1. Communicating a Smarter Future Keynote at Network 2012 4th annual distribution network strategy conference 16 February 2012 Sandy Sheard Deputy Director for Future Electricity Networks, DECC

2. Agenda Context Smarter systems and customer engagement Government action Conclusions 2

3. DECC’s low carbon and security of supply objectives will lead to major changes in future generation and demand. Today’s electricity generation can easily be flexed to meet changes in demand, and is largely located onshore. To 2020 and beyond we will see: increased electricity demand with different load patterns intermittent and inflexible supply More generation in new locations, two-way flows A greater role for non- generation flexible solutions like demand side response (DSR), storage and interconnection 3

4. Two key challenges for the system: levels of investment and system balancing Generation: £75bn could be needed by 2020 Transmission networks: Up to £24bn could be needed onshore in the period 2013-21 and in the order of £7bn could be needed offshore by 2020 Distribution networks: around £28bn could be needed in the period 2015 to 2023; a further £60-80bn could be needed in the period 2020-2050 InvestmentSystem Balancing *Actual wind data from 2006 Demand over even days in January 2010 Demand over seven days in January 2050* Increased intermittency & inflexibility  Smarter systems can help us address these challenges 4

5. Agenda Context Smarter systems and customer engagement Government action Conclusions 5

6. Smarter systems enable a more efficient, dynamic approach Process of applying information and communication technologies More dynamic ‘real time’ flows of information More interaction between suppliers, network companies and consumers 6

7. Smarter systems will help us meet future challenges by making the right investment choices and increasing system flexibility maximise use of networks (headroom) factor in and make best use of distributed generation sources build less peaking plant maximise use of intermittent sources reduce / shift demand (DSR) use the right ‘tool’ for the job (storage vs. generation vs. wires) Use system assets more efficiently use non-generation sources and local generation sources to flex ‘supply’ (EVs & heat pumps as storage, distributed generation) manage 2-way electricity flows reduce / shift peak demand through DSR (user control & remote control) Use tools & technology innovatively  At the networks level, the main change needs to come from distribution networks.  More active management of the networks including greater interaction with customers. 7

8. …to low carbon transition partner From electricity user… Smarter systems require a paradigm shift in engagement to drive behaviour change 8

9. Agenda Context Smarter systems and customer engagement Government action Conclusions 9

10. Government is already taking action on smarter systems 1 Leadership on network investment 2 3 Enabling a smarter grid 4 Longer term thinking on future challenges Changing customer behaviour 10

11. Leadership on network investment, working with Ofgem 11 Smart Grid Forum brings together thinking from DECC, Ofgem and industry Informing Ofgem’s “RIIO” price control framework for distribution companies 1 Five workstreams underway: 1.Assumptions and Scenarios (DECC) 2.Network Implications and solutions (Network Companies) 3.Cost/Benefit Evaluation Framework of smart solutions (Ofgem) 4.“Closing Doors” 5.Ways of Working (DECC / Ofgem) New and longer term incentives to encourage innovation and smarter solutions: 8 year price control period (2015 – 2023) Ofgem considering new innovation incentives for future networks Aligned with Government policy objectives

12. Changing customer behaviour 2 Behavioural Change and Energy Use’ paper written jointly with Cabinet Office Behavioural Insight team – including five trials. Green Deal: Running trials to understand behaviour and incentives Smart meters: Using behavioural theory and trials to inform customer engagement strategy Smart meters programme and the Green Deal are giving customers choice and the opportunity to take an active role in energy efficiency and demand side management. 12

13. Supporting new smart technology and approaches 3 Low Carbon Network Fund (LCNF) Low Carbon Investment Fund (LCIF) EU Funding Streams £500m administered by Ofgem over 5 years to fund smart grid trials by DNOs Aims to improve networks‘ performance Currently 24 projects; £80 million spent £2.9m administered by DECC to part-fund 8 pilots May be integrated into LCNF or DfT’s “Plugged in Places” All funding now distributed and evaluation taking place Major funding scheme is Framework 7 programme – leverages national programme demonstrations DECC plays active part in developing future calls for these schemes 13

14. Longer term thinking on future challenges to the system 4 Electricity Storage Interconnection Thermal peaking plant and flexible core generation Demand Side Response Publish initial paper in Summer 2012. Whole system cost analysis Potential for different technologies to improve future flexibility / respond to challenges Linkages with wider system Market framework, incentives for flexibility Network strategy, balancing Interaction with Smart Meters, EMR Developing an overarching strategy to ensure the system evolves in the most cost- effective way. Underpinned by an analytical understanding of the `balancing challenge‘ to the electricity system. 14

15. Agenda Context Smarter systems and customer engagement Government action Conclusions 15

16. Conclusions Smarter systems, with the grid at their heart, will be a key enabler to deliver the transition to low carbon. Smarter systems will need industry to work in partnership with customers requiring a paradigm shift in engagement. Industry, consumers, government and the regulator need to work together, today, to deliver the smart systems of tomorrow. 16