Roads to Net Zero: A view on NGESO’s latest Future Energy Scenarios
Yesterday, National Grid ESO (NGESO) released its Future Energy Scenarios (FES) 2023, an annual evaluation of potential approaches to decarbonising our energy system. The FES presents four UK electricity system decarbonisation pathways (Fig. 1). Two of these pathways, Consumer Transformation (CT) and System Transformation (ST) succeed in GB reaching net zero by 2050. Leading the Way (LW) reaches net zero by 2046 (a year earlier than FES 2022 projections), while “Falling Short” (FS) would not get us to net zero by 2050.
This year’s FES highlights the importance of energy security and accelerating the delivery and installation of net zero technologies such as solar, wind, Bioenergy Carbon Capture and Storage (BECCS) and Carbon Capture and Storage (CCS). A stark reminder that reaching net zero is not achievable without negative emission technologies. As the UK government continues to consult on the review of the electricity market arrangement (REMA), the FES has demonstrated the need for substantial change to our GB energy system in the coming years, although it remains unclear what this looks like.
Across all pathways consumers have a role to play in the energy transition. The FES’s themes include the changing generation mix, the electrification of heat and the economic benefits associated with this, the electrification of transport and the role flexibility will play in managing all of this. Though the FES do not specify the pathway with the lowest overall system cost they clearly outline that reaching net zero by 2050 is possible in a variety of ways.
Renewable generation is now cheaper than traditional sources
The UK generation mix is changing. In 2022, 48.5% of GB electricity came from zero-carbon sources. As industry has moved up the learning curve, deploying higher levels of renewables, the levelized costs of wind and solar have dropped. Renewables are now cheaper to build and operate than coal and natural gas generation and this trend is set to continue despite short-term supply chain constraints (Fig. 2).
Despite this, only one NGESO scenario reaches the UK Government’s offshore wind target of 50 GW by 2030 and no scenario reaches the solar target of 70GW by 2035 (Fig. 3). The 5GW floating offshore wind target, is not achieved in any scenario. We will not reach the projected levels of solar and wind build out without allowing quicker, more coordinated, and efficient connections to the system. A collaboration between Government, Ofgem and industry will be critical for this, and the National Grid ESO connection reform consultation and Holistic Network Design is a step in the right direction.
The electrification of heat and transport is critical for decarbonisation
Currently, road transport and residential heating account for 30% and 17% of the UK’s greenhouse gas emissions, respectively. Electrification is key to decarbonising transport and heat. All scenarios that result in reaching net zero by 2050 include substantial road transport electrification. This aligns with Government policy which brought forward the ban on petrol and diesel car and van sales to 2030, and a 2035 ban of plug-in hybrid cars and vans.
With over 20 million households in CT and LW projected to have heat pumps (double that in FS) improving energy efficiency is a no-regrets policy needed to create a cost optimal heating system. However, current and expected funding for home insulation is insufficient to drive this. This year FES illustrates that by 2030 running a hydrogen boiler will be nearly twice as costly as a heat pump (Fig. 4). If the cost of social and environmental policies were transferred from electricity bills to, e.g. general taxation, the marginal cost of heat pump operation would be even lower.
Approximately 60,000 heat pumps were installed last year: we are still far off the Government’s pledge to install 600,000 heat pumps per year by 2028 in homes across England. LW reaches the government’s 600,000 installation target by 2026, (two years later than was estimated in FES 2022); CT reaches the 600,000 target by 2027. Despite recent slow progress, this year, heat pump installation rates ramp up faster in all four scenarios when compared to FES 2022, suggesting that up to 160,000 heat pumps could be installed this year (LW), nearly three times last year’s figure (Fig. 5). Even in ST, the scenario with the least amount of electrification, electrification is often more cost-effective than hydrogen for decarbonising heating in the commercial sector.
However, for the first time in three years, annual hydrogen demand projections have risen across all scenarios, particularly ST, due to a doubling in the usage of hydrogen in power generation (Fig. 6), a process prone to significant losses through inefficiencies. This is a reminder that FES illustrates credible pathways of getting to net zero, but not necessarily the most economical way to do so. All scenarios see some hydrogen use to decarbonise heavy industry. Hydrogen demand for road and transport in CT has been lowered suggesting that hydrogen plays a diminishing role, compared to electrification, in the decarbonisation of transport.
In all scenarios, electricity demand is projected to double by 2050
The electrification of heat and transport brings both challenges and opportunities. Even in scenarios where residential heat pump numbers are the highest, electricity demand does not increase significantly more than in ST (the scenario where heat pump uptake is the least — Fig. 7). This is because the higher heat pump scenarios assume thermal storage would be installed alongside heat pumps to release energy at peak times and reduce peak demand from heating by up to 30%. Additionally, home appliances become highly efficient in all net zero scenarios, reducing demand (compared to today’s levels) by 2050. The higher electricity demand in this year’s CT scenario reflects the faster uptake in heat pumps.
So, how do we manage a changing generation mix and increasing electricity demand?
Increasing levels of electricity demand and in particular peak demand combined with avoiding significant levels of renewable generation curtailment, require flexibility. By 2050 the system could require 130 GW of additional flexible capacity and 196GW in total. Approximately 30% of this flexibility is expected to be from end consumers who engage in smart charging, V2G and smart heating technologies (Fig. 8). Compared to FES 2022, V2G numbers have been halved, likely to reflect the lack of V2G enabled cars and commercially viable charges on the market currently.
Consumer demand-side flexibility is pivotal to decarbonisation
Significant levels of demand-side flexibility are required to operate the electricity system without unabated natural gas after 2035. The Demand Flexibility Service (DFS) was an example of this last winter, delivering over 300MW in one event. However, there is still work required to ensure all smart metres are able to participate. If done correctly, over 2GW of DSR would be ready to participate this winter. Smart charging of EVs could contribute to a 60% reduction in peak demand by 2050 and flexibility from heat pumps would further reduce peaks.
Unlocking consumer flexibility will be contingent on consumer engagement, suitable incentives or prices from energy suppliers and consumers trusting their suppliers. However, consumers do not trust their utilities. Every year, Edelman publishes its Edelman Trust Barometer, which gauges consumer sentiment. For the tenth year in a row, energy companies ranked amongst the least trusted in the world.
We also need smart digital solutions. Even the most engaged consumers won’t manually adjust their demand in line with prices, they will need technology to do this automatically and seamlessly on their behalf. This is only possible with open data access and interoperability standards.
The role of policy
Today flexibility is predominantly provided by gas generation. By 2050, storage could provide up to 30% of total system flexibility, with short duration lithium-ion solutions comprising 70% of this. Fortunately, GB already has over 70GW of lithium-ion batteries in the pipeline. However, up to 30% of the storage requirement will be forms of longer duration energy storage (LDES), e.g compressed air, liquid air and pumped storage. Currently, LDES needs support to reach commercialisation. The Government must holistically review the business cases for LDES, including the role of hydrogen, alongside the future of Capacity Market and electricity market design to ensure that there is a clear trajectory to meet the flexibility required for a net zero electricity system. Furthermore, meeting net zero power emissions assumes large scale deployment of CCUS and BECCS by the end of this decade, two other technologies that will require predictable long term revenue streams to get off the ground.
Conclusion
It is great that the FES presents three ways of reaching net zero by 2050 and that consumer flexibility plays an essential role for all of these. However, the energy market of the future must harness the vast potential of consumer flexibility to be able to integrate renewables and ensure security of supply at the lowest possible cost. Good market reform will be essential for this. For this to be put into action, we need a market design that encourages the right behaviour and investments at the right time, in the right place and at the lowest overall system cost.
