What is the Role of Pumped Hydro Energy Storage in Generating Value and Reducing Energy System Costs in a Net Zero Economy

Abstract

Pumped hydro energy storage is an enabling/balancing technology that allows low carbon electricity to be generated in one area at a given point in time and stored for later use when needed in that area or others. Thus, it exploits very specific geographical resources that are plentiful in particular regional areas within the UK (for example, the Scottish Highlands) and uses them to deliver valuable outcomes for the UK electricity grid and the UK economy as a whole. In the first instance, electricity industry developments can have important employment impacts during their construction phase. For example, Hinkley Point is reported to have generated 6,500 direct construction jobs on site. According to UK Government ‘employment multipliers’, this could lead to an additional 5,785 indirect supply chain jobs. Similarly, just one large pumped hydro station could have important employment impacts across local, regional and national economies. For example, development of the Coire Glas station in Scotland is estimated to require 3,500 direct construction industry jobs. This could generate an additional 3,115 supply chain jobs. At operational stage, pumped hydro is an example of region- and/or location-specific capacity that plays a key role in delivering a national and increasingly electric powered energy system that is at the same time reliable, flexible, secure and where any market failure issues can be resolved, economically efficient. The strategic importance of drawing on regional resources and has been highlighted by the Committee on Climate Change (CCC) in the context of the net zero carbon economy advice accepted by Government where Scotland has a more ambitious 2045 target for this reason. There is a strategic case for deploying further pumped storage capacity to service the UK energy system and economy, alongside other solutions such as increased interconnector capacity. This is particularly so if the UK takes a path of increased electrification involving potentially quadrupling our reliance on renewable generation coupled with reduced reliance of both the gas grid to provide flexibility in delivering heat, and reducing the role of fossil fuels by enabling bulk energy storage. On the other hand the current market environment in which pumped hydro capacity decisions are made gives rise to a very fundamental market failure. This arises because the individual station owners who need to invest in new pumped hydro stations currently cannot value the benefits that accrue to the wider UK electricity system, economy and society in their investment decisions. Our provisional analysis suggests that potential social benefits generated per unit of pumped hydro capacity will grow the more capacity is added to the system, but this will not be reflected in the private revenues realised by station operators. Policy intervention could address this market failure to allow the wider social costs and benefits of pumped hydro investments to be effectively taken into account in the decision making of the owners of pumped hydro capacity. This could either be at the stage of investing in capacity and/or influencing the revenues that investment costs must be set against. For example, where pumped hydro can play a similar role to interconnectors in moving electricity about the country when it is most needed, the type of ‘cap and floor’ mechanism may play a role in preventing distortive price fluctuations.