Rebalancing policy costs: an easy win for Clean Power 2030
Refinancing policy costs could make bills cheaper for customers while building support for net zero.
If we are to successfully decarbonise Britain’s power system in line with the Government’s plans for Clean Power 2030 by the end of this decade, the UK will need to create at least 12GW of demand-side flexibility at peak times.
This is to accommodate the variability that comes with using more sustainable sources of power such as solar and wind, which cannot provide power on demand in the same way as fossil fuels.
We have two ways of creating this kind of demand-side flexibility. One is by incentivising consumers to use energy at times, and in ways, that are more in line with supply – for instance by introducing more flexible products like the new E.ON Next Smart Saver tariff. The other is by providing more access to flex-enabling technologies.
Flex-enabling technologies and how to promote them
On both the demand and supply sides, storage is an essential part of bringing more flexibility to the energy system.
When it comes to supply, this might mean using more large-scale solutions like the 115MW battery, (one of two) in which E.ON is currently investing at a new facility on the site of the former Uskmouth coal-fired power station in Newport, South Wales.
As for the demand side, storage can take a number of different forms:
Batteries are the most obvious kind of domestic storage, allowing customers to buy electricity at cheap off-peak prices when supply is high, store it, and then use or even export it when there’s increased demand and prices are higher.
Electric Vehicles (EVs) -while primarily used for transport, EVs are also effectively batteries on wheels, and they come with many of the same user-benefits as other forms of storage. Because they tend to be more in use during the day, and left to charge at night, EVs are also great for making the most of low-cost, off-peak electricity.
Heat Pumps are a less obvious form of storage, but by using electricity to heat water that is then kept in a cylinder for later use, they allow consumers to pay for energy at one point in time and make use of it later, again putting more flexibility into the system.
To create the kind of demand-side flexibility the UK needs to see in the next few years, the Government will want to encourage as much uptake of these kinds of technologies as possible. One way they can do that is by making electricity cheaper.
Policy costs are government-mandated levies used to fund initiatives like investment in renewable energy, efficiency schemes, and support for financially vulnerable customers. They make up almost one fifth of the electricity bill and are an important tool for supporting customers and net zero, but the way they are currently levied risks jeopardising the Government’s green electrification goals under Clean Power 2030.
As a result, a unit of electricity consumed is over four times more expensive compared to gas, which makes it more challenging for a heat pump to compete with a gas boiler despite having an efficiency of around 300%, although a Time-of-Use tariff such as E.ON Next Pumped can help.
By taking action to reduce the policy cost component of electricity for households through, for example, refinancing solutions that would allow customers to pay for policy levies over a much longer period of time, we estimate the average consumer could save between £100 and £150 on their annual electricity bill for the rest of this decade. This would incentivise more investment in technologies like battery storage, electric vehicles, and heat pumps, which are not only cleaner than alternatives like gas boilers and petrol cars, but could also help the UK to achieve the demand-side flexibility we need to make new energy work.
Refinancing policy costs could provide an easy win for Clean Power 2030 while helping to build public support for net zero by making electricity cheaper for customers. That’s why we would support government efforts to create much-needed demand-side flexibility by bringing these levies more in line with the UK’s overall climate goals.
To find out more about how we’re working to create more demand-side flexibility, go here.