17
Examination of witnesses
Simon Virley, Tim Lord and Alex Campbell.
Q46 The Chair: Welcome to the committee’s sixth evidence session in its inquiry into long-duration energy storage. We are looking forward to hearing from Alex Campbell, the Director of Policy and Partnerships for the Long Duration Energy Storage Council; Tim Lord, the UK Head of Climate Change at HSBC; and Simon Virley, the vice-chair and Head of Energy And Natural Resources at KPMG.
This session is being broadcast on parliamentlive.tv and a full transcript is being taken, which will be made available to you shortly after this meeting for you to make any minor corrections. If you think of anything, such as any data that might be useful to us, that you do not get a chance to tell us during this session, we would very much appreciate receiving it as additional formal evidence to the inquiry. Thank you very much for coming. I will kick off with the first question.
We have heard about the need for a substantial increase in long-duration energy storage capacity as part of getting to net zero. One of the major concerns with long-duration energy storage projects is how to make them commercial. We would be interested to hear what challenges relevant technologies would face in becoming commercial? In order to answer that question, how crucial is it that the Government have a strategic vision for the role of long-duration energy storage and how it fits with other technologies in the grid and generating system?
Simon Virley: We work with a number of companies looking to develop long-duration storage technologies, including hydrogen storage. There are a number of challenges at the moment in getting those projects to be commercially viable. I will identify a few of them. First, there is a very long lead-time in construction. These projects are often many years in the making—a decade or so from start to finish. Secondly, there are very high capital expenditure requirements, with big upfront costs to get the stores built. Thirdly, as yet, there is a very uncertain market arrangement for the demand for hydrogen because the hydrogen market is not yet fully developed, as you have heard from previous witnesses.
For those reasons, and because the Government have yet to put in place fully their new policy and regulatory framework, the companies that I work with are certainly not yet in a position to take a final investment decision on some of the early-stage projects. From the “minded to” statement that we heard about in August, we now know the direction of travel of the Government’s thinking but, until we see the final details of that arrangement, it will be difficult for the companies that I work with to get to final investment decisions. Those are the kinds of commercial challenges that the companies I work with face at the moment. I am looking forward to seeing the details of the Government’s policy framework that seek to address those points.
The Chair: The “minded to” statement seemed to leave just about every option on the table, so does it really help at this point?
Simon Virley: It helps a bit. I would describe it as work in progress. We have seen that the Government rather favour a cap and floor arrangement for long-duration storage. I was involved in the Government as a civil servant for 25 years and we certainly used cap and floor, for example to stimulate the buildout of interconnectors, which have some similar characteristics to long-duration storage. It could work as a policy framework.
I was heavily involved in the development of the contract for difference regime for renewables. Personally, I would favour a cap and floor arrangement because the use of long-duration storage in the market is so uncertain. It favours a mechanism such as cap and floor, which, as your previous witnesses said, is about making sure that capital expenditures can be outlaid up front, well ahead of the use of the store, and giving investors enough certainty to know that their debt costs and a reasonable return on equity will be covered. It certainly can work but, as you intimate, it still depends on the detail of what exactly that policy framework will look like in practice.
The Chair: Thank you. Tim?
Tim Lord: Thank you; it is a pleasure to be here. First, I agree that we need a substantial increase in long-duration storage energy capacity alongside other approaches, including on the demand and supply side. To Simon’s point, the companies that we work with are developing some interesting and exciting technologies and projects but they are still some way from being commercial. A few interlinked challenges lie behind that, some of which Simon touched on.
The first is a lack of clarity around policy and market design; we do not have a clearly understood and articulated role for long-duration storage in the system in the way that we do for offshore wind, solar and so on. That will be critical to driving the confidence that we need for investments to be made.
Secondly, linked to that is revenue. Ultimately, a key aspect of commercialising any technology is certainty about the revenue, which enables the equity and debt finance to come in. At the moment, there is very limited revenue certainty for long-duration energy storage products. These technologies provide a service that the current set of support regimes is not well designed to support, in particular given the issues around the very high capital costs, in some cases, for these technologies. The support regimes are not currently fit for purpose. As Simon said, we have made some progress but it is certainly still work in progress.
Thirdly, there is a set of issues around cost and the need for some of these technologies to come down the cost curve. Related to that is their novelty, in particular for investors. In some ways, these are unfamiliar technologies; they face specific technological or regulatory challenges that we have not tackled yet. Those are all addressable but we need to move quite quickly to address them.
My final point is one that you touched on quite extensively in the earlier session, on the wider systemic issues—for example, around planning, grid connectivity and so on. More clarity on them is really important to enable these projects to become commercial and investable.
The Chair: You talked about how long the projects take to deliver. Given that, at the moment, we have a target of a fully decarbonised electricity system by 2035—possibly even earlier if we have a change of Government—is there any chance that we will have long-duration energy storage available by the early to mid-2030s?
Tim Lord: It is challenging but it is possible to do that. The need for long-duration storage will evolve and potentially increase over time. We do not need all the long-duration storage that we will ever need in place by 2030, for example. To some degree, it will ramp over time as we electrify more heating and transport in the 2030s and 2040s. It is possible to start delivering long-duration energy storage at scale on those kinds of timescales but we need to move quite quickly to enable that to happen.
The Chair: Thank you. Alex?
Alex Campbell: Thank you. I apologise again to the committee for being late. I thought an hour’s leeway with the trains would have been sufficient but, unfortunately, it was not.
The Long Duration Energy Storage Council—the LDES Council—is a global organisation. For context, we have around 70 member companies that do the technology—among the British companies are Invinity, which gave you evidence, RheEnergise and Ceres, which is very active in the hydrogen space—and some that are users of LDES. They include some of the mining companies, such as Rio Tinto, and Microsoft and Google—the companies that want to be leaders. They are investing in and looking very much at the full suite of LDES technologies.
One of the challenges for the sector is that there is a great range of technologies at the moment, covering heat, electrochemical, electromechanical and, indeed, chemical in the form of hydrogen. Much as the previous witnesses have just said, some of the big challenges are around a lack of visibility over government targets. When we look at the analysis, whether globally or in Britain, we see a huge need for long-duration energy storage. According to our analysis, globally, we will need up to 8 terawatts, which includes heat and power, with power around 2.5 terawatts. In the British context, Britain will need 30 to 50 gigawatts from the 2030s to the 2050s. Certainly, there is a huge need, but the pathway for investors and developers is not clear.
An example of what works spectacularly well is offshore wind, which Simon referred to earlier. Governments set targets and a clear vision and ambition for the gigawatts that they wanted then, in parallel, introduced a mechanism that unlocked that. Whether that is a cap and floor mechanism or another type of mechanism is to be discussed with the Government; we look forward to their consultation on the policy framework later on, hopefully this year. That is essential to unlocking the investment. If the supply chain—the value chain—knows that the Government are serious, it is willing to put in money and time and we can see that develop over time.
As I said, the range of technologies is another challenge. In the UK, we have long-duration energy storage on the grid at the moment: pumped- storage hydropower. Most of that was developed under different market arrangements; I would be happy to get into why those are different from the challenges today.
The Chair: Thank you very much; that was a very helpful introduction. I now turn to Lord Wei, who is joining us virtually.
Q47 Lord Wei: This question is specifically for Alex Campbell. On behalf of the Long Duration Energy Storage Council, can you describe the state of the industry internationally? Which companies are active in the UK and what exciting projects or technologies would you highlight?
Alex Campbell: That is slightly tricky because, of course, I do not want to pick favourites. We represent a huge range of technologies. As I mentioned previously, there are broadly four classes of LDES. The first is chemical, which includes hydrogen. In the UK, Ceres Power is a key leader in some of the novel innovations. Secondly, there is electromechanical, which includes pumped-storage hydropower and some of the novel forms of pumped storage using high-density liquids; RheEnergise is another UK firm doing that. Thirdly, there is electrochemical, which is novel battery types. Invinity, which I mentioned earlier, is active in that space, as are many of our international companies. Finally, there are thermal technologies, which might be super-heated sand, for example, or molten salt.
They all have different use cases so I do not want to pick out a specific one that is suitable for the UK because I suspect that a number of them would be. Ørsted—it is a Danish firm in the offshore wind space, as I am sure you know—is very much looking to invest in long-duration storage projects in the UK but is waiting to see what the right technologies are and what the right market arrangements should be. Globally, it is an even more complex picture. We can look to China, for example, where they have huge ambitions for long-duration energy storage—in particular pumped-storage hydropower, where they want to triple their install capacity. It is close to 40 gigawatts today but they want it up to 120 gigawatts in the early 2030s, perhaps even going beyond that during the 2030s to 200-plus gigawatts, according to PowerChina. The Chinese Government have certainly set very ambitious targets.
I hope you will forgive me; it is difficult to point to specific technologies and projects but we cover the full range, from the well established, with pumped-storage hydropower, through to those earlier technology-grade LDES level-type technologies that are more in the pilot and research and development stage.
Lord Wei: Building on that last point, with hydrogen, say, do you see countries around the world, such as China, and their market leaders building up capacity, perhaps a bit like we have seen with the EV industry? Might that affect the UK’s development as those companies or investors come to the UK?
Alex Campbell: I would not profess to be a hydrogen expert specifically but, clearly, many countries are pushing hard at different aspects of the hydrogen value chain. Australia, Namibia, Morocco and Chile are all very active in that space. They are putting in renewable electricity generation because of their cheap sun or wind—or both, in some cases. There are many companies around the world active in different parts of the hydrogen value chain as well.
Lord Wei: Can you outline the most urgent ask that your members have of the Government here to enable them to get their projects off the ground?
Alex Campbell: Absolutely. There are two key things. The first is a clear and visible policy framework that shows revenues over time, much as we have had for offshore wind, as I said before. The second is clear targets and ambition on what the Government think the electricity grid—the system—will eventually need to procure. I mean that in a holistic sense, rather than a particular agency procuring the numbers. Those are the two big asks. There is also a good case for support for earlier-level technologies; the Government, to their credit, have put tens of millions of pounds into pilot projects through various competitions for long-duration storage.
Q48 Lord Winston: Simon Virley mentioned cap and floor. I wonder whether the other two of you are interested in that model or, indeed, other models such as regulated assets, CfDs and so on. Would you like to deal with that first? Then we will ask what the policymakers should be doing about the different issues.
Tim Lord: I think that all of us worked at some point on the contract for difference in the electricity market reform programme when we worked in government. Where I would start with this question is this: what do we want a support mechanism to do in terms of the outcomes that we want it to deliver?
First, we need to incentivise project development. We need a pipeline of viable, investible projects. We have seen with offshore wind that some of its success was about developing a long pipeline of projects at different stages of development so that we could start to deploy.
Secondly, we need to make sure that those projects are investible at a low cost of capital, or as low a cost of capital as we can deliver, to protect consumers from excessive costs.
We need to locate them in the right places and we need to incentivise them—this is hard—to operate in the way that the system needs, which is to deliver energy and electrons when required, such as when wind is low. You have had some of those conversations already. We need them to operate as part of a wider system, so we need to be cautious about technology-specific approaches that do not take account of the other technologies that will be entering the system at the same time.
Having said all that, I would not want to pick a winner for what the right support regime looks like because it is quite hard to do that in isolation. The work that the Government are doing on wider reform of the electricity market arrangements is really important. It is hard to design a specific incentive regime for an individual set of technologies without thinking about what the wider support regime looks like.
The CfD, as designed for renewables, is a really interesting model. It has been a very successful model for renewables; I do not think that it works for long-duration energy storage, certainly as designed, given the need for a regime that operates where the demands for storage will vary quite a lot month on month and year on year and, secondly, where the incentive to deliver at the right time is critical in a way that is not quite the case for renewables. A cap and floor regime, possibly combined with revisions to the capacity market to ensure availability, could potentially be successful, but it is hard to say exactly what that should look like without a bit more clarity about the Government’s wider approach to reforms of the electricity market.
Alex Campbell: That is a crucial point about the difference between a CfD and a cap and floor or other type of mechanism. With a CfD, you are incentivising to generate as much as possible to get as much low-carbon electricity on the grid. That is the way it is designed and works. With a cap and floor and other types of mechanisms, as Tim said, we want to get the incentives right. We want the generation when it is most needed; that makes the design of a scheme more complicated and suggests that a conventional CfD, at least, is not necessarily the right way to do it.
The further complication is that different types of technology will be better at delivering different types of services and needs. An eight to 10 or 12-hour need will be better served by some types of technology—perhaps a novel form of pumped storage—while 100-plus hours might need more novel battery chemistries, such as iron-air chemistries or things like that. Again, when you are designing the mechanism, you need to think about the way it is awarded and whether there is a competitive tender. Do you have different pots, if you like—rather as we had with CfDs—for different types of technologies? There is quite a lot of devil in the detail so it is important for the Government to be alive to all those challenges and not box themselves in too early.
Lord Winston: We heard in the previous session that, ultimately, we have to think about the consumer and how they view what has happened. Can the three of you talk about what we should advise policymakers to consider when making those judgments?
Simon Virley: There are precedents that we can draw on in the design of a policy framework. We have seen cap and floor work for interconnectors where we have the same characteristics: long lead-times, high capital expenditure requirements and an uncertain operating environment. You do not know quite when the interconnectors will be needed as it depends on weather and other factors. That framework is right but, in order to protect consumers, you need to make sure that you have done two things.
First, make sure that the cost of capital is as low as possible. We could import what we did with the contract for difference, which was to make sure that it is a long-term contract, of 15 years, and a private law contract; in other words, companies can basically sue the Government if a future Government decide to change the policy framework. That was important for de-risking and getting a low cost of capital for offshore wind.
Secondly, to protect consumers, as I think previous witnesses have hinted, you can have a gainshare arrangement such that, if there is any upside for developers, the gains get shared progressively with consumers. The investors do not get all the return if there is a higher return on the project; there is an expectation of an “okay” band of return and, above that, you have a gainshare arrangement whereby, in essence, the returns get shared between investors and consumers. That is another way of protecting consumer bills and making sure that consumers are protected through the regulatory framework.
Tim Lord: I agree with everything that Simon said. I would add this: what outcome do we want for consumers? We want to keep the lights on and do so affordably and in a zero-carbon way. Focusing very much on the outcomes rather than just the technologies is really important for protecting and enabling consumers. It is worth saying that consumers potentially have a really active role to play in bringing value to that through demand side flexibility. Long-duration storage has an important role to play but, potentially, we need less of that if we have the right incentives on the demand side and we are rewarding consumers for the value that they are potentially adding to the grid in a decarbonised scenario.
You can probably tell that we are quite sympathetic to policymakers, having been in that seat ourselves. It is hard to do in the sense that, ideally, you would design a regime focused very much on outcomes—that is, what outcomes do we want the system to deliver and how do we create incentives for that? On the other hand, in order to get moving on some of the technologies we have touched on that we know we are going to need, we probably need to design some technology-specific approaches. On the role of consumers, we need something that gets those technologies moving, gets pilot and demonstration projects on to the system and is designed such that, ultimately, in the long term, we can hopefully move to a more technology-neutral approach that encourages innovation and both supply and demand development. That is the way to go.
Alex Campbell: I agree with everything that has just been said. Casting my mind back to the early days of offshore wind in the UK when I was at RenewableUK, prior to joining government, we were targeting £100 per megawatt hour for offshore wind. That has now been blown away. At the last but one auction, it was around the £40 per megawatt hour mark. That was because of concerted action by the Government, working with industry, which eventually brought the prices down. If there had been a fixation on the cost for those first contracts, I am concerned that the UK would perhaps not have got to the position that it is now in—notwithstanding the last auction—with real world leadership in offshore wind. We need to keep the long-term picture very much in mind and accept that, with novel early-stage technologies, costs will understandably be higher. They will come down over time provided that you send clear signals to the market that you have a plan of attack and will keep supporting it, if necessary with caps so that the consumer benefits from any supernormal profits, and so on.
Lord Winston: Thank you. You have covered my supplementaries pretty well in those answers.
The Chair: Can I throw in a question for a quick answer? If you are designing this commercial mechanism for LDES, does it depend on your having a clear strategic vision for the need, including the kind of volumes and location of energy storage around the UK that you are going to need? Is there tension against the fact that, as you said, Tim, you are trying to make sure that we bring demand reduction into the picture as well?
Tim Lord: You need some clarity on what you want your electricity system to do. For example, depending on which route we go down, how we decarbonise heating will impose very different requirements on the electricity system and therefore create very different requirements for long-duration storage. You need a bit more clarity of vision around that. Having said that, we should not try to say, “Here’s exactly how many gigawatts of every single thing we will need in 2050. Let’s go and build it”. We need to create space for innovation and to course correct as some technologies come down and cost more than we expected. Some might perhaps come down and cost a bit less than we expected. We should not try to plan precisely for exactly what we will need in 2050, for example.
The Chair: But how about something that does not say what technologies we need but says more about a target for long-duration energy storage in 2050?
Tim Lord: I am cautious about targets on that kind of timescale. You can say that you are going to need a pretty significant volume; you have heard from other witnesses who have talked about ranges of between 20 and 100 terawatt hours. I do not think that we should agonise too much over whether it is 30 or 70; the key thing at the moment is to get the market moving and get an investible regime in place so that we can start to see how the costs come down and how that can support—
The Chair: Okay, but we have heard from your colleagues that the lack of targets and visibility is impeding us in doing that. Alex?
Alex Campbell: I very much sympathise; it is complex looking at an energy system decades out. As Tim says about demand side reduction, there might be a wonderful technology breakthrough that negates the need for some or all other types of technologies but, without the Government at least having an ambition, giving a sense to investors and developers of what they are aiming for, it becomes difficult to make the case. If you are a company trying to develop and you are talking to your investor, you need to be able to say 10 gigawatts or 20 gigawatts. Even if it is only a government ambition—I remember the lawyers poring internally over whether something was an ambition, a target or somewhere in between—sending some sort of clear signal that you are serious is so important. I completely understand that you cannot be locked into any particular technology path but the risk of not setting that kind of ambition is that we miss out, delay and end up missing the boat in decarbonising this way.
The Chair: Where do you sit on this one, Simon?
Simon Virley: I am rather in agreement with Alex. The UK has an almost unique set of geographical and geological advantages when it comes to hydrogen storage in particular. We need to be a world leader in this area. Those geological advantages include having salt caverns quite close to where the offshore wind farms will be. The Government, having set a net-zero ambition, need to follow through and give industry clarity about the kind of range of long-duration storage that they think will be needed by 2035 and 2050.
The Chair: Thank you very much. Let us move on to Lord Rees, which is joining us virtually.
Q49 Lord Rees of Ludlow: Thank you. Apart from financial issues, can you comment on two other concerns? One is about whether the number of skilled people with the right expertise will be available to push through these projects on the scale that is needed. The other concern is around the slowness of the planning process, especially for the caverns. We were told by the Royal Society that it could get one cavern done but it needs about 50 altogether. Can you comment on the feasibility of getting round the planning situation and whether there are enough people to be experts in pushing this programme through?
Simon Virley: They are both major barriers as things stand. I do not think that we have the skills we need yet. We need a major step up in skills and training to create the number of electrical engineers, hydrogen engineers and others who will be needed for this long-duration storage. Also, on planning, there is a big role. I heard you discussing with previous witnesses the future system operator in terms of setting out the strategic national plan for the infrastructure that we will need for a net-zero power system. In my opinion, that would include some idea of the spatial plan for where we think these stores might be sited because, then, the Government can try to facilitate speedy planning and consenting decisions to meet that strategic need. Those two important barriers need to be addressed.
Tim Lord: I concur. You talked about skills with the previous witnesses. A big issue to highlight is that you cannot do this only by pushing the supply side; you have to have the pipeline of projects and credible investment instruments that those projects might get built. That will then create the incentives for private sector developers and investors to invest in skills to get them built. We need a supply side push and to think strategically about that as a country, but we also need to make sure that we have the projects and the credibility associated with them because that will incentivise the skills investments that we need.
We absolutely need to be more strategic in the way that we think about planning. You have touched on grid connections in a number of your sessions. That is a really significant planning and wider regulatory issue, but we need to tackle all those issues in parallel if we are to get these projects off the ground.
Alex Campbell: I fully support the previous comments. If we have a pipeline, companies are more likely to invest in skills and training. On permitting and planning, the LDES Council is part of the Global Renewables Alliance, an umbrella organisation covering wind, geothermal, solar, hydrogen and hydropower. We have had a Planning for Climate Commission chaired by Malcolm Turnbull, a former Prime Minister of Australia, which has come up with a nine-point plan to expedite planning and permitting across the world. The issue is not unique to the UK, although we have our particular challenges. I would be happy to share that with the committee afterwards, if you like, because there are some really sensible recommendations in it.
The Chair: We would be very happy with that.
Lord Rees of Ludlow: Perhaps you could expand a bit on possible collaboration in technology with other countries. Is it conceivable that interconnectors could reduce the overall need? That depends on modelling the scenarios for the correlation between the crisis times in different countries. Are those the sorts of things that you have been discussing?
Alex Campbell: Interconnectors certainly have a role to play. The more you are connected with other energy systems, the better. Of course, the weather patterns in north-west Europe will be similar to those in Britain, so they are not—
Lord Rees of Ludlow: They are not used that much.
Alex Campbell: Yes. They are useful but they are not the only solution, for sure. I would characterise them as part of the mix.
The Chair: Lord Rees asked whether there are other countries that we should be collaborating with on some of these challenges.
Lord Rees of Ludlow: And with which I would have thought we should be collaborating on the technology.
Alex Campbell: Many countries are looking at innovative forms of long-duration energy storage. The US Department of Energy is a case in point. The Australians are introducing their own mechanism; they are consulting on the detail at the moment. As a result of the war in Ukraine, the European Commission has put a renewed focus on long-duration energy storage as well. I heard Commissioner Simson talking about it at an event in Bonn a couple of weeks ago. There are plenty of opportunities. It depends which level you are talking about. Are you talking about committee level or Government to Government? I am sure that the Government are engaged with various partners at that level through things like the G20 and the Clean Energy Ministerial.
The Chair: We move on to Lord Holmes, who is also joining us virtually.
Q50 Lord Holmes of Richmond: Good afternoon to all of you. Thank you for taking the time to be with us. Are you aware of any major private investors who are interested in developing long-duration energy storage projects? What are some of the major factors that are currently stopping them? What more is needed to make such projects more attractive?
Simon Virley: I am aware that a number of major energy companies are looking to develop long-duration storage projects. That includes Centrica’s plans to convert the Rough gas storage facility to hydrogen. We have Inovyn, a subsidiary of INEOS, looking at salt caverns. We have SSE and Equinor looking at the Aldbrough project on the east coast, among others. They are all at what I would describe as the early stage of their development.
It comes back to the barriers that I talked about earlier: very long lead-times, high capex and the uncertain market conditions in which the stores would operate. I am sure that all those developers will be looking for the kind of granular detail that you need to take a final investment decision. If the Government go for cap and floor, exactly what is the floor? Is it the sum of the capex and the fixed operating cost of the project, or some other amount? What would be the cap arrangements, what would be the gainshare arrangements, and so on? As you will appreciate, in order to make the expenditures involved, which are very significant indeed, the companies involved will need that level of detail, which we expect to see from the Government over the next few months. The sooner, the better.
Tim Lord: As Simon said, there is a huge amount of interest in this from private sector developers and investors. If I think about it from the banks’ and debt providers’ perspective, the key thing, as Simon said, is some of the specifics and details around how the revenue mechanisms will actually work. What assurances do I have that debt finance will ultimately be repaid?
We have touched on some of these issues already. There are particular challenges around demand and the offtake risk. For a renewable CfD, it is pretty straightforward: you will get paid for every megawatt hour that you generate. For these, the amount of energy that will be used in a particular month or year is uncertain, so how do we manage the demand and offtake risk? Secondly, there is the regulatory regime that goes around this. What is the regulatory model? How stable will it be? How can we be assured about future stability?
Then there is the set of risks you have touched on both today and in previous sessions. There is construction and completion risk. These are novel projects. Often, the technology is pretty well developed but has not necessarily been demonstrated at scale in the UK. There are some operating risk challenges that come with that. The granularity around what the support regime looks like will be hugely important for both equity and debt finance providers to come forward. As Simon said, the Government are looking at all the right issues. The challenge is that some of the decisions around those are not straightforward.
Alex Campbell: I do not have much to add to what the previous witnesses have said. We speak a lot with some of the major international banks that are interested in investing in projects around the world or, indeed, in some of the technology providers themselves. As I mentioned at the beginning of my comments, we have members such as Microsoft, Google and Breakthrough Energy that are both investing in technologies and wanting to be users, so it is quite a complicated picture. These are large household names we have all heard of that are very keen to see the sector work. We have already heard about the challenges. I just reiterate what we have already said.
Q51 Lord Sharkey: Can I return to the subject of market mechanisms in energy systems? Can you give us any examples internationally of market mechanisms in energy systems that have been successfully used to encourage the creation of strategic assets such as long-duration energy storage on the grid?
Alex Campbell: In the context of a market system like the UK’s or more generally?
Lord Sharkey: More generally.
Alex Campbell: Okay. In Australia, for example, there is consultation, either just completed or live at the moment, on its scheme to try to incentivise the deployment of long-duration energy storage assets. I guess that it is not too dissimilar to a cap and floor but it has not been deployed yet. In Israel, there have been specific bilateral negotiations and contracts secured for pumped-storage hydropower assets. It does not really correlate with the system that we have in the UK but it is similar to capacity market-type payment mechanisms. I do not know how familiar you are with the capacity market but it is essentially paying for availability. There are various terms related to that.
Some of the vertically integrated entities in the US have more responsibility for the whole of the electricity system, combining various aspects that in the UK are dispersed across different players. Because some of those entities have a responsibility to provide electricity from generation through their network and are responsible for all parts of the system, they have seen that it makes commercial sense to invest in long-duration energy storage. The fact that we do not have that in quite the same way in the UK makes it more difficult as a simple commercial investment.
To be clear, I do not think that there is anything deploying LDES at scale around the world in a market like the UK’s. There is actually an opportunity for the UK to be a world leader.
Lord Sharkey: For innovations.
Tim Lord: The international examples of what the UK needs are quite limited. What are we talking about? We are talking about a system that is going to have very high levels of renewables penetration and where the demand profile is going to change significantly as we electrify transport and heating and, in particular, become an even more winter-peaking system than currently. We are also a system and a geography with very limited hydro potential. All those things combine to mean that, as Alex said, there are limited perfect analogies.
Having said that, there are analogies for getting strategically important technologies and assets built in cost-effective ways where we can draw on some of the principles, even if not the specifics around the design. We can talk in more detail about the electricity market reform programme and the CfD, if it is helpful. While the design of the mechanism is not exactly what you would need for long-duration energy storage, we can read across a lot of the principles and approaches that were applied in developing that mechanism. I think that it is an opportunity for the UK to innovate and lead, as we have done very often in energy market regulation and design in the past. I do not think that there is a cookie-cutter approach that we can take from elsewhere.
Lord Sharkey: Is there clarity, or even agreement, on what those principles are?
Tim Lord: You can have a reasonable level of agreement. If we look at EMR, it is about having clarity around the policy outcomes that you are trying to deliver at the outset and keeping those consistent throughout the process. Secondly, it is about stability when it comes to the policy design process; how engagement happens as part of that and the officials who are running that process is important. Identifying the strategically important approaches and technologies and making sure that your approach is tailored towards those is significant. In the UK, we rightly made sure that EMR was designed in a way that would bring offshore wind forward. There should not be a race to the bottom on cost, and there are a number of factors to consider, but the use of competitive mechanisms, both in the capacity market in the UK and in the allocation of contracts for difference, has in general been very effective. You can take those and other principles and apply them in this context, too.
Simon Virley: I very much agree with Tim’s points. Looking at the success of offshore wind, I remind the committee that, if you go back 10 years, I sat in front of Select Committees not unlike this one defending some of the early decisions that we made and being criticised for overpaying on some of the early offshore wind projects. My encouragement to my successors in the department is to set out a long-term vision and stick with it through thick and thin. Hopefully, we can then celebrate the success of the deployment of long-duration storage over the next few years.
I would like to think that, as Tim said, we could learn some of the lessons about the policy certainty that enabled investors to innovate and invest at scale in the UK market on offshore wind. It was certainty, combined with the bankability of a 15-year private law contract, that unlocked the investment in offshore wind. We need to replicate that kind of boldness in the policy-making here. There will be mistakes—you just have to accept that—but you need to have confidence that we are going to need it, so we will have to get there. Hopefully, the pay-off will be down the line.
Lord Sharkey: In that kind of architecture, do you think that there is a role for a publicly owned energy company such as the one proposed by the Opposition?
Simon Virley: Potentially, to de-risk where you have market failures, but it is important that, if there is direct state intervention, it is to facilitate and de-risk those market failures. Let us not have a state-backed company doing things that the private sector can do in technology innovation. This is a new area. It is nascent technology. There may be a role for a publicly owned energy company to de-risk some of the investments, at least at the start, before the market and investors get fully comfortable with it as a new technology.
Tim Lord: That is right. The challenge here is how you get the cost of capital down and make projects investible. Public finance has a potential role to play in that, alongside private finance, whether it is through a publicly owned energy company doing that or through other approaches. Public finance—hopefully, a relatively limited amount of public finance so that we protect consumers and, ultimately, taxpayers—can play a really important role in de-risking the earlier projects in particular.
Lord Sharkey: Alex, do you have anything to add?
Alex Campbell: I am slightly loath to get into what is clearly a hot political issue. One of the challenges with long-duration energy storage is that the benefits are felt in different places across the energy system, whether it is in grid reinforcement, simple energy arbitrage or some of the ancillary grid services that it can provide. That suggests that you need some sort of holistic view of where the benefit sits. I could certainly see a role for the Government in identifying the need and trying to come forward with a mechanism to deploy. Whether it requires a state company to deliver it is another matter.
The Chair: We come to Baroness Northover for our final question.
Q52 Baroness Northover: You have addressed many of these points but perhaps I could focus in. As you know, our report will make recommendations to the Government to help shape their policy in this area. What key recommendations do you have for the Government’s policy if they want to support the growth of long-duration energy storage at scale?
Simon Virley: I would start with the strategic vision that we talked about earlier on the amount of long-duration storage we are going to need—a range, perhaps—at different dates. I would include in that some idea of the spatial plan. Where do we think these suitable sites might be? How will the Government address the planning and consenting issues that will inevitably be one of the major barriers?
Secondly, it would be filling in the details on the cap and floor arrangement, if that is what they go for. I talked about some of the details. How is the floor going to be defined? What is the gainshare mechanism with consumers? When does it kick in and above what rate of return? There are also important interactions with other policy instruments. Earlier, reference was made to the capacity market. How does the cap and floor regime interact with that? How does it interact with the proposed RAB model for the pipes to take the hydrogen? You have to think holistically about the interfaces between them.
Thirdly, we talked earlier about some of the other challenges, such as the skills that we will need to address these needs going forward. Inevitably, that will be a partnership between public and private, but the private sector can respond only if it knows what it is trying to respond to. Net zero is the greatest externality of all time. It is something that the market on its own will not deliver without some clear direction from the Government. That would be my shopping list.
Tim Lord: The first thing is to take a systemic view. In some ways, when we have done market reforms in the past, it has been a bit easier than it is now. When we did electricity market reform, we knew that gas would continue to play a significant role in the electricity system for what was then the foreseeable future—10 or 15 years. We are now 10 or 15 years later and the system is going to change much more fundamentally in the next couple of decades than it has in the last, notwithstanding the fact that we have seen really big changes. We need the ability to take a systemic view, both to make sure that we are focused on least-cost solutions and so that investors have the clarity that they need to develop their approaches.
Ultimately, to get these projects built, particularly the earlier projects, their bankability and investibility are hugely important. Modelled outcomes matter but whether a bank or other investor will fund it is critical. That means that the banks and investors need to develop their approaches and expertise but, as Simon said, the details really matter. What are the risks? How are they allocated? How are they being reduced to make sure that projects can be deployed commercially?
The third thing is that we need to get on with it. I do not mean that as a criticism, as I think that this is a really difficult area. We are trying to do something that we have not done before. Equally, we need to move pretty quickly. Some of the dates that we are talking about for the decarbonisation of the power system are not terribly far away. We can debate whether we put a specific number on the exact gigawatts of storage that we will need in 2050, but we are certainly going to need quite a lot of it in the next decade or so. Moving quickly and accepting that not everything will function exactly as one might have expected is important.
Alex Campbell: I risk sounding like a broken record but we should first identify the need—the strategic vision—and set some appropriate targets over time, just so that everybody knows that they are on the same page as the Government. Secondly, we should deploy the mechanism, with all the protections that we have talked about. It must be a flexible, clear mechanism that investors know will work and deliver.
Those are the headlines from me. A point that I have probably not touched on enough previously is that we must not forget the role of heat. There are many long-duration storage technologies that play in the heat space as well. There is a good interlink between renewable generation and heat, especially for industry and the medium-range temperatures. Let us not exclude those technologies but keep them in the mix, too.
The Chair: Thank you very much. You have helped us considerably with that list. I am sure that you will see it reflected when we finally produce our report. This has been a very useful session.
Lord Krebs: May I ask a couple of supplementaries? Did the three of you include in your wish list the role of different storage mechanisms? We have heard about thermal, pumped-storage hydrogen, et cetera. Do you think that the Government should have a view on the relative contributions of the four different systems that are mentioned in your written evidence, Alex?
Alex Campbell: In my view, if you get the strategic analysis right in the first place, you do not necessarily pick the technologies. It is more about the characteristics that they bring to the system. I talked earlier about the fact that some technologies are better at 100-hour duration than 10-hour duration. With lithium ion, it is down to two hours. We all recognise and understand that the analysis is not going to be perfect but, if it has been done well and you have a mechanism that allocates contracts accordingly, it should all come out in the wash, if that makes sense.
Simon Virley: I agree with that 100%. The Government should be talking about the system needs—what is needed for the system—rather than saying, “It’s this particular technology that we need”. We need that overarching framework.
Lord Krebs: In the previous session, one of the witnesses referred to various uses of hydrogen. If we have a storage system for hydrogen, do we use it for home heating, transport or balancing electricity supply over the long term? Is that something where the Government need a strategic view?
Simon Virley: Personally, I think that they do. In that instance, the Government need to make a decision on whether they want to use hydrogen at all in domestic heating. That policy decision is due over the next couple of years. A lot of the companies that I work with think that, in industrial processes, it is hard to see how you do not use hydrogen for some heavy industry; I think that your previous witnesses said the same thing. I believe that we will need hydrogen in power generation going forward. We will need it for some heavy transport. Earlier, we heard about the possible use of ammonia as a low-carbon transport fuel for shipping. Personally, I see a big role for hydrogen in the decarbonised economy but there are some things where the Government simply have to take a policy view. Only the Government can take that decision.
Tim Lord: That is right. The one thing I would add is that the decision on heating, in particular, is important in so far as it changes the profile of demand: what you will need your electricity system to do and, therefore, what you will need technologies such as long-duration storage to do. Of course, it also changes the profile of supply. If you are putting hydrogen into your gas grid, hydrogen will be a scarce resource and you will not be able to use it for other things, or it will cost more for other things. That decision, which has always been a couple of years away, is really important in setting out the sort of strategic vision for the power system that we have been talking about today.
Alex Campbell: To add to that super briefly, hydrogen is a fantastic source of energy but it is not perfect for everything. There are different use cases. The one concern that we have is that overly focusing on hydrogen means that you might end up using it for certain use cases when there are actually more efficient, more sensible technologies to deploy. If we have not got off the ground, do not have the mechanisms in place and have not set out the strategic vision, consumers will ultimately lose out in the long run.
Lord Winston: You mentioned the success in getting investment into wind power but windmills were fairly predictably successful from quite early on. Given the uncertainties of long-term storage, such as batteries, do you feel that there is a fundamental difference here for the financing—getting the right investment, for example? Do you think that that is less of a problem now than it was, say, 10 years ago?
Tim Lord: It is a very good question. If I look back 10 or 15 years, when I first started working on wind power, I do not think that it was necessarily predictable that we would be able to deliver offshore wind at the kinds of prices and scales that we are now seeing. Similarly, we can look at what has happened on the costs of solar and how they have come down but, at the top of that cost curve, we did not know whether that would happen.
This goes to the point that Alex has just made. There are a number of technologies in which we can have a pretty high level of confidence and that we should certainly be backing, at least to a degree. Hydrogen is one of them. Long-duration battery storage is another. Demand side response is another. This is easy to say and hard to do but we are going to need to design regimes that get some of those technologies moving so that we can demonstrate them at scale and start to test their cost reduction potential. We will also need to adapt our approach. Some of them will do what solar and offshore wind have done. Some of them, for various reasons, may not. We will need to adapt our approach over time to reflect that.
The Chair: Thank you very much to our three witnesses in this second session today. Alex, you offered to send us some further information, which I am sure we will find very helpful. If the other two witnesses think of anything that they would like to add to their evidence, we will be very pleased to hear it.
