Sunday 5 February 2023

How long can we rely on cheap rate electricity?

A number of my friends are considering or have already installed a Tepeo zero emissions boiler (ZEB) with storage as a low carbon heating solution for their home. This is less disruptive than installing a heat pump but it is only 100% efficient compared to 300% or so for a heat pump. It relies on cheap electricity to keep energy bills at a sensible level – either economy 7 overnight, or similar, or relying on prices fluctuating during the day with a tariff based on wholesale prices, such as Octopus Agile. I shall call all of these tariffs ‘cheap time’, for brevity. 

Cheap time tariffs could become cheaper – or more expensive

Historically, overnight demand is lower than during the day, and hence prices are lower because there is no need to run the expensive peaking plant. This has enabled tariffs such as Economy 7 to work well for homes with storage heating. Hitherto this has been only a small fraction of heating demand: I estimate just 2.2% of domestic heating demand in England [1]. However, there is going to be lots more demand for cheap time power due to switching to low carbon transport and the need for electricity storage to take account of intermittent renewables. Cheap-time tariffs could become cheaper, because renewable power is cheap, or more expensive, because there is more demand for it. On balance I fear the latter is more likely.

Marginal pricing is going to change – but we don’t know what will replace it.

At the moment, wholesale prices are based on a marginal pricing scheme which means that the price paid is that of the most expensive power plant in the mix. For the time being this is mostly gas. There is general agreement that this has to change, but not on what the new scheme should be. It is a very complex subject. There was a consultation last year [2] and feedback is under review. I don’t think we can make any assumptions at this stage, except that basic economics should apply.

Lots of competing uses for cheap time power make for a complex market.

There are a lot of potential users for cheap time power including:

  • Short term storage for heat – for domestic and commercial buildings 
    • Such as in the Tepeo zero emissions boiler, as well as conventional storage heaters
  • Charging electric vehicles
  • Short term storage for electricity in fixed batteries, at domestic, commercial or grid scale. These will store cheap power for delivery when the price is high. They can run on thin(ish) margins if the storage cycles are efficient. Batteries can be 90% efficient or more.
  • Making green hydrogen for power stations (i.e. as medium to long term electricity storage)
    • Converting hydrogen to electricity is rarely more than 50% efficient and there are other losses in the electricity-hydrogen-electricity process. However hydrogen is easier to store at scale than the equivalent electrical energy.
  • Various industrial processes that can run intermittently. Examples include:
    • Making hydrogen and hence ammonia (currently made from methane) for which the main use is to make agricultural fertiliser
    • Or making hydrocarbon fuel for other sectors such as aviation or heavy vehicles (needs a carbon source too).
    • Capturing CO2 from the air (direct air capture, or DAC) or from seawater for use (e.g. as a carbon source for hydrocarbon fuel) or geological sequestration 

The value of the power depends on how it is used – and the cost of alternatives. 

Assuming basic market principles, while there is lots more power than can be used, then it will be cheap. However, when there is not enough then those users prepared to pay most will get what they need and others go without.

For some of these uses there are alternatives. For example, there are lots of ways to do DAC (see ‘Greenhouse Gas Removal – and checking it works’. Also synthetic fuel made from cheap time power will have to compete with biofuel from energy crops, as long as there is land available to grow them. The value of the fuel is set by the cheapest method to make it. You will not get buyers for your fuel made from green hydrogen and carbon from a biomass power station if there are other people making it cheaper from algae or sugar.

Curtailed power is almost free to use for co-located plant.

Power can be surplus even when there is insufficient at a national scale, when there is more than the grid can handle in that area. This currently happens frequently in Scotland, as there is far more wind power generated there than the connections to England can handle. This is called curtailment. Some generators have power users directly connected so that they can still use power even when they are curtailed. Using the power onsite also means they avoid charges for using the grid. Storage co-located with the generator can help to smooth the intermittency which is useful. Estimates of the cost of green hydrogen production assume that curtailed power is free [3]. This may be a little optimistic. However, this power is not available to power your Tepeo ZEB.

You may have a battery co-located with PV panels at home. If you have more PV capacity than you are allowed to export to the grid you will sometimes experience curtailment, but you can use the battery (or a Tepeo) to store the surplus. Actually, optimal use of your battery is more complicated than this because you really want to maximise your self-consumption but that is another story.

Short term battery storage with high efficiency could be profitable on small price differences.

Short term storage users with high efficiency can profitably purchase energy at not much less than the normal price. For example, if your battery is 90% efficient you only need a 12% increase in wholesale price to break even. In practice you need more than that to cover your fixed costs. However, you can afford to use the battery at quite thin margins when cheaper power is not available. 

By 2035 daily heat storage users will compete with larger demands from other cheap time users.

Suppose 5% of current domestic gas demand is switched to daily heat storage by 2035. We can compare the demand for heat storage with other short term storage users:

  • 100 GWh/day on a typical December day for daily heat storage (30 GWh for existing storage heaters [1] plus 70 GWh switched from gas users [4]) 
  • 140 to 250 GWh/day for EV charging (averaged over the year) [5a]
  • 50 to 150 GWh capacity of other short term energy storage by 2035 – some of which can tolerate low margins but not all will be used every day [5b].

This means that by 2035 daily heat storage is competing with other cheap time users with greater energy demand, possibly much greater. 

As a daily heat storage user you cannot afford to wait.

If you have a ZEB boiler with storage such as Tepeo, you need to recharge daily during the winter, so you cannot afford to wait a long time for cheap time power. 

On average there should be plenty of cheap power available, but not every day.

Averaged over the year there will definitely be surplus power available. Otherwise we would be at critical risk of running short. However, this does not mean there will be surplus cheap low carbon power. There may be days on end, even in winter, with low wind and low sun. Short term storage will run out and then we are left with more expensive options such as biomass power stations, hydrogen gas power stations or long term storage. There may also be some power to buy from interconnectors to Europe and there will be some demand side response. There will be lots of options but they will not be cheap.

We can run the energy system with a large surplus of renewable energy and little storage, in which case there will be few days when cheap energy runs short. Or we can run the system with a large amount of storage and less surplus renewables, in which shortages will be much more frequent. Which happens depends on the relative cost of energy storage and renewables. It is too soon to tell.

A fixed tariff is less risky for you – though it will cost more on average.

If you can tolerate short periods of high energy costs you could do OK with a tariff based on wholesale prices such as Agile. This will allow you to take full advantage of whatever price differential there is. However, if cash flow is a problem then you would be better with a pre-set tariff so that your supplier takes the risk of short periods with very high costs. They will charge a premium for this; you can consider it insurance. 

In summary

Historically, heating homes with storage heaters on an Economy 7 tariff has worked well because wholesale prices were reliably lower overnight when demand was low. However, there are going to be a lot more potential users for cheap time power. Industrial users co-located with generators experiencing curtailment will get very cheap power. However, normal users have to compete with everyone else on the grid.

The future market arrangements for wholesale electricity are uncertain but we can assume that basic economics will apply. With a range of users for cheap time power, and some prepared to pay more than others, we can expect the price gap between normal and cheap time power to decrease. This means that the current price differential between cheap time tariffs and standard rates for electricity is likely to narrow. 

This could happen within a decade depending on how fast we scale up generation of intermittent power, energy storage, electric vehicles that need charging and various industrial cheap time processes. The effect is greater if we end up with a lot of storage and not so much surplus power. 

For switching to low carbon heating you can either choose the high efficiency of a heat pump or an electric heating system with storage that allows you to use cheap rate power. The latter is often less disruptive and cheaper to install but exposes you to the risk of diminishing cheap rate price differences.

[1] Cambridge Housing Model: a stock model derived from data from the English Housing Survey. The version I am using now includes data from 2019. 4.5% of dwellings use storage heaters but they are mostly small homes so the proportion of heating demand is lower. The overall heat demand from homes with storage heaters is 33 GWh/year.

[2] Review of Electricity Market Arrangements ( 2022

[3] Hydrogen Production Costs ( 2021

[4] DUKES (2020)

  • Domestic gas demand from is currently 25,700 ktoe/year = 300 TWh
  • 5% of homes would be 15 TWh/year
  • Approximately 0.46% of this for a december day, based on degree days for space heating and an allowance for hot water
  • 15 TWh * 0.0046 = 69 GWh 

[5] Data from National Grid Future Energy Scenarios data workbook (National Grid) 2022

a) Table EC.T.06 indicates EV charging 50 to 90 TWh/year = 140 to 250 GWh/day

b) Table FL.17 indicated 50 to 150 GWh capacity of other short term energy storage

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