas, most notably on the energy demand side; sustainability and regulation, customer engagement, and smart meters, smart grid and energy savings.“We have also developed new thinking on long term issues for the water sector.“Fifteen years is a long time in sustainability.“We were established in the year 2000, which is just a blink of an eye in environmental terms, yet since this time we have seen some amazing changes, not least in the use of technology. The next fifteen years will witness huge changes again and will herald some important national and global decisions on how we deal with energy demand, climate change and environmental degradation. This year itself is a crucial one for the environment, with the UN climate summit in Paris and new Sustainable Development Goals.“We hope that Sustainability First will continue to weave its magic behind the scenes during the next fifteen years. We still maintain a very active interest in the energy demand-side and how that will play out in terms of practical implementation.  Much of our work over the next fifteen years will focus on the long-term public interest, both in energy and water, with a current focus on the New Energy and Water Public Interest Network (New-Pin), which brings public interest groups together with regulators and companies to develop a more clearly-articulated ‘public interest voice’ to underpin both the short-run operation and the long-run investment programmes of the water and energy sectors.“We sincerely hope to be able to celebrate Sustainability First’s next fifteen years with you all in 2030. Or, if not, that by then sustainability issues are so mainstream that the organisation is no longer needed.”

Customer-Led Network Revolution reports important new results

Apologies to our readers for a quiet autumn on the Sustainability First blog.  This was largely due to a concentration of work supporting the completion of Northern Powergrid’s smart grid project, the Customer-Led Network Revolution (CLNR).CLNR is a £54 million project, part-funded through the Low Carbon Network Fund, led by Northern Powergrid, with partners British Gas, Durham and Newcastle Universities and EA Technology.  It explored combinations of smart network technology, smart meters and appliances, and different customer incentives to find cost-effective solutions to operating an electricity network in a low carbon economy.  Sustainability First has been involved from the outset in several ways.  Northern Powergrid has been a key sponsor of our GB Electricity Demand Project, and thinking on the two projects has run in parallel.  We have provided an expert challenge role to the project to help ensure robust findings that take account of similar work done elsewhere.  And we have produced several one-off pieces of work such as our report on customer recruitment challenges and a report on lessons from the installation of smart appliances and monitoring equipment.This highly ambitious project has finally reached its conclusion and published a set of key reports that set out its findings (CLNR-L246 - domestic and SME customers, CLNR-L247 – industrial and commercial customers, and CLNR-L248 – optimal network solutions provide a comprehensive overview).  They are all well worth a read.There are a number of important findings of relevance to demand-side response.  DSR trials were successfully carried out with a range of industrial and commercial customers and Northern Powergrid will now be seeking to use DSR as the first choice option for addressing network constraints.  On the domestic side, CLNR was able to analyse the electricity demand profiles of a wide range of domestic smart meter users.  The analysis revealed a relatively consistent annual average demand across the different domestic demographic groups, with much higher variability within groups than between them, although there were clear differences on daily use profiles between different socio-economic groups.Time of use tariffs were popular with and easily understood by domestic customers, where the majority saved money (60%) and average demand in the 4pm to 8pm peak was up to about 10% lower than the control group, who had smart meters but a flat rate tariff. Interestingly, though, there was little difference in peak demand between the two groups on the days of highest network demand.  The trial provided a safety net for the 40% that did not save money, and they were guaranteed to pay no more than a standard flat tariff.The restricted hours and direct control trials tested customers’ willingness to accept a time-based restriction on the use of a smart heat pump or washing machine. The technology was proven, but the benefit from smart washing machines was limited and whilst the heat pumps successfully reduced peak load by 2.5 kW, there were technical issues and problems of customer acceptability.These reports are now available for consultation and peer review until 20 February.  The findings will need to be assessed alongside the emerging findings from the other LCNF projects.  It is a mark of a ground-breaking smart grid project that it raises new questions as well as providing answers, and there are plenty of areas that now need further investigation as well as those findings that can, and will, be applied straight away.Jon BirdAssociate

How can households participate in the demand-side electricity markets?

Sustainability First’s GB Electricity Demand Project, a major three year study into the demand-side electricity markets is drawing to a close.  Looking back over the three years or so of the project, it is clear how much the electricity demand-side has risen up the energy policy agenda over that time and how our understanding has developed.  While others are now working on different aspects of the subject, notably a team with wide industry involvement under Ofgem’s leadership in Workstream Six of the Smart Grid Forum, Sustainability First’s recent  Paper 12, on how households can participate in the demand-side market, continues to break new ground, raising issues that will require more detailed attention if this market is to develop successfully.  In this and the next few blog items, we shall be looking at these findings.The analysis in this paper leads us to the conclusion that, in the period up to 2020, the largest overall value from the demand-side rests in the wholesale electricity markets (ie in avoiding the cost of expensive on-peak generation), but that this value has yet to be unlocked to any significant extent.  Once customers have smart meters, the opportunity is there for suppliers to offer time of use tariffs for peak avoidance.  The problem is that for individual households, other than those using on-peak electric heating, the ability currently to shift load and therefore to cut bills is limited.  After 2020, there will be a significantly higher proportion of inflexible electricity generation.  Together with the widespread use of smart meters and the potential for modest adaptations to settlement, and, perhaps, eventual half-hourly settlement for domestic customers, the opportunities for domestic customers will grow.  In addition to benefiting from exposure to the wholesale market itself, domestic customers, either directly or through the involvement of aggregators, may be able to engage in the capacity and balancing markets.  The opportunities here will significantly add to the value which an individual customer can obtain from their demand-side actions.  Households will also be able to assist distribution networks through DSR, but the opportunities are likely to be very location-specific and the value to a particular household may be relatively modest.  Smart meters could, potentially, also allow domestic customers to reduce the transmission charge part of their bill through TRIAD avoidance.The opportunities for taking part in these markets will certainly exist and the technology for it to happen will also be in place, but are the commercial drivers likely to develop?  Although a number of trials of tariffs and other interventions are currently taking place in projects under the Low Carbon Network Fund and elsewhere, there does not seem to be much appetite by energy suppliers yet to develop commercial DSR offerings to households.  But they will need to develop strategies to deal with the considerable uncertainties they are likely to face in the market going forward.Another important factor that significantly weakens the commercial incentives for suppliers to encourage domestic customers to embrace DSR is the fact that so many individual components of the final electricity bill are socialised. In other words customers pay their suppliers an average price, not the actual cost of providing them with that service.  First, a flat standard p/kWh unit-rate retail tariff makes no distinction between the cost of generating the electricity at different times of day or year. Second, low voltage transportation charges payable by suppliers to distribution networks may vary to some extent between network operators, but within a particular distribution area, distribution charges do not distinguish between rural and urban, or peak and off-peak usage by households.  Third, the government levies on the bill to pay for the Renewable Obligation, the Energy Company Obligation, the small scale Feed-in Tariff and in due course the FIT Contracts for Difference are recovered from customers either as a fixed amount or as a standard p/kWh sum, regardless of a customer’s location or the time of day they use their power.  Only the levy to recover the costs of the capacity market has sought to incorporate in its design some limited peak-related price-signal for suppliers. DECC estimate that the levies will amount to 33% of the bill by 2020 and 41% of the bill by 2030.  This is a very sizeable bundle of charges which are not time-differentiated for suppliers to simply ‘pass through’ to their customers. The sum of these ‘fixed’ charges relative to the differential between on-peak and off-peak prices in wholesale prices risks reducing the overall incentive on suppliers to encourage their customers to take part in DSR.But if electricity prices are perhaps made more cost-reflective, won’t there be losers as well as winners?  And how do we protect those who are less able to change their behaviour?  Would an alternative be simply to ensure that the electricity supply companies become more directly exposed to more cost-reflective and variable versions of these ‘fixed cost’ elements?  This would place the risk of responding to cost-reflective incentives largely with the suppliers - who might be expected to be able to understand and react rationally to these stronger price incentives. These companies, making use of the growing body of understanding of customer behaviour, could then each work out their own best strategies for encouraging DSR among their retail customers.These basic questions of principle regarding development of household DSR markets are ones we shall be addressing in blog items in the coming weeks.

Demand side essential to deal with the energy trilemma

We return after the summer break to a world where there is still no single definition of sustainability that appeals to everyone but where the need to deal with the trilemma of energy security, affordability and climate change remains as important as ever.  On energy security, with two nuclear stations currently offline, fires at Ferrybridge and Ironbridge coal-fired stations and Barking gas-fired station to close, National Grid will have its work cut out this winter. On affordability, Ofgem’s August projection of an average dual fuel bill for the twelve months from August 2014 is £1330.  And Edward Davey’s statement on the Government’s position for the Paris climate change conference shows as strong a commitment as ever to the need to decarbonise the world economy.In each of these areas the demand side has an important, if not essential, part to play.  It’s not surprising, therefore, that the Commons Energy and Climate Change Select Committee launched an inquiry at the beginning of July into demand-side measures with a call for evidence, and it is equally unsurprising that, given the amount of work on the demand side that Sustainability First has undertaken over the last three or so years in its GB Electricity Demand Project that we submitted written evidence to the Inquiry.The Committee took oral evidence in early September and Tim Yeo, the Committee’s chair, has written to Matthew Hancock, the Minister of State at DECC, about steps needed to make DSR a reality in the capacity market.  Our own written evidence to the inquiry provides a useful introduction to the topics dealt with in the most recent twelfth paper from the Electricity Demand Project, on household demand-side participation in the GB electricity markets, that we shall be covering in more detail in our next few blog entries.We told the Committee that, while near-term market interventions for the demand-side in the capacity market and the EDR pilot were clearly important, the findings from the GB Electricity Demand Project suggest that if the electricity system as a whole is to benefit from electricity demand-side measures, then wider and longer-term issues also need to be considered, including in relation to household electricity demand-side measures.Given how much emphasis the Government is placing on energy efficiency measures to reduce the impact of price increases on customers, reducing electricity demand is absolutely central to minimising the increase in electricity system costs and therefore to reducing the impact on customer bills. There are major risks for customers’ bills if we fail to drive forward successfully on product standards and on appliance stock turnover.Modelling for the GB Electricity Demand Project by Brattle has indicated that the technical potential for load shifting across all sectors today may be up to around 18GW out of a total of 54GW on a January weekday winter evening and around 10 GW of 35 GW on an August weekend evening. In the business sector, commercial conditions and market arrangements are developing and there is growing interest in load turn-down and turn-up solutions in addition to the previous emphasis on embedded generation. But, for the household sector, which represents around one-half of winter-evening peak load, there is still some way to go before there is sufficient commercial interest from market actors plus more demand-side ‘pull’ from customers and consumers themselves.Demand-side response is increasingly useful to all parts of the electricity value chain:  by electricity suppliers to avoid the need for expensive power generation at peak times and / or low-wind periods and to avoid the risk of costly ‘imbalance’ penalties; by distribution network operators to avoid the need to reinforce the network where it is constrained or close to its physical capacity and to keep down the cost for customers who require new connections to the network; as well as the more traditional uses by National Grid for balancing national supply and demand.It will be difficult for domestic customers to engage with DSR unless the actions they take can be measured and they can be properly incentivised to take these actions. Smart meters should provide the means to achieve this. However, this will need to be done with care. Customer incentives for DSR are bound to increase complexity for the end-consumer. And we need to take care to protect those customers, such as the fuel poor and the vulnerable, who may be less able to change their behaviour and may therefore face price increases without the ability to react to such increases.Network operators and third parties will need fair access to end-customers via the smart meter set-up.  Electricity suppliers will be responsible for installing household and small-business smart meters and for communicating with the meter - and with the related switches for appliance control. If companies other than suppliers wish to control customer appliances by making use of the smart meter arrangements and the auxiliary load control switches, then, initially at least, they will need supplier cooperation.Community projects are of great interest in themselves and widely popular. They also provide a useful and enthusiastic test-bed for the introduction of low carbon technologies and experimenting with demand-side response. A number of these projects were reviewed in Paper 10 of the GB Electricity Demand Project.  However, we identified a range of detailed commercial, regulatory and administrative matters that will need to be resolved to enable local matching of supply and demand to become a reality at scale.

Sustainability First and Foremost

In a recent blog, Richard Adams recommends focusing on adaptability as a better defined and more active goal than sustainability. I see his point, but I do not fully agree. Relying on human adaptability is not a sufficient answer to the problems facing the planet. It is necessary, but it will never be sufficient. Sustainability and the delivery of demanding sustainable development goals must still come first. Properly understood sustainability is not a passive concept. It is a call for another industrial revolution.

Adapting as best we can to the many changes taking place in the world around us is of course necessary. For example it is right and proper that the climate change community is devoting increasing attention to the action that needs to be taken around the world to cope with the consequences of the climate change that is already taking place. And enhancing our capacity to make such adaptations - human adaptability - is indeed a vital task.

But many changes to the global environment do not just happen ineluctably through natural processes. Most of the changes currently taking place in the world are caused by human activity and in particular by the remorseless pursuit of economic growth and resource consumption. And since some of these changes are at the same time actively damaging to the global environment and to the future well-being of humanity as a whole we absolutely do need to get our act together globally to alter the direction of some of the changes and mitigate their damaging impacts.

Adaptation by itself is a kind of appeasement of the economic forces that are leading to destruction of the environment. But economic forces are insatiable and can never be appeased. We need to identify and confront these blind forces, to divert them from their destructive pathways and to guide them to a more sustainable future.

Making the transition to a more sustainable world frequently implies incurring some extra cost in the present or short term in order to secure longer term benefits or avoidance of longer term losses. Forestry management provides a good example. There is a growing global demand for timber and other forestry products. But we no longer allow this to lead inexorably to the destruction of the world’s forests, adapting to this loss as best we can. On the contrary sustainable forestry management is now the norm in many parts of the world and is gradually spreading more widely.

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Unless we show adaptability, we will not achieve sustainability

In late June those with an interest in global sustainability may have become aware of the headlines that greeted the publication of the UN’s World Investment Report for 2014. A typical article would be headed “The UN’s sustainable development goals (SDGs) will fail unless governments and businesses find an extra US$ 2.5 trillion a year to support them.” It would then be pointed out that the predecessor Millennium Development Goals only had a shortfall of $120 billion a year leaving readers to draw their own conclusions, conclusions which no doubt would feature a meditation on the theme ‘hope springs eternal in the human breast’.

Over the last 15 years I’ve become less certain about what sustainability is. It’s not that there is a shortage of definitions or a poor supply of related economic models, business practice or even supporting political theory. My problem is that, by most measures, our world – specifically the great majority of humanity – continues to augment the way they live in a style that negate the definitions. I am beginning to wonder whether our focus on sustainability is the right approach.

Sustainability is a word that implies continuity, it’s a rather comfortable, passive, plodding sort of word. In evolutionary terms any life form that concentrated on sustainability would probably become extinct. Perhaps we should be paying greater attention to a more functional adjective, adaptability. The big advantage of adaptability is that it can be defined relatively easily and doesn’t need to have goals or objectives – which themselves become the subject of intense debate and dispute. Adaptability is itself the goal, the objective, the ability of an entity or organism to alter itself or its responses to the changed circumstances or environment.

In fact much of the work undertaken by Sustainability First has pointed to adaptability as the key to sustainability itself – a necessary precursor. Unless we, as individuals or organisations, have the capacity to change then treading lightly on the earth or meeting the needs of the present without compromising the ability of future generations to meet their own needs will remain wishful thinking.

Richard Adams

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