Electric vehicles and UK power challenges - business risk or opportunity?

The government’s ban on all petrol and diesel vehicles by 2040 has the potential to disrupt businesses on a large scale, say Simon Sjenitzer and Phil McVan

The UK government has quietly announced a huge commitment to move away from internal combustion engines to adopt 100% new electric vehicles by 2040 and there is nothing particularly surprising in that. The automotive industry already has current and planned new electric models, although you can expect hybrid to remain a feature for the foreseeable. 

How could that possibly affect my business and what could possibly go wrong?

The Department of Transport reports that 36.7 million vehicles are licenced in Great Britain, of which 30.5 million are cars, as of March 2016. New registrations ran at 916,000 in the first quarter of 2016 alone, the highest since records were kept, starting in 2001. We can envisage growth of electric vehicles (EV) accelerating as governmental incentives (and penalties) are put in place to help us make the change.

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EV charge points are normally 3, 7, 22 or even 50KW, with 7 KW being the typical size. Fast chargers can be 50KW as we strive to grab as much boost as we can whilst on that service station coffee break. 

Typically, electric cars are charged at home and then “topped up” almost like a phone as we move around during our busy day.

So far, so good, there is nothing much to worry about until that point. Until you wonder where these charge points are and how much power they will need. Well, if all 30 million cars were electric, needing 7KW of charge that would be . . . 210GW of installed capacity, (we currently have around 70GW). That’s a lot, so where is that going to come from? With diversity factors, we expect it won’t be anything like that demand, and, of course, with battery storage technology we should be able to charge cars at off-peak rates.

To scale this number, UK demand at time of writing is 23.88GW, with a power generation mix of nuclear 7.7GW, coal 7GW, wind 5GW, CCGT 4.5GW. This might then suggest we need a very substantial increase in generation capacity to meet this forecasted increased demand. 

Renewable installed generation capacity in the UK is approaching 20GW, although, typically, it may produce 10GW actual. However, its characteristics of distributed and intermittent generation are causing major headaches for National Grid. This situation has induced the capacity market, whereby keeping the lights on is managed through buying in both capacity and balancing services at substantial extra cost.

The strike price for offshore wind under Contracts for Differences (CfD), required to underpin investor certainty, are reported as high as £140MW for 20 years - expensive stuff compared to historic costs based on gas CCGT at around half that figure.

Where are these additional costs to be recovered from?

Everyone, of course. The massive increases in extra levied charges for “pass through” costs have been added back to every kWh on our bills to recoup government incentives, such as Feed in Tariff, Renewables Obligation, Contracts for Differences and Capacity Market. 

This has seen our energy bills change from 70% energy component to less than 50% and heading towards 30%. We find ourselves heading towards 70% now being essentially levies or, perhaps, green taxes.

The other key factor in switching to electric vehicles will be the loss of tax revenues to the treasury.

Currently, the treasury receives around £28bn per annum in fuel duty plus VAT revenues from wholesale energy. This could become a huge loss to the Treasury. Perhaps, there needs to be other ways to recover this lost income. Maybe we could tax other forms of energy and recoup losses that way?

We can now see substantial investment required in energy generation capacity, infrastructure to deliver power to already constrained local networks, returns on investment on renewables and the cost recovery from users through energy levies paying for much of these changes.

Adding up all these changes, it is now beginning to look like it has potential for business disruption on a grand scale. 

Corporate governance of these matters now becomes a key risk. The need to appraise and mitigate what may seem relatively small steps, and remote from day to day operations, but could begin to impact the businesses’ freedom to act and courses of actions open. 

How organisations buy energy, generate and store, where possible, then use it efficiently to support the business process, has become an increasingly complex landscape. Decisions being made in boardrooms today will affect whether, in years to come, this revolution was seen as an opportunity wasted or realised. 

Which side are you on?

Simon Sjenitzer is director of energy business development at WYG and Phil McVan is managing director of CarbonBit.