Recent days have seen headline initiatives by the Government and Ofgem to encourage a shift to electric vehicles by 2040, to promote battery storage, flexible energy pricing and a ‘smart’ grid. This is increasingly necessary as the UK becomes more reliant on renewable sources of energy such as wind and solar which provide intermittent supply, while a structural shift to electric vehicles and a proliferation of electric devices will heighten demand, putting more strain on networks.
High levels of distributed and renewable generation are already a reality. According to Department for Business, Energy & Industrial Strategy July 2017 UK Energy Statistics, renewables (notably wind, solar photovoltaics, and anaerobic digestion) generated 83 TWh, or 24.5 per cent of the UK’s electricity generation in 2016. Coal’s share has fallen sharply to 9 per cent, reflecting a shift in the relative profitability of coal based generation (the ‘clean dark spread’) with 42 per cent for gas and 21 per cent for nuclear.
National Grid plays a key part in the UK energy system, owning and maintaining the high-voltage electricity transmission network in England and Wales, as well as owning and operating the UK’s gas transmission and part of the gas distribution infrastructure. What is less well known is its role of balancing energy supply with demand as ‘system operator’. This gives it a particular insight into UK energy flows. Each year National Grid publishes extensive scenario analysis of the UK energy market in its highly influential ‘Future Energy Scenarios’ and the latest (published this July) is notable in projecting a major long-term structural shift in the UK energy market over the period to 2050.
Four central scenarios balancing green aspirations and prosperity are examined
Given the range of possible scenarios and variables over the next 30 years, as well as the pace of technological change, it is unlikely that any of these scenarios will play out as projected. For instance a range of commentators, including Ofgem, has noted the unanticipated recent growth of technologies such as solar generation and battery storage
Nonetheless, the analysis merits careful consideration because it highlights the themes which will surely play out over the period:
- The energy system is shifting to one with more complex, decentralised, flows of electricity supply and demand.
- Decentralised supply in particular will make it more complex to manage the network.
- Greater volatility in electricity demand: peak demand has the potential to increase significantly (from 60GW today to 85 GW in 2050) if electric vehicles become a major part of the transport system.
- Gas demand is projected to decline overall (from current 817 TWh to 772 TWh by 2050) driven primarily by decrease in gas used for power generation; but gas remains critical to the security of energy supply. So the infrastructure will continue to need investment both to maintain and increase flexibility as the system becomes more decentralised.
- The pattern of gas supply has changed dramatically in the last 15 years and the UK is currently dependent on imported gas from Norway, continental Europe and the world market (LNG) for around half of its needs. The scenarios project a continuing significant import dependency.
Can we draw any conclusions from this analysis for UK pension schemes supported by energy sector utilities?
- For many years the way in which electricity has been generated, transmitted and distributed to users has not changed dramatically. Technological developments in renewable generation and systems management are now disrupting this much more rapidly than thought even a few years ago.
- Pension scheme trustees are increasingly expected to look at the range of risks to their various cash flows in an integrated way. Perhaps the range of scenarios would be a good place to start from a covenant perspective, examining the financial impact and following though into the investment and funding impact.
- Gas and electricity demand are highly inter-linked and the projected shifts in the balance of demand (with electricity demand rising and gas declining) will not be linear. This calls for more focus in covenant monitoring of energy trends from year to year.