Charging ahead The electrification of transport is happening at pace, but investment in the UK electrical grid is not - June 2018 - Roland Berger
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June 2018 Charging ahead The electrification of transport is happening at pace, but investment in the UK electrical grid is not
2 Roland Berger Focus – Charging ahead Management summary Jane grins, and gives an exaggerated wave to the Tesla deliv- ery van as it vanishes into the early evening. Her new Tesla 3 gleams on the driveway, worth every day of the four years since she paid her deposit. Even worth the five weeks since her smug neighbour, Mike, took delivery of his (lower spec) version, sat charging next door. Blithely, she trots up to the new umbilical by her garage, thinking about who she will visit once the battery is topped up. And, with a flick of the switch, every cooker, television and reading light in Acacia Gardens is plunged into darkness ... The Electrification of Transport is hap- pening at pace, just as the UK regulation of distribution networks is adopting longer, slower cycles. We foresee the two falling out of step.
Charging ahead – Roland Berger Focus 3
Contents
1. Who would want to be a regulator? .................................................................................. 4
Squeezed by increasing fuel poverty, UK politicians, and non-UK asset owners.
2. The non-linear rise of electric vehicles ............................................................................. 8
Expect a step increase around the end of the RIIO regulatory period.
3. In the short term, be smarter .............................................................................................. 10
And in the long term, invest more in the grid.
Cover photo: Luca Piccini Basile / iStockphoto4 Roland Berger Focus – Charging ahead
Who would
want to be
a regula-
Chapter 1:
tor?
Who would want
to be a regulator?
Squeezed by increasing fuel poverty,
UK politicians, and non-UK asset owners.Charging ahead – Roland Berger Focus 5 The UK energy regulator, Ofgem, is in perilous waters, in 2016. The idea was a simple and progressive one: to blown by the politicians, international asset owners, allow certainty for distribution grid owners by giving technological change, and ever-ageing infrastructure. them a longer eight year regulatory cycle over which to From the left, Corbyn rails against corporate greed and recuperate their desired investments, rather than the prescribes nationalisation. From the right, the May gov- previous five. With public sector infrastructure invest- ernment offers populist price caps against the Big Six, ment at around half the OECD-recommended level of and their often-EU member state owners. The same 3.5% of GDP, and with total investment stubbornly be- member states anchor the ever-growing list of intercon- low its peers, the UK was slipping behind. A longer in- nectors that the UK now uses to keep its lights on, and vestment cycle would give private money the confidence often have a stake in underwriting the huge offshore it needed to capitalise operational expenditure, and to wind investments now breaking cost efficiency records manage a gradual migration to a smarter Distribution and grid stability norms alike. They have some Brex- System Operator (DSO) philosophy. A it-enforced anxieties, as with the Euratom treaty and the With the duration agreed, what level of spending would French-owned nuclear fleet, but have been broadly en- the regulator allow? Recent history of some DNOs being thusiastic in their involvement in the UK power sector, fined for failing to deliver capital programmes, and po- the liberalisation of which has few if any parallels over litical and voter pressure for perceived value for money, the past 30 years. There are some areas where the Euro- contributed to a RIIO determination seen as tough by peans have been less active; they have less involvement many in industry. in the distribution networks, these mostly being held by The result has been a reverse of the spending growth of Asian and American infrastructure investors. It is in recent cycles, no growth foreseen until 2023, and pressure these cosmopolitan ranks that the regulator has honed throughout the distribution network supply chain. B its powers of diplomacy. The regulator has had conspicuous successes: the UK now goes weeks without using coal, and has carbon emissions lower than at any time since the reign of Queen Victoria. Grid interruption has been manageable, in spite of the rise in intermittent renewables; never in the history of the world's oldest electricity network has there been a single grey start. Strides have been made in energy efficiency since the 2008 demand peak, alterna- tive storage technologies have displaced spinning re- serve, a vigorous independent energy retailer market has been sustained, world-first instruments like the ca- pacity auction have been introduced, and a balanced portfolio of supply sources have maintained a healthy demand margin. It was into this varied-but-creditable energy environ- ment that Ofgem launched its new RIIO regulatory cycle
6 Roland Berger Focus – Charging ahead
A: The UK has underinvested in infrastructure relative to other countries, OECD targets and
historical precedents.
Total infrastructure investment [% of GDP].
TOTAL INFRASTRUCTURE INVESTMENT, 1990-2020
28%
25%
24%
France
22%
7.5%
22%
US 20%
20%
Germany
18%
5.6%
5.3%
UK
4.9%
3.5%
3.4%
OECD target
2.5%
2.1%
2.1%
2.0%
1.9%
1.8%
1.5%
1.2%
0.9%
0.6%
n/a
1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020
UK PUBLIC SECTOR NET INFRASTRUCTURE INVESTMENT, 1956-2016
Source: WEF, IMF, OECD, ONS, Roland BergerCharging ahead – Roland Berger Focus 7
B: Asset replacement was the key driver during DPCR4-5, and expenditure stabilised during ED1 due to
slowdown of intensive replacement.
Historical and forecast UK electricity transmission & distribution expenditure, nominal, 2006-23 [GBP bn].
Distribution
DPCR4 DPCR5 RIIO-ED1
-1.3% Forecast
+7.2% 3.5 3.5
3.3 3.4 3.4 3.4 3.4 3.3 3.3
3.1 3.2
2.8 2.9
2.7 2.7
2.5
2.2
2.0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
TPCR4 RIIO-ET1
+1.5% 2.4 2.3 2.3 2.4
2.2 2.1
+14.1% 2.0
1.8
1.1 1.1
0.9 1.0 1.0 1.0
n/a n/a n/a n/a
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Transmission
Source: Ofgem, Distribution Network Operators (DNOs), Scottish Hydro Electric transmission, NGET, SPT, Roland Berger8 Roland Berger Focus – Charging ahead Chapter 2: The non-linear rise of electric vehicles Expect a step increase around the end of the RIIO regulatory period.
Charging ahead – Roland Berger Focus 9 While distribution network regulators continue their tions were occasionally sold with little technical grasp incremental pursuit of pennies per kWh transmitted, a of the power that would be generated, and almost nev- major disruption looms. er with an understanding of the reinforcement needed Roland Berger has been maintaining an ever-more-ag- at the local 11kV substation. In the worst cases this gressive market forecast for over a decade, and be- leads to supply exceeding demand at noon on sunny lieves that Electric Vehicles are fast approaching cost days, to voltages increasing locally, and to the inverters parity, and that this tipping point will occur as early automatically holding off the domestic PV installa- as 2023 in certain applications, leading to a step tions. This is rare, and little known, and fortunately change in demand. likely to be overlooked by unwitting investors, proba- History's first cars were mostly electric, before becom- bly too surprised by the British sunshine to spend time ing synonymous with the internal combustion engine. watching their dormant inverter outputs. It may how- This may now revert, driven by environmental concern, ever presage a more compelling challenge. and, less obviously, Chinese industrial policy. An uptake of electric vehicles, for which the most up to China has nothing to fear from disruption to the trans- date rapid chargers draw fifty times the load of a house, portation sector. Its government has acknowledged the will stress the distribution network. All of the evidence weakness of its automotive suppliers' relationship with suggests that the home is the most desirable place to the IC engine, and has long signaled its intention to charge EVs, and that the evening, already the time of leapfrog to electric vehicles. China is home to 50% of all the highest load, is the preferred time for charging. automotive batteries deployed, vs. 30% of cars. China's Early adopters, the authors included, can freeload on stationary electrification efforts are also world class, in- the existing network. The present system (notwith- stalling more than the UK's entire generation capacity standing EV tax breaks and incentives) allows incre- every single year in recent times. Chinese power design mental vehicle chargers to be added without shoul- teams, accounting in some measures for half of the dering any cost for Use of System. The cost of world's total design capability, are now facing much re- upgrading this system is very material in the long duced demand growth at home, and are turning atten- term; work by Roland Berger in Germany puts grid re- tion to its networks with ease. inforcement in the high billions, and on a par with By our assessment, these distribution networks will need the creation of an entire hydrogen infrastructure, as attention, and lots of it. required by competing fuel cell solutions. This risks The risk here, simply, is that clusters of EV charging will becoming a straightforward case of the poor (electric- overload the distribution network at peak times, and that, ity user) subsidising the rich (EV buyer), however well in the absence of action, power outages will ensue. intended the rich. But, as our opening vignette ex- A precedent for this scenario already exists, albeit in plores, the high price and prestige of EVs will lead to reverse, in UK domestic solar. Neighbourhoods with problems arising in wealthy well-established neigh- easily accessed south facing roofs have in some cases bourhoods first. And these inhabitants, perhaps in- hit a problem with PV. An over-achieving salesman, or dustry leaders and politicians amongst them, will a well-intended housing association, has on occasion make their voices heard with the regulator. They are led to a localised bloom of PV installations, harvesting unlikely to wait until the end of the regulatory period both the sun, and the subsidies on offer. Such installa- to travel again. So what is the solution?
10 Roland Berger Focus – Charging ahead Chapter 3: In the short term, be smarter And in the long term, invest more in the grid.
Charging ahead – Roland Berger Focus 11 Smart Grids have been a long time coming. For many The consumer who knows what their activity is costing years it has been acknowledged that a smaller grid, in real time will seek to reduce this cost through their smoothing out the electrical energy required over a lon- behaviour, goes the doctrine. Even accommodating the ger period, would be cheaper, as it would not be neces- narrow majority of consumers (termed "Unplugged" or sary to size the necessary wires, transformers and "On standby" by Ofgem) who demonstrably don't give a switchgear for peak load. jot, a narrow business case has been made. The three broad solutions to this are Demand Side Man- But a more interesting market is emerging which greatly agement (DSM), Storage, and Distributed Generation (DG). strengthens this business case. The supplier to a con- All three of these solutions have been in play for over 50 sumer with a smart meter knows exactly when they used years in the UK. their energy, and if they exploit new half hourly settle- Traditionally Demand Side Management involved a call ment codes they can charge just at those times rather from the CEGB to a major industrial load to switch off to than paying an average rate. This leads intuitively to a help balance the grid; interruptible power supply tariffs more intelligent real-time version of the old Economy 7 for industry stem from this time. Similarly pumped stor- tariffs popularised in the 1970s to encourage off-peak age stations, pioneered in the Alps in the 19th Century, usage. The first-mover energy retailers are already offer- reached the UK in their present form in the 1960's and ing this product to an as-yet-unprepared public. Second 70's, and distributed power generation, as any visitor to movers will surely offer to trigger non-essential loads by the National Trust's Cragside property in Northumber- remote signal in order to optimise costs, and effectively land will testify, is as old as electricity itself. automate bill reduction. But what is changing rapidly in recent times is that tech- Storage is also getting smarter, and at every scale. nological innovation is allowing Smart grids. At the large scale, there is a global renaissance in pumped Demand side management today is becoming smarter. storage, which, after many years of minimal investment, Instead of simply switching large loads on and off on is re-emerging in some countries, for example Australia. request, control systems can do this automatically. The The topography and planning sensitivity of the UK does load change can come from many sources, for example not lend itself to such schemes, but interconnectors now by temporarily switching fleets of standby generators underway to Norway are a good proxy. on, or by temporarily tripping non-essential loads such At the small scale, automotive Li-Ion batteries are creat- as the refrigerators across a chain of supermarkets, all ing nascent markets, as their compelling cost reductions of which can be tripped for a couple of minutes without outweigh technical drawbacks. Auto batteries are pursu- the food being spoiled. Such interventions can be con- ing energy density rather than cycle life, and may not ul- trolled simply using wireless technology, and have no timately be the perfect grid storage tool, but the enormity damaging impact on business continuity. of the automotive prize is driving down costs at break- The economic drivers which encourage DSM can also be neck speed. Battery manufacturers, particularly those harnessed to directly "nudge" consumer behaviour. with more cyclable LFP cathode chemistries, are seeing Smart meters are pivotal here. Smart meters, presently stationary markets as a helpful volume staging post on undergoing a much-delayed and oft-maligned roll-out the road to automotive TCO parity. Battery banks are al- to UK domestic consumers, have mostly been justified ready displacing spinning reserve in many liberalised on the basis of consumer information driving choice. short-duration storage markets, the UK included. At a mi-
12 Roland Berger Focus – Charging ahead cro-scale some of the pioneers of domestic PV are toying This is the philosophy behind DSOs, is already under- with behind-the-meter storage to minimise export. way, and will allow us to get more from our existing dis- Some commentators expect this current boom in sta- tribution networks, mitigating operating costs in the tionary applications for car batteries to grow almost in- near-to-mid term. But in the mid-to-long term, consum- definitely. On balance, we don't. The low duration grid ers are going to pay more for the grid. stability markets, while real, are modest in scale, and we In RB's analysis, regardless of what happens to electricity don't expect to see huge fleets of tethered EVs putting generation prices, the absolute cost and sophistication of power onto the grid; in battery terms this is a shire horse distribution networks and service provision will rise. We duty for a race horse (and a very expensive way to believe that the genie has already escaped the bottle in life-limit a Tesla). However, we will certainly see automo- terms of the electrification of transport, now only a mat- tive chargers getting switched on and off on demand, ter of time. Use of system charges and other levies not and there are many such applications to come. related to wholesale prices will rise in absolute terms and Ultimately RB's analysis suggests that the mid-duration become increasingly politically sensitive. C market, for example overcoming intermittency at a The simplest and cheapest way to charge EVs at a societal wind-farm level, is probably the market with the greatest level is to use spare capacity. This will need zero capex. scale and potential. This is not a foreseeable focus of On the highest demand day, which this year was February most Li-Ion R&D as it has different success factors, and 28th, the overnight demand trough was about 150 GWh. is much smaller than the automotive market. However Assuming charging times can be managed, there is thus the drivers for this market are real, and like all infant enough spare capacity to charge 2m BEVs a night without industries we will now see a period of product innova- investing in new capacity, and even more in the summer tion, probably including more esoteric battery chemis- (though it is hard to imagine entitled Tesla drivers wait- tries, flow batteries, gravity devices, flywheels, hydro- ing until the Summer). There are 32m vehicles in the UK. gen, supercapacitors, P2X, compressed air, etc. Using the RB global model as a guide, we believe that 2m Finally, and more prosaically, distributed generation BEVs will be adopted well within a decade, after which, will continue to grow as a proportion of new generating even with continued energy efficiency gains, we will need capacity. This can be seen in the continued growth of more grid capacity. Electric bus depots, increasingly the gas engine sales in most OECD markets which, being norm in China, and now trialled in Waterloo, will also often radically oversupplied, have otherwise been shut- accelerate this trend. ting larger merchant plant. Over time, we expect to see There are broader environmental gains to flattening our this matching of points of load and supply to increase, demand curve. The demise of coal and rise of wind has for example to include distributed power generation at meant that the Carbon intensity of UK electricity is much EV charging destinations like bus stations. less than half of what it used to be. The first subsidy-free So, in the UK, these three technologies (DSM, Storage, onshore wind farm is now underway, and offer prices for and DG), along with increasingly sophisticated control new offshore wind are now routinely a third cheaper than methods for networks, have already allowed the distri- new nuclear. In the absence of change, a problem arises in bution of electricity to become smarter. The world-first the mid-term, as windy nights start to lead to supply ex- liberalisation of the UK energy market has made it a ceeding demand, and the economics of interconnector ex- testing ground for many world-relevant technologies. port are as yet unproven. If we can push up minimum load
Charging ahead – Roland Berger Focus 13
C: Current electricity system will struggle if all cars in the UK become electrified.
24 hrs UK power demand, 28th Feb 2018 [GW].
60
AVAILABLE CAPACITY FOR CHARGING
50
Biomass
40 Imports & storage
Hydro
Solar
30 Gas
Wind
20
Coal
10
Nuclear
0
00:00 02:00 04:00 06:00 08:00 10:00 12:00 14:00 16:00 18:00 20:00 22:00 00:00
Source: DECC, National Grid, SMMT, Roland Berger
(for example by charging EVs overnight) the UK can invest Beyond the first decade and the first two million EVs, or
more in wind, and reduce our carbon intensity further. as heat becomes electrified (which we doubt will be as
So what do we foresee for the long term? Electricity de- fast), we are going to need to increase grid capacity. As-
mand rising and flattening, an investment in grid systems, suming, again, that we can spread this charging load
and consumers being charged for the use of these systems. across the full day, and assuming further that the 3%
For the first ten years, and the first couple of million elec- efficiency savings of the past decade can be repeated
tric vehicles, the emphasis will be on incentive and tariff over the next two decades, then we see 75% of domestic
structures to move to off-peak charging. Around the end vehicles being replaced by BEVs, and the peak demand
of the RIIO regulatory period in 2023 we will see a step on the UK system rising from 52GW this year to 66GW
increase in distribution network investment needs, firstly in 2038 – a relatively modest increase, but a huge rever-
in wealthy suburbs, and then everywhere. Network sal after a decade of falling expenditure.
charges, presently around 25% of consumer bills, will in- The course is set for wholesale change in the UK mar-
crease, probably raising democratic challenges about kets for energy generation and distribution over the
how such costs should be borne. Environmentalists will next twenty years. The source of this change has not
be cheered as, though more electricity will mean more been UK energy policy, which has been derided as
gas burned, much of it will come from wind and solar, weak over many years, but global technological ad-
and carbon emissions will be offset many times over by vances. Businesses, regulators and consumers should
displaced gasoline consumption. adjust accordingly.14 Roland Berger Focus – Charging ahead Credits and copyright WE WELCOME YOUR QUESTIONS, COMMENTS AND SUGGESTIONS AUTHORS TIM LONGSTAFF DAVID FRANS Partner Partner +44 20 3075-1100 +31 (20) 7960-621 tim.longstaff@rolandberger.com david.frans@rolandberger.com KLAUS MUELLER DENIS DEPOUX Partner Partner +49 (211) 43 89-2120 +86 21 5298 6677-814 klaus.mueller@rolandberger.com denis.depoux@rolandberger.com This publication has been prepared for general guidance only. The reader should not act according to any information provided in this publication without receiving specific professional advice. Roland Berger GmbH shall not be liable for any damages resulting from any use of the information contained in the publication. © 2018 ROLAND BERGER GMBH. ALL RIGHTS RESERVED.
Charging ahead – Roland Berger Focus 15
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