The energy transition: How do you make sure the electrification of energy remains affordable? - Simon Maine AMA

  • 20 August 2021
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The energy transition: How do you make sure the electrification of energy remains affordable? - Simon Maine AMA
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OVO Energy’s Corporate Affairs Director, Simon Maine during an ‘Ask me anything’ event in August 2021:

 

“The way we subsidise the energy transition at the moment is that it’s entirely levied on the electricity side of the bill and very very little on the gas side. Which means artificially gas is quite cheap in comparison to electricity. 

 

That’s fine 10 years ago. Now we’ve all seen the incredible change on the electrical side of the equation on the grid, that’s now the cleaner part of the energy system and we can see a route to getting it even cleaner. So the idea that electricity, which is a fundamentally cleaner fuel, is somehow the more expensive one and gas is the cheaper one relatively speaking is a nonsense. We need to change that. 

 

We actually collaborated with a few other energy suppliers to write a report on this earlier this year and its publicly available, here. Some people say that you should just move the energy costs from electricity to gas - just do a straight swap. Our concern with that is that you’re making gas very expensive at a time when many people are very reliant on it. 

 

Either way it’s fundamentally regressive, people with less income pay proportionately more if you do it that way. So we’ve called for bringing it on to government taxation and then levying a carbon charge, a carbon tax to make gas more expensive than electricity but on a fair, per carbon basis. The idea is that by shifting the policy costs, proportionality back on to gas, you’ll actually create that incentive to switch. 

 

It’s not just about the upfront costs of doing all the things that I’m sure you’ve done to your house, which can be expensive and they take time and commitment, but then there’s the ongoing costs. We want electricity to show that it’s the cheapest way of running a home as well as the cleanest. 

 

The other thing to consider, and this takes me back to my days when we were financing solar farms and wind farms, is that all of the investment is upfront in renewable energy because the fuel is free, so the whole business model is about getting the capital together and then once you’ve managed to pay off the original capital then you’re just pure profit at the far end of the lifetime of a plant. 

 

So government stepped in to securitise that profit, the return on investment at the beginning but once you get beyond that part of the cycle we’re gonna have wind farms that are 20, 30, 40 years old that are just generating essentially free energy - the capital costs would have been recouped decades before, so the power price in the market should come right down. 

 

That’s where renewables can really do something quite interesting to the price of energy on the market and I know there are issues around how do you account for back-up generation and system level costs that go with that but I do think fundamentally once you're past the investment phase a mainly renewable grid should be an ultimately cheaper source of electricity.”


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Here is some info on the prices paid for these electric REGO. It is variable over time and based on the type of renewable. But as an example lets take the 40p mentioned here. For 3000kwh a home might use in a year that would need three REGOs, costing £1.20 in total. Is that right? I must say i don't really see any point in these REGO. 

https://theenergyst.com/green-power-rego-certificates-rise-50-in-price-since-january-cornwall-insight-finds/

I have to be honest i would currently purchase my energy from ovo and others based mainly on price and then customer service, then features, then REGOs

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Yep good question that, @Jeffus 

 

I know that it’s complicated enough to put me off making sweeping statements around pricing. However I agree with Transparent that wholesale gas prices will effect the price of electricity as this is how the biggest chunk (see live fuel mix here) is generated. We’ve made a guide on wholesale prices, here. We’ve outlined our position on Renewable Energy Guarantee of Origin (REGO) certificates, here

 

I should also call out the major power purchase agreements that OVO have signed this year:

 

OVO Energy and Ørsted sign major power purchase agreement

 

OVO Energy signs major Power Purchase Agreement with Eneco
 

A similar chat happening on price increases here: 

 

 

So as ovo are buying more electricity direct from renewable suppliers, will ovo electricity prices be less impacted by gas prices going forward? 

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@Tim_OVOwrote

...wholesale gas prices will effect the price of electricity as this is how the biggest chunk (see live fuel mix here) is generated.

 

So here’s the ‘live’ energy mix from that National Grid site at just before 11:00 today

 

Compare that with the energy mix that I’m actually receiving in the uncharted lands beyond Dartmoor

 

So we agree on the percentage of fossil fuels, but I’m receiving almost double the national average for renewables.

This highlights the difficulty of customer pricing being set primarily on national wholesale statistics. Those areas of the UK which invest heavily in the switch to renewable sources receive precious little financial benefit from doing so.

Moreover those communities tend to be the less affluent areas of the UK, where fuel-poverty is higher - Westcountry, SW Wales, West coast of Scotland.

Moving to a carbon tax which is based on national data will adversely affect those who have better implemented the switch to renewables.

Or does Simon Maine think there is a mechanism in which the tax could be implemented (using rebates?) such that renewable-energy-rich areas don’t end up subsidising the metropolitan areas for their profligate attitude to energy?

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@Tim_OVOwrote

...wholesale gas prices will effect the price of electricity as this is how the biggest chunk (see live fuel mix here) is generated.

 

So here’s the ‘live’ energy mix from that National Grid site at just before 11:00 today

 

Compare that with the energy mix that I’m actually receiving in the uncharted lands beyond Dartmoor

 

So we agree on the percentage of fossil fuels, but I’m actually receiving almost double the national average for renewables.

This highlights the difficulty of customer pricing being set primarily on national wholesale statistics. Those areas of the UK which invest heavily in the switch to renewable sources receive precious little financial benefit from doing so.

Moreover those communities tend to be the less affluent areas of the UK, where fuel-poverty is higher - Westcountry, SW Wales, West coast of Scotland.

Moving to a carbon tax which is based on national data will adversely affect those who have better implemented the switch to renewables.

Or does Simon Maine think there is a mechanism in which the tax could be implemented (using rebates?) such that renewable-energy-rich areas don’t end up subsidising the metropolitan areas for their profligate attitude to energy?

How does the second table handle

- interconnectors. Is that zero?

- renewable. Does this include biomass, energy from waste etc?

 

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I can get that information by going the next level down for each category of fuel:

BSP 33/0001  23aug21  11:33

Note that the French interconnect is more correctly identified as primarily of nuclear origin.

If you want to have a look at this live data directly, you can go to Western Power’s Carbon Tracer site

Use postcode PL19 8NH, which is the address of a 33kV Primary Transformer(!) served by the same Bulk Supply Point (33/0001) that I’ve used to obtain the above data. :slight_smile:

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Once you know a few ‘useful’ Post-codes to enter, you can find some really interesting statistics. TR8 5BH is the address for the large solar farm owned by Bosch at Fraddon in Central Cornwall.

Fraddon is an extremely important point of the Distribution Grid map. It’s the nearest 33kV Bulk Supply Point to the ‘end’ of the two National Grid lines which serve the Westcountry. Beyond that Indian Queens Grid Supply Point (GSP), all electricity is carried solely by Western Power.

reproduced from Western Power Distribution with permission

Coincidentally Fraddon is also the point on the Cornish Distribution Grid which is most heavily affected by the county’s solar generation, and the wind-turbines on the northern coast.

This makes Fraddon BSP a pinch-point where the transformers have to cope with large swings of forward current (from the 400kV National Grid) and reverse current from the regional renewables industry.

All the data you are seeing via these online charts is available to be used in its raw form for planning. So if they wanted to, Kaluza could take both live and forecast Energy-mix data and use it

a: as an input to their Billing System once their Time Of Use tariff is issued. Customers could then make ethical choices on when to use electricity rather than just price

b: as an input to their Flex Platform so that customers with storage facilities, such as V2G, could be used to ‘store and forward’ electricity, thereby relieving the constraints on 33kV transformers which cannot take the peaks of reverse power.

 

Personally, I’d like to see OVO putting more effort into such uses of the Flex Platform to increase the actual proportion of renewable electricity in the mix, and correspondingly less time lobbying HMG about a carbon tax.

OVO already has a ‘tool’ which can be developed to solve a large proportion of the UK’s carbon emissions problem.

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Out of interest I’ve just looked up the Energy Mix forecast for Fraddon BSP for the rest of this week. The chart at the top of the graphic shows times where light-green is best and dark red is worst for carbon intensity.

There would be far less red on the chart in winter because the north Cornwall wind turbines will be doing what they’re designed for :slight_smile:

 

In the lower part of the screenshot I’ve highlighted the situation for midday on this coming Friday. 97% renewable electricity available and just 13g/kWh  :sunglasses:

If OVO are serious about investing in renewables then this needs to be reflected in the customer choices in the app for the forthcoming Time Of Use tariff.

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I should also call out the major power purchase agreements that OVO have signed this year:

 

OVO Energy and Ørsted sign major power purchase agreement

 

OVO Energy signs major Power Purchase Agreement with Eneco
​​​​​

 

 

So as ovo are buying more electricity direct from renewable suppliers, will ovo electricity prices be less impacted by gas prices going forward? 

 

Hi @Jeffus,

 

We thought this was a really great question and we wanted to make the effort of finding out how it works in more detail. 

 

We’ve spoken to our team involved in buying energy on the wholesale market, and they were really helpful in giving us some insight into this. As with most things, it’s complicated, and they gave us the watered down version. However you OVO Forum lot tend to be pretty technical, for better or worse. In fact, I showed the team this thread and they were amazed at the level of technical knowledge and understanding on show. So there’s some kudos to you all in this thread @Transparent @Simon1D. I wonder if this might be better in its own thread…..?

 

Anyway, we were advised that the process on a basic level (but still pretty technical, you have been warned), for wholesale energy costs, works as follows:

 

  • OVO Energy buys energy from multiple energy sources, including via power purchase agreements (PPA), securing energy for our members from wind farms. 
  • The price paid for electricity from wind farms (like that bought under our PPAs) is often closely linked to the market price of energy. 
  • The market price of electricity is set by the "marginal" generator of electricity at that point. This means the generator selling the last unit of energy to meet the demand in the market sets the price for all energy in that market. *We’ve been advised that it’s actually more complicated than this, but the principle applies.*
  • That means that, even though the cost of generating from a wind farm may be low, the energy is still priced at the cost of the marginal unit. 
  • Often, the cost of electricity is set by gas fired generation (gas being the "marginal" unit), so the price of electricity is closely linked to gas. 
  • So at the moment, the electricity we buy from PPAs is still closely linked to the price of gas, because the price of electricity in the market is set by the price of gas fired generation. 

 

I’m grateful to the team for explaining this link between wholesale energy sources and costs, and I hope you found that of value, @Jeffus

 

I think this ties in nicely to what Simon Maine said, about the benefit of bearing the brunt of the one off cost of renewables:

 

The other thing to consider, and this takes me back to my days when we were financing solar farms and wind farms, is that all of the investment is upfront in renewable energy because the fuel is free, so the whole business model is about getting the capital together and then once you’ve managed to pay off the original capital then you’re just pure profit at the far end of the lifetime of a plant. 

 

So government stepped in to securitise that profit, the return on investment at the beginning but once you get beyond that part of the cycle we’re gonna have wind farms that are 20, 30, 40 years old that are just generating essentially free energy - the capital costs would have been recouped decades before, so the power price in the market should come right down. 

 

That’s where renewables can really do something quite interesting to the price of energy on the market and I know there are issues around how do you account for back-up generation and system level costs that go with that but I do think fundamentally once you're past the investment phase a mainly renewable grid should be an ultimately cheaper source of electricity.”

 

As always keen to hear your thoughts!

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@Tim_OVOwrote

our team involved in buying energy on the wholesale market

So let’s give them a name, shall we?

Can I propose “Joule Traders”?

 

… the generator selling the last unit of energy to meet the demand in the market sets the price for all energy in that market.

I really feel so restricted using words.

Let’s translate this into a simplistic diagram:

 

Once upon a time, OVO wanted to buy 10MWH of electricity for their merry band of customers.

The wind blew strong in the North Sea and they picked up 4MWH from Ørsted and 3MWH from Eneco under their shiny new PPAs. At 63 and 61 Spondulicks respectively, the Joule Traders were very pleased with their progress so far.

Looking around the market they noticed Vattenfall were very rich in solar MWH, which was a perfect match for OVO’s green credentials. But 3MWH were already committed to Red-Bug Energy, leaving OVO able to secure only 2MWH.

It was almost the close of trading for the next half-hour period and the Joule Traders were still 1MWH short of their requirement.

Thankfully they were approached by a man in a fur coat who offered them his business card. He said his name was Sergei and could sell them the final 1MWH for 90 Spondulicks.

With time running out, the Joule Traders shook hands on the deal.

It was going to be more expensive than they’d hoped. The deal with Sergei was the last trade of the session. So his price of §90 wiped out all their hard work of securing the cheaper green electricity. Their PPAs weren’t strong enough to give them the lower-cost wind-energy they’d been hoping for.

Worse still, Sergei’s electricity had been generated by GazRU and came loaded with tonnes of carbon dioxide.

With their green energy guarantee at stake, the chief Joule Trader went online and found what he was looking for.

With a few quick clicks of the mouse, he’d bought himself a freshly-minted 1MWH REGO Certificate.

And since the customers never realised how the system worked, everyone lived happily ever after.

 

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I really feel so restricted using words.

Let’s translate this into a simplistic diagram:

 

 

Such a great diagram, @Transparent.

 

Not quite how I interpreted things though (and as I’m by no means an expert in the wholesale energy market I’m happy to be corrected on this one). My own graphics skills are well below your great standard so I won’t show you my attempt to visualise things (lets hope my words will do).

 

From my understanding of things when the energy companies (OVO, Red-bug Energy, Underwater Sea Creature ect...) need to buy energy from the general market (ie not directly from the generator via a PPA) they let the national grid know how much they need for that half-hourly block. The national grid will then make sure there’s enough power on the grid to supply this demand. If they need to call in additional generators, it’s the final generator (which is often a gas-powered plant which can power up last minute) that gets to decide the price for all the energy supplied by all generators (excluding those with a PPA) at that time. So if the price of gas is particularly high at that moment in time they set a higher price per MW - this same price then has to be charged by all generators supplying the grid for that time period.

 

So if GazRU decides they want to charge 90 Sponduliks per MW, Vattenfall then has to charge the same even though the cost to produce their glorious solar energy might be much lower.

 

Not sure if your lovely simplified graphic might be closer to the reality or my convoluted wordy explanation - what does everyone else make of this one? @Jeffus@Simon1D@Tim_OVO 

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Well, market trading isn’t my speciality either, but I’d be disappointed if my “rocket scientist” qualifications didn’t enable me to understand the mechanisms. I can resist no longer …

The key point is the difference between deals that are struck in advance (the ones with Ørsted and Eneco) whose price is fixed beforehand, and deals that are struck when Ovo’s need arises (ones with Vattenfall and GazRU) which are priced at the level of the most recent deal. It’s not that Vattenfall “charge” that price (after all they did commit to a deal at a lower price, but that wasn’t the most recent/final deal in that trading period), rather it’s just that all non-fixed price deals in that period are settled at a common rate. Perhaps @Transparent didn’t make that clear, but that is (my understanding of) how markets work.

In fact, that’s how markets “have” to be set up, if they’re to have a chance of avoiding utter chaos. If Vattenfall weren’t reassured that they’d get whatever is the final price during the trading period, they’d be less likely to commit to a sale at §72 before the very end of the period. With the market set up this way, they can get the certainty of selling  2 MWh at §72 (possibly more) and avoid the risk of 2 MWh being left unsold (because there were no more takers when they tried to hold out for a higher price). Vattenfall’s ability to store energy left unsold in one period, for sale in the next period is, shall we say, very limited. GazRU on the other hand, have generation capacity that can be turned on and off more or less at will, without huge losses, so they’re much more inclined to hold out for a higher price and keep their gas unburned if they think a better price will be offered in the future.

There’s no meaning to “the price of gas” other than as the combined effect of a lot of judgements like this, and how they change over time.

But just because I might understand how markets work (please correct me, @Jess_OVO@Transparent, where needed) doesn’t mean I think they’re the best thing since sliced bread (and I’m not assuming that anyone else in this discussion thinks that, btw). On the contrary, the “invisible hand” is ultimately what is pushing us towards oblivion, and the sooner that is recognised by more people, the better.

What we need, at the very least, are mechanisms that ensure that the output from the good generators is all used, and the dirty output is only used when necessary, i.e. after that. Sadly, to achieve that would take more intervention than I’m likely to see in my lifetime.

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.

Chapter 2 - Payback time

 

That evening the Joule Traders were at their usual Bristol bistro, Watts Cooking.

They were joined at the table by a colleague from their sister-company, Kolaborate.

How’s your day been?” asked Ampz?

They told him of their successful PPAs with the wind-turbine operators, but how the deal with GazRU had pushed up the price of the solar power from Vattenfall because Sergei’s had been the last trade of the session.

I can help you with that,” Ampz replied. “What’s the weather like tonight?

Well that’s the problem,” said the senior Trader. “It’s blowing a gale, but we only need 6MWH of the ten being generated by Ørsted and Eneco.

No problem, guys” retorted Ampz. “Kolaborate’s running a couple of trials with Storage Batteries and Vehicle to Grid EV chargers. I’ll take the extra 4MWH and store it for you!

 

That would be great,” replied the Joule Traders. “And we get to take advantage of the lower prices too!

 

The next day the Traders were back at their screens in the office, looking for another 10MWH for their customers.

The wind had died down, but the sky was still overcast and Vattenfall had only 1MWH to offer Red-bug Energy. With Ørsted and Eneco having just 7MWH between them, it looked like both OVO and Red-bug were going to fall into the clutches of GazRU.

At that moment the door opened and in walked Ampz.

Hi guys,” he said cheerily. “It’s time to raid the energy stores.

 

Ampz tapped a few keys on his smartphone and the energy recovery was in place.

They even had 1MWH surplus to sell on to Red-bug at a profit.

Sergei was furious. He’d been all ready to cash in on the lack of sunshine and sell his dirty energy at §97. But now he was going to lose out entirely.

The Joule Traders were overjoyed and eager to ask Ampz about his system.

What’s it called?” they enquired.

We’re thinking of calling it the Flux Platform,” he smiled. “After all, it’s pretty attractive technology!

 

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Meanwhile, the mutterings of “keep it in the ground” grew ever louder...

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Thanks @Jess_OVO 

I’ve refined the 1st diagram of the series to show the difference between the price paid under a PPA, and that on the open market.

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18% Solar photovaltaic at the moment, according to https://grid.iamkate.com/ (16:00 on the 7th September, 2021):

 

 

Still 47% coming for natural gas… Wow

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I must admit i am now even more worried about affordability during the transition than i was when i first posed the question for this thread.

Given the increasing costs for electricity and gas recently I fear affordability may get significantly worse for a considerable amount of time.

Myself and many others will I am sure be fine. My younger adopted brother and his young family were already finding things hard. With the latest rises we will be helping them with their bills over the winter. It is grim for those who work hard in relatively poorly paid unsecure but important work.

There is no chance of people like my brother being able to handle higher monthly bills during the transition that we are already seeing, even if the end game may be better in terms of cost and the environment. Also no chance any time soon that the majority of people like him in rented accommodation will be switching to things like ashp, solar panels, batteries etc. 

I can't honestly say i have heard anything that will help many people in fuel poverty or in the cusp of fuel poverty. I don't see much of a plan or strategy. I found Simons reply a bit naive, but i am sure he didn't mean it. Sorry if that sounds negative @Tim_OVO

The transition feels a bit of a mess to me. 

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