Tim Stone

The most fundamental issue is that we have no idea of the state we are transitioning INTO.  There is no, properly thought-out, vision of what 2030 (or beyond) will look like either in terms of the nature of the electricity demand to be supplied nor the most economically advantageous way of doing so given the necessary constraints such as levels of CO2 permissible in generation of the electricity and the ability of the market to deliver differing generation solutions in time.

There are already steps being taken in a number of the industrialised economies to introduce Smart meters and then a Smart Grid.  One of the side effects of this, in addition to the efficiency savings it should generate, is that the nature of the demand that the generations and transmission system operators have to deliver becomes more and more baseload-like in character.  Couple this with the very likely introduction and strong take-up of plugin-hybrid or pure electric vehicles and further, stronger changes towards baseload characteristic will follow.  It is likely that these cars will act as storage devices for electricity.  For example, when a driver parks one of these cars following the morning commute, there is very likely to be a powerful price advantage if the driver were to be prepared to allow the residual charge to be fed back into the grid to reduce the morning peak and the car then recharged later in the morning.  These vehicles could well have operating costs equivalent to petrol at 9p per litre and the uptake could well be a disruptive change once the designs are more mature.

The generating mix currently assumed in many industrialised countries is the result of political drive, not practical solutions.  The most rational – and ultimately likely – way to approach the generating mix is to consider it as an optimisation problem where the objective is to minimise the cost (not price under some particular market or regulatory regime) to the national economy of supplying the demand subject to constraints such as achieving CO2 reduction targets and practical build constraints (how fast can offshore wind be built in appropriate areas, how fast can new nuclear be built).  Cost here includes the cost of the various subsidies both overt and covert.  Crucially, the solution to this problem has one major constraint – it must be rationally capable of operation by a transmission system operator using proven technology and skills.

The actions to be prioritised are clear; first understand what the nature of the demand will be in 2030 and secondly then to run that optimisation problem and examine the rational economic solution.  It may well offer some significant surprises to current perceptions.

Tim Stone, KPMG

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