Network investment is unavoidable as more people turn to electric cars

Analysis: Is the electricity network ready for an EV revolution?

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An E&T analysis has revealed a potentially huge investment gap that could put the decarbonisation of transport and the UK’s net-zero ambitions in jeopardy.

A revolution is coming – and it will be powered by electricity. As part of the government’s net-zero drive, and with a looming 2030 ban on the sale of new petrol and diesel cars, up to 30 million electric vehicle chargers will need to be installed by 2050, according to the trade association for energy infrastructure companies, BEAMA. On top of that, the association says 20 million heat pumps will also be required, increasing electricity demand by more than 70 per cent.

Merlin Hyman, chief executive of Regen, a think tank with the mission of helping the UK achieve a net-zero energy system, describes this as “a massive ask”. He notes that the EV revolution involves transferring an entire energy supply chain – one that (until now) has been delivered via oil tankers through the Strait of Hormuz to refineries and petrol stations in the UK – onto the UK’s ageing electricity network.

“Overall, it may save us money as it is probably a cheaper supply chain to look after than the oil supply chain, which is partly why electric vehicles cost less to run. But you can’t expect the electricity network to supply this entire new service without some investment. You can say the same for heat,” Hyman says.

BEAMA’s report found that without £330bn of investment into the grid by 2050, “the prospect of electric vehicles not being charged, heat pumps not having sufficient power, or renewable generation not connecting are real possibilities”.

Yet the government, amid a cost-of-living crisis, said the figures “overestimate the level of investment needed in electricity distribution infrastructure”.

While it is difficult to predict the exact investment that will be needed, there is a consensus that distribution network operators (DNOs) will need to invest in hundreds of thousands of kilometres of additional distribution cabling, and to significantly increase the number of substations on the grid.

As EV consultant Mark Daly points out: “National Grid says that if everyone switched over to EVs tomorrow we’d have enough electricity; it’s just getting it to people’s sockets that’s the issue.”

‘National Grid says that if everyone switched over to EVs tomorrow we’d have enough electricity, it’s just getting it to people’s sockets that’s the issue.’

Mark Daly, EV consultant

Daly is talking about the low-voltage network – the part of the electric power distribution network that carries electrical energy from distribution transformers to peoples’ homes where EVs and heat pumps are connected.

One reason it is hard to accurately forecast the amount of investment needed is because the low-voltage network is a blind spot.

“There is very little data on the low-voltage network. There has not needed to be [more],” says Hyman. “If you have 100 homes at the end of a line, there is an industry standard about how big the line is. No one monitors what is on that line, whether it’s stressed or not stressed. It is expensive to monitor – our homes used a predictable amount of electricity, so there was no need to monitor it.”

Cracks are already starting to appear. In July this year, developers in West London were told there is not enough capacity in the electricity grid to support construction of new homes for at least five years.

The Energy Networks Association (ENA), which represents UK DNOs, said increased demand for electricity capacity in the area was largely due to a rapid influx of batteries and data centres. These uses often place huge demands on the electricity supply.

A spokesperson for the ENA said constraints faced in West London were “an isolated circumstance caused by a quick and concentrated expansion of demand from a localised growth in data centres, far higher than forecast”.

However, the ENA also said “a long-term approach to investment” is required. “We’re in dialogue with Ofgem to make changes to their reactive regime and ensure that where new infrastructure is needed, network companies can build it once and build it right,” the spokesperson said.

Energy regulator Ofgem is responsible for ensuring the electricity network has the capacity to meet increased demand. It sets the amount DNOs are allowed to charge consumers for their services. In June, Ofgem set out its RIIO-ED2 draft determinations on investment plans for the five-year period to 2028 submitted by DNOs.

E&T analysis of business plans that DNOs submitted to Ofgem last December reveal an appetite for investment that is much lower than BEAMA’s calculations suggest will be necessary.

According to the BEAMA report, without substantial mitigation, such as improving household energy efficiency and introducing network flexibility, DNOs will need to invest as much as £7bn each year in capital, averaged over the next 15 years, and as much as £15bn per year subsequently.

However, business plans show that overall, DNOs asked Ofgem to invest just £12.6bn over the next five years. That is £2.52bn per year for the next price control period, or just 36 per cent of the investment that BEAMA says will be necessary.

This is before Ofgem knocked off another 19 per cent in its draft determinations, which were published in July, meaning DNOs (as it stands) will only be able to invest £10.3bn on capital expenditure. On a yearly basis, this equates to just 29 per cent of the investment recommended by BEAMA.

An Ofgem spokesperson said: “These proposals will ensure networks can make the investments needed to support the delivery of national and local climate change ambitions.” The regulator noted that despite the reduction, its proposed investment was far greater than what was allowed in RIIO-ED1, covering 2015-2023.

Responding to this, David Smith, chief executive of the ENA, said final determinations, which are due to be published in December, “will need more work to give us confidence that RIIO-ED2 will be compatible with customers’ expectations of an energy system that enables the transition to net zero”.

He added: “As record numbers of electric vehicles, renewable energy and heat pumps are introduced to our energy system, the ED2 price control period is crucial, recognising the scale of transformation and the leading role networks will play in enabling decarbonisation.”

Ofgem said the level of investment is supported by a suite of what are known as “uncertainty mechanisms”, which are designed to release additional allowances quickly if demand increases or requirements change.

Yet Hyman believes there is a significant risk that not enough investment will be made. “The uncertainty mechanisms proposed are so complicated that the DNOs don’t really understand them,” he says. “The system Ofgem has come up with is clunky.

“Those uncertainty mechanisms must work quickly and easily. The DNOs will not take the risk, they will not spend money they do not know they’ll get back. If the mechanism is too uncertain, they are going to say ‘I will just do the basics’.”

Hyman thinks Ofgem is rightly concerned with getting a good deal for customers during a cost-of-living crisis, and that DNOs should “make every penny count... but actually investing in the distribution network, in infrastructure, is an efficient way of investing and it is our way out of relying on gas for heating... when we are vulnerable to thousand-pound swings in the gas price”.

He also thinks reinforcement of the network would not necessarily have a huge impact on consumer bills.

Even if we really went flat out with reinforcement, the bill impact is not actually that high, notes Hyman, “when we are talking about £3,000 energy bills, it’s not a huge amount. Our distribution network costs us less than a Netflix subscription. It’s around seven or eight quid a month.”

According to Hyman, Ofgem is conscious of consumer bills, so it asked DNOs to base their investment plans on a ‘system transformation scenario’, which he describes as “quite a low bar because it is not compliant with 2035 net-zero electricity or the government target of 600,000 heat pumps a year. It’s quite a top-down, big-solution idea.” The sensible thing, he believes, “would be to say we know this is happening, we have committed, let’s get on with it, maybe some of it happens a bit earlier than it actually needs to”.

Ofgem is encouraging DNOs to invest in grid flexibility as a way to reduce reinforcement costs. A report commissioned by the government last year found that flexibility could help reduce costs of the energy system by as much as £10bn a year.

Northern Powergrid, one of the UK’s six DNOs, says that in its business plan, “we assume that energy supplier propositions increasingly reward customers financially for moving their electricity use away from peak periods – particularly for activities such as charging electric vehicles”.

Sotiris Georgiopoulos, head of smart grid development at another DNO, UK Power Networks, thinks “flexibility is helping to fundamentally accelerate the transition to net zero”.

“We’re also working to procure more of our flexibility closer to real-time, when our requirements are clearer, and when our customers understand better what flexibility they have to spare,” he adds.

James Court, chief executive of Electric Vehicle Association (EVA) England, says that if you can get all EVs to plug in at night and turn them down when needed, this will lead to a much cheaper energy system overall. “The cost of reinforcement is huge, but if we had an energy pricing system that reflects flexibility overall, then the system would cost less and the reinforcement charges are actually a catalyst to having cheapening electricity.”

However, Hyman warns that flexibility is only a part of the solution. “We need to be cleverer and smarter, but it doesn’t overcome physical reality. You can be as smart and flexible as you like, but sooner or later you still need investment,” he says.

Hyman explains that at a low-voltage distribution level, for example, a street, “let’s say you have a power cut and then it comes back, and everyone does want to charge their car, it’s hard to send a flex signal at that kind of small number, as there will always be events where everyone behaves the same”.

Similarly, the DNO Western Power Distribution says: “consideration needs to be given to the extent to which consumers are exposed to prices – fully exposing all consumers to highly variable pricing could undermine a fair energy transition if consumers are unable to shift consumption or invest in other alternatives”.

Hyman is concerned that there is a lack of collaborative thinking on net zero.

“Ofgem is responsible for what Ofgem is responsible for. Its job as it sees it is to keep consumers bills down. The fact that network reinforcement helps us reduce our reliance on gas is not really Ofgem’s remit. I think they are blinkered – just focused on their bit,” he says.

This kind of thinking has had unintended consequences. For example, notes Hyman, there is a lot of renewable energy in Scotland that cannot be transferred to the rest of the UK because cables were not built. This means the Electricity System Operator (ESO) is having to pay wind generators to turn off and pay coal plants to turn on. “We knew it was coming, but we didn’t build the cables, and now we’re paying the price.

“It’s exactly the same thinking now, we can see it coming – we’ve committed to EVs and heat pumps, we know we need to invest in the low-voltage network, but we are penny-pinching; taking a short-sighted and blinkered approach and therefore not making the investment we need.”

A spokesperson for the Department for Business, Energy and Industrial Strategy said it liaises regularly with the DNOs and Ofgem, and the regulator “uses the price control framework to ensure that electricity network companies are provided with the necessary funding to deliver the required capacity to meet future demand on the grid.”

Meanwhile, the government’s independent climate adviser, the Climate Change Committee, is clear. “Electricity grid upgrades must begin in the 2020s, as ensuring these networks are ready to meet future demand is more cost-effective than implementing network reinforcements once demand outstrips capacity,” it said in a recent report.

Court describes reinforcing the electricity network as “trying to fix the plane while we are still flying it”. It will be no small feat. Without the right level of investment, it seems likely the UK’s decarbonisation targets will come crashing down to earth.

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