A smarter, more flexible power system could save to up to £8 billion by 2030 – the equivalent of up to £90 per household – according to a new report from think tank Policy Exchange.

The report says the increase in renewable generation and the reduction of conventional generation capacity has created new challenges for the management and operation of the current power system. Dirty forms of generation, such as diesel generators, are increasingly being used to balance the system and “keep the lights on”.

An overhaul of the power system is needed, the report suggests, to encourage smarter, cleaner technologies such as storage and demand response (where power users vary their demand to meet supply). The report also identifies how to remove the regulatory and policy barriers facing these technologies, to create a level playing field, and reduce the reliance on dirtier forms of generation such as diesel.

Richard Howard, author of the report, said: “Making the power system smarter will also mean it can provide cheaper and cleaner electricity. The current set of policies is encouraging a growth in dirty diesel generators – exacerbating air pollution in UK cities and towns. The government needs to level the playing field to encourage the use of cleaner technologies such as demand response and storage. This approach is not only greener, but could also lead to savings worth £90 per household per year by 2030.”

In the short term, the report proposes:
• The government should clamp down on the development of polluting diesel generators, by regulating their emissions and exposing them to carbon taxes.
• The government should review Capacity Market rules to ensure that clean technologies such as storage and demand response are able to access three year capacity contracts on the same basis as power stations undergoing refurbishment.
• Regulatory changes are needed to remove the ‘double-charging’ of environmental levies on storage, which is undermining their viability.
• Distributed Network Operators (DNOs) should be encouraged to consider new approaches to managing their networks such as demand response and storage. The rules and regulations governing DNOs are outdated, and need to be updated.

In the longer-term, the report calls for a major reform of the wholesale power market to value and encourage flexibility. It suggests moving to a ‘nodal pricing’ model – which would better reflect the geographical patterns of demand and supply across the country, as well as the physical constraints within the network. Evidence from power markets in New Zealand, Singapore and several US regions suggests that the use of nodal pricing can lead to improvements in efficiency and significant savings to consumers.

The report also calls for a major overhaul and simplification of the balancing services managed by National Grid, as well as network charging arrangements. Commenting on the report Prof Sir David King, Special Representative for Climate Change, Foreign and Commonwealth Office, said: “In order to move to a low carbon power system, incorporating more renewable energy, we also need to create a smarter, more flexible power system. This important report from Policy Exchange shows how government can encourage smart technologies such as storage through changes to policy, regulation, and market design.”