Keeping Industry in the UK: Power Costs and Flexibility | Ben Watts

Hello, everybody. Can everybody hear me okay? Great. Well, I'm Ben Watts. I'm guessing a few of you probably come across me online, probably on LinkedIn, possibly more recently on Substack. I write quite a lot as an analyst, mostly about GV and our relationships with our friends on the continent, Ireland, places like that. I like wholesale power and that kind of stuff, but I'm also very interested in flexibility, in flexibility, electrification, and trends like that as well. So it's a pleasure to be here today, and I'm going to focus mostly on industry and stuff in the UK. I'm sure there are parallels with other countries and other places, but there's obviously been a lot of focus on this recently, both from the incumbent government and opposition parties, a lot of interest in the price of power that industry pays in the UK compared with other countries, and I kind of want to start with other countries. And I kind of want to start by contextualising that a bit with the more overall kind of energy consumption of our industry. So this is my kind of animated Sankey diagram going back over 25 years, and it shows you all the different industries, big industries that use energy in the UK, and the different fuel sources that go in. So electricity gets the most attention. That's because, like, electricity prices in the UK are more outliers relative to the rest of the world than our gas supply is. I think it's quite important to remember that over the last 20 years, like, there have been a whole bunch of other changes going on that aren't just about, you know, the high price of electricity now. You know, there's been a long trend for efficiency improvements. There have been changes like LED lighting. You know, there's been some electrification of low -grade heat for natural gas or even oil, in some cases, towards electricity over time. And while kind of industrial output, at least in GDP terms, has actually held up better than a lot of people think, like, there's, you know, some of the big changes that we've seen over the last 25 years have not necessarily been driven by, you know, spikes in commodity prices. Like, you know, something like 2008, which seems like a distant memory, and to someone my age, I'm 37, was when I was at school or university. Like, some of the big changes that we've seen have just been, you know, industry that's been struggling for a long time and hit, you know, an economic shock. In that case, the kind of global financial crash and depression and just simply never recovered. So, yeah, there's quite a lot going on there, and I think I would invite anyone that's kind of interested in this area to kind of look at the broader topic, the broader kind of energy mix that goes into industry and, you know, other things going on. Now, you can't get the demand for every bit of industry in the UK and, you know, look at what its kind of profile and what it looks like. But what you can do is for the larger things that are connected to the transmission grid, there are actually individually identifiable balancing marking units. And you can go into Alexon's data, and you can have a look at when those places, so, you know, we're talking, well, some people might not call railways industry. I'll leave that to your discretion, but, you know, aluminium chemicals, steel, oil refining and chemical works. And you can see, like, you know, they use a little bit more weekday, but they're generally quite base-loading. And the amount that they're using has fallen a lot over time. But also, and I, you know, again, I can't, I can say much less about the demand from individual kind of smaller businesses, commercial businesses, rather than industrial kind of plants. But just as a kind of, like, a comparison, what you can do is you can take the GSP, the grid supply point data, for some of our big commercial city centres. So, City Road's big substation in the Square Mile covers a bit of East London as well, but that's a proxy, basically, for what the consumption of the Square Mile, the City of London looks like. Manchester, Birmingham, Glasgow, smaller but similar-ish profiles. The interesting thing is, if you take the industrial profile for the whole country, all the cement works, all the refineries, all the paper mills, everything like that, stuff it all together, we're now in a situation where the actual consumption of that is not that different from the Square Mile of London. And I think that's quite staggering. Like, you know, we really don't have that much big industry left in this country. Another thing about this is that, you know, it kind of makes sense when you think about it, but the decline of industry has been going on at the same time that we've been adding more and more generation further north. You know, wind build-out, wind curtailment, all those kinds of things, which I'm sure you guys are very familiar with. Now, a bit of that demand was actually as far north as Scotland. I know, like, for example, the Grangemouth oil refinery closed, I think, eventually two years ago. Someone might correct me on that, but quite a bit of our industry that did exist was in places like the Tees Valley, Yorkshire, bits of the Midlands, a little bit on the south coast, places like Fawley oil refinery. But broadly, like, the decline of industry that we've seen has, at least to some extent, kind of exacerbated some of the changes in the flows of electricity around our grid and some of the challenges that we've got with transmission. Not the biggest thing, but it's there. And certainly from a government perspective, you know, a government that's interested in generating lots of really good manufacturing jobs in different parts of the country, you know, it's a dynamic in that as well. Now, if you look at the current grid connection queue, you know, unfortunately, government might like it to be otherwise, but there isn't a massive queue of industry looking for big transmission grid connections apart from data centres. Data centres are obviously the topic of du jour of everybody who's working in the sector at the moment. There is, you know, an ongoing topic and debate about how much those data centres are over procuring or hogging or asking for more capacity than they actually end up using. I'm sure people in this room might have looked at some of these things, but, you know, certainly if you look at some of the existing data centres that are there, they're not using anywhere near their capacity a lot of the time. Sometimes, like, there are also variations in the patterns that they, you know, ways in which they use power. And, you know, traditionally people think that they're kind of going to be, like, baseload sources of demand, like, that's sometimes the case and it's sometimes not. So, yeah, I'd say with that 50 gigawatts, like, I wouldn't necessarily treat that, even if it all came online, as something that would be, like, constant, you know, demand on our grid. But it's there and there's obviously a fair amount of money behind it. Maybe not after last week, but, you know, certainly an area of interest. Again, I'm putting storage batteries and electrolyzers there. How much of that comes about, whether you call that industry or not, you know, I'll leave that to your discretion. But I think the important thing is that relative to our peak demand on the grid, 45 is actually on the high side. But, you know, that's something that's shrunk a lot over the last kind of 20 years as well. And some of that is stuff like LED lighting or, you know, the decline of industry that I've shown you on the previous charts. But, you know, over time, that's other things like flexibility, battery storage, behind the meter flex, those kinds of things as well. Right. But I cannot, from Richard's kind introduction, I'm not sure I'm going to be able to tell every industry how to stay in the UK and how to, you know, be competitive today. I can offer some ideas. I'm going to run through these in the time we've got together and then I'll take any questions from you. But, yeah, just a caveat. Some of these may be familiar, some of them may not be, too. Anyway, yeah, first one, timing. So, we saw on the previous chart that industry demand is quite baseloady, at least compared with domestic demand. And it's also quite flat around the year. You know, we have a wholesale market, which is traditionally gas-driven in the UK. And that's just about starting to change now. Like, you know, it's still kind of in the 80s a lot of the time, the percentage of the time when gas is setting the price. But we're just about starting to see the point, particularly with the Soda build-out in this country and our interconnection with Europe, that at least for kind of five, six months of the year, the price is kind of losing that stable equilibrium and kind of falling below. And if you're a business that happens to be able to use or does use quite a lot of its power during the day or even during the weekend for industry, that's something that's good. And I'm always a little bit sceptical about people saying that GB is such an outlier or some of the, not so much the industry kind of, like, write-ups, but some of the more mainstream press when they do write about this kind of thing, you get a, you know, a kind of really catastrophic kind of description about how GB's prices are so much worse than anywhere else. And I, you know, they're bad compared with France, they're bad compared with the US, they're not that bad compared with some bits of Europe. So, okay, maybe you can shift some of your demand or you happen to be able to do a lot of your work when it's sunny and during the winter. The other obvious thing, you know, in a country like the UK where we're building so much wind, we just paused the auction round nine round of CFD auctions, but there's still AR7, AR8 coming on board and there's still projects before that that are being built that are hopefully going to connect to the grid. Can you shift your demand to, like, match windy periods? I'm not entirely convinced that that's the case for the majority of industry. It would be nice if they could. It might be that when we build out some of our long-duration storage in Scotland that we get kind of shoulder periods around windy spells when the power prices are a bit lower as well. But I'm not entirely convinced that that's a plan that, you know, somebody investing a lot of capex in an industrial plant is going to look at and go, well, that's great, you know, I can see it's going to be windy all next week, I'm going to produce then and then, you know, I'm going to shut down for a week and then I'm going to do something else. Like, I think it might sometimes work the other way around, like if I'm thinking of taking my plant offline to do some maintenance for a couple of days, I can see a high-priced spell of power, like, let's do it now, I can probably have a bit more sympathy with that. But I'm not aware of many industries where, you know, people want to sacrifice the flexibility of when they're doing their work to the wills of the weather. Like, I don't personally see that. Oh, probably should have put this chart a bit earlier. Yeah, but the interesting thing about the build-out of the solar is originally you were seeing prices falling quite a bit in spring and early summer, but that's kind of gradually filling out to wider parts of the year, even in, like, October or kind of late February, you can see the impact of the sun on those daytime prices. So, there's wholesale costs, commodity costs, and then there's non-commodity costs, which is probably the more controversial bit of the bill for a lot of industry. And over time, as those have grown, more and more businesses have looked for exemptions and carve-outs. Now, I'm not going to go through here, like, a, you know, tick list of the industries that are in and are out. Like, it has changed over time. It will probably keep changing. And, you know, depending on what the government sees as priority areas, depending on its negotiations with the EU on various things, like, that's probably going to keep changing. So, what I will talk about instead is talk a little bit more about some of those arrangements that are around for businesses to not necessarily procure all of their power through the traditional wholesale market, but instead, you know, try and generate a bit of the power themselves or use some novel kind of arrangements that are coming about in the balancing settlement code. So, private wire and self-generation, kind of self-explanatory, put something on your roof, have a CHP unit, which gets some nice carbon tax breaks, generate some of your power, don't buy it from the grid with all the levies, you know, nice saving there. Another option, which requires you being kind of a certain sweet spot of size, is the levy-exempt supplier kind of route, where you can pair up some industrial demands somewhere in the country, can be anywhere, with some generation somewhere else, and you can effectively kind of sleeve that power over the grid and avoid some of the levies, but not all. That's an interesting one. But, there's a problem. And the problem is that actually, particularly in a world of higher wholesale prices, some of the levies like the CFD have actually kind of come down, because they are very nice kind of stabilizing mechanisms against higher wholesale gas and commodity prices. The cost of balancing is going up and up. Part of that's just because the cost of gas is going up, and a lot of the cost of balancing is actually turning up gas generation. But it's also because we're adding more and more wind ahead of the grid that we're building out, and therefore we're redispatching more and more on our grid. Now, there's some conversations at the moment about what's going to happen with the tariffs for balancing from next April. I think that's certainly something to watch if you're in the space. I'm not 100% sure if something might change about how the kind of forecasting and the billing of that happens. Like, I have the impression that, you know, there might have to be some kind of a bit of a reckoning or a bit of a truing up or a bit of a, you know, seeing that slightly differently going forward than we have done in the past. But there is a way around all of this, and I think it's particularly interesting in the data center side of things, and it's been bubbling away for a long time under slightly different guise. So there are a couple of grid months called P4 for 1, P4 for 2. They are set up around kind of complex sites is the traditional term, but it's kind of evolved into something that's more a notion of community energy that doesn't have to always be, you know, you know, charity, charities and, you know, collectives putting solar panels on roofs, on checked roofs and things like that. It can be kind of more of a corporate kind of municipal type approach to generating power and energy in a particular area. But the interesting thing about it is that if you can source and procure the power within a particular primary substation area, it's kind of typically up to about 10 megawatts of demand, you can avoid BIS-UOS, but you can also avoid CFD, RO levies. RO is no longer relevant for domestic, but it is important for commercial. And you can also avoid some CM levies as well. Yeah. So what kind of things can you do? Well, maybe you've got a factory, maybe you've got a data center, maybe it has an existing grid connection. It's very nice. And maybe there are some options to put some generation behind that. Maybe some of that's firm, like, you know, gas, CHP, something like that. Maybe there's an option to put some solar there. Maybe it's on site exactly. Maybe it's on an adjacent roof. Maybe it's in an adjacent field. But, yeah, potentially some kind of blend of generation firm and non-firm that you can attach to that anchor user with an existing grid connection. And then, yeah, sorry, a battery as well to kind of smooth that around. So you have this anchor tenant, and then you have a pool of places that are local to that. Now, you're not going to be able to avoid all of the grid levies for the power that is shared over the local distribution network. You're still going to have to pay due offs and some other levies. But it's quite a big saving. And the interesting thing about this model is, and the government's put quite a bit into the white paper, the energy independence bill that was released last week, is that there are going to be some incentives, mandates, for community ownership share in some of these schemes in order for them to benefit from some of these levies and exemptions and whatnot, but also hopefully drive more community engagement and support towards them. So, you know, it could be sharing excess power on the grid, but it could also be sharing excess heat via heat networks. So lots of interesting stuff. And I guess a bunch of considerations for businesses that might previously not really have thought of taking a role in, you know, the heat requirements for the area or the energy generation requirements for the area, potentially kind of looking at this in a slightly broader context. Right, I have tried to come up with a list of things that are upcoming in the next couple of years. I'm not sure I've got everything there, and I'm sure a lot of the dates and times on these might slip. But, yeah. And that's it. Excellent, Ben. Fascinating stuff. And lots of... I like the, you know, the solutions that you put forwarding as well with the sort of integrated solutions there. Just a question regarding data centers. I know you mentioned it's a bit of a hot topic. I couldn't resist. We're seeing quite a bit of a backlash, I mean, obviously in the United States, but also in Northern Europe, Finland, Denmark, now Norway has put restrictions on grid reservations, and they're looking to sort of put in place a permitting process. Do you think this is something that could spread to the UK? It has already, actually. Sure, but in that kind of scale, yeah. Yeah, I mean, there's a massive... So I live in rural Devon, South Devon, but in North Devon there is a massive proposed data center, I think 1.6 gigawatts, which is, I mean, broadly trying to use the grid capacity that was reserved for the X-links interconnector to Morocco. But that has absolutely massive opposition and really, really organized opposition. And I think it's a bit of a shame because, I mean, personally, I'm an advocate of data centers and AI, but I think we're missing the opportunity in many cases to think in a slightly more integrated way about the energy needs of an area. Like, you know, you can often... If you build a heat network, you can take back grid capacity from existing gas and electricity users. If that grid needs reinforcing, then the data center can contribute towards that. You know, data centers are going to generate a lot of excess heat in the winter, which we need, and we have a housing stock, which is very difficult in many cases to decarbonize at scale. And we've got big problems in our kind of heat pump rollout in terms of keeping the cost of that sort of thing down. So, you know, I see them as an opportunity. I see them as, you know, they are a challenge. Like, I think the challenges of water are a problem. I think the extent to which, you know, at least in the lack of, like, zonal or more regional pricing signals coming about, however they do, like, more data centers than we would want are going to want to go further south in the UK. And I think, yeah, the water issue there is an issue as well. But, no, I think... I really, really hope that we can kind of get the most out of the data center rollout that we have and kind of integrate them into the local economy or other businesses that are using energy instead of having kind of, you know, real competition over grid capacity between, you know, homes and other businesses and data centers. Like, I hope the government can kind of, you know, manage that in a nice kind of way. I don't think it's easy. But, yeah, I really hope so. Yeah. Any questions for Ben? Well, we've got... I'll start here, move around. I'll only take a few, as in the interest of time. Hi, Ben. Thanks very much. Robin from Montel. I just wondered what you think about the government. They're always going on about saying how pragmatic they are. But, I mean, what is your view in terms of... I mean, are they doing enough to curtail these extremely high power prices and prevent this so-called de-industrialization that you talk about? And, basically, what can they do? You used the verb curtail in there. Do you mean... Are you talking specifically about wind to gas kind of... I mean, like, curtail in terms of reduce, like, these high power prices, basically. Oh, okay, okay. Yeah, I mean, I posted about this quite a bit in the last week. There have been some quite high prices. Okay. It's slightly... So, it's adjacent to this. Obviously, it depends how you're, you know, hedged, how you're managed, whether you're sitting within balance or not. Yes, I think there are things government can do. I think... I've written a lot about this, but I think we've got to think more realistically about the network transmission constraints that we have on our grid, because I don't think they're going away as quickly as we might like. And I think we've got to think quite seriously about how we look after the gas fleet, the firm fleet that we have, and pay them the right amount to allow them to maintain themselves and keep themselves ready and on the grid, you know, and avoid over-rewarding at times as well. I think that requires market reform, and it requires thinking about things differently to what we have done in the past. But I'm, yeah, I'm certainly... Yeah, it worries me when I see very, very high prices at times for some redispatch on the grid. Does that answer your question? You can... If you can follow up in the break, probably, Robin. Yep, one more question here. Very short one, I hope. That 51 gigawatt figure in your presentation... Thank you for the presentation, by the way. At the beginning of data-centred demand, is that where is that figure coming from, and what's in nature what that figure represents? Yeah, it's from a mid-year view document from the government. I've sourced it, and you should have got the slides sent to you. Sorry? Yeah, yeah. It had changed quite a bit from last year, I noticed when I put the slides together. I mean, I treat them with a bit of caution, because at least until recently... There's this reform going through where they're going to be much more closely held accountable for the capacity that they're looking for, so I think it's probably going to change quite a lot. But, yeah... I think it's helpful to put the figures that are out there and that people are working around, but I'm not actually necessarily sure we should all be expecting that. It's my personal view, and I'm very happy to be challenged on that. Like, I think there's going to be a decent role for data and AI centres within the UK, but I don't... I think unless we get to a point where we have much cheaper fundamental power, like I don't see us being, like, you know, the location of choice in Europe, you know... That answer your question? Yeah. I think if there are any more questions, please... Ben, you're here all day, so you can feel free to approach them in the breaks. But in the interest of time, we have to move on. So, once again, Ben, thank you very much indeed for the presentation. Ben, Ben, Ben, we have a little present for you. Oh, present? There we go, yeah. Oh, thank you. Something... Some chocolates for the journey back to Devon.