• Blog

How distributed energy can help address the UK's power 'trilemma'

Distributed energy offers the potential for high investor returns whilst addressing the energy ‘trilemma’ of security, sustainability, and affordability.

Historically, the cost of generating power in the UK has been higher than the cost of transporting power – with typically 40% of a household power bill being generation and 20% being transmission. As a result, energy companies and Governments have looked to maximise economics of scale in generation by constructing large generation capacity close to fuel source. These central plants were designed in a site-specific manner, and built as bespoke projects. Whilst large, distant and bespoke was expensive, it was offset by low energy transportation costs – and as failures in the system originated at the generation rather than transmission stage, transporting energy over long distances was not considered a reliability problem.
Over time, however, the cost & reliability of generation has improved whilst the cost & reliability of transmission has deteriorated. Generation today has become sufficiently reliable that most failures now originate in the grid. Hence the main source of both cost and quality problems is no longer generation, but lies in transmission – which in turn means that future efficiency gains will be achieved not by increasing generating capacity, but by locating generating capacity closer to demand.
Meanwhile, the economics of mass producing smaller pre-fabricated units have prevailed over the manufacturing of large bespoke site-specific units. Put simply, the mass production of smaller generating units now offers greater economies than bigger units can gain through size.
This has created an opportunity for a variety of small, grid-connected generation devices, which we collectively call Distributed Energy (DE). Typical DE systems have low maintenance, low pollution and high efficiencies and are built on renewable energy sources including solar, wind, small hydro, biomass, biogas, and geothermal power.
In addition, DE directly addresses the energy “trilemma” of Security, Sustainability, and Affordability. With lower carbon emissions, reduced transmission & distribution losses, short build time, security and diversity of supply and improved resource efficiency (by using both the power and the heat output), DE is not only bringing in new sources of investment, but also engaging end users with the needs of energy efficiency and delaying the need for network upgrades.
The UK is somewhat of a laggard, where DE represents only 10% of installed capacity (vs France, Italy and Germany all over 30%) but efforts are being made to close the gap. The use of Government incentives including Feed in Tariffs and Renewable Obligation Certificates has been paramount to encouraging investment and providing the visibility required to make long-term capital commitments.
At Oxford Capital alone, we have successfully invested over £150m in Solar PV, providing income backed by real assets which provide index-linked contractual returns over a 20 year period. Similar opportunities are now being opened up in biomass and also in assets that support the network itself. The assets all share similar characteristics such as smaller project size, smaller individual capital commitment, quick construction time, and project diversification.
Demand for these DE assets is also less dependent upon regulations and Government intervention. Under the traditional system of centralised energy, the high degree of regulation either explicitly controlled supply or implicitly made independent power producers cautious on billion-pound investments. But DE is driven by consumers with micro rather than macro goals – so as long DE delivers value to consumers, their use will continue to grow.
We also see opportunities on the demand side, where new technologies and consumer demand for cleaner energy are rapidly transforming the market. Demand Response (DR) is an evolution of what utilities have done for years – but better information technology has enabled it to be refined to be faster, more reliable and more attractive to consumers. That reliability means it can now count as a system asset and an industry of DR aggregators has grown up that recruit customers to reduce demand when required. This frees up power for use elsewhere, making DR able to contribute additional power to the system in a way no different to a power station – but producing “negawatts” instead of megawatts.
As such, the new world of Distributed Energy bodes well not just for the community – through better security, sustainability and affordability – but also for the individuals who invest in these projects for the potential for 7-9% project returns. With benefits evident for both sets of stakeholders, the role of Distributed Energy will take centre stage for power development in UK and beyond.