Is the UK’s power system on its knees? Are we headed for some near Armageddon of darkness and cold? Probably not, but for the opportunist, now is the time to ask for that increase in the back-up generation budget.
Believe everything in the papers and you might think the UK’s power grid was on the point of collapse. It’s not. The grid is 99.9999 reliable, a reasonable SLA. But power margins are thinning. Next winter will be the tightest for years. In some scenarios, regulator Ofgem thinks it could be a negative figure. It’s not likely to lead to Armageddon but it would be wise to ensure your back-up is fighting fit before the first frosts.
What’s going on?
In short, the power system is going through structural change. Big utilities are struggling with huge debt and falling power prices. Power generation economics are disrupted by wind and solar. When the wind blows and the sun shines, wholesale power prices tank. Old coal stations now face higher costs for carbon emissions. Some become uneconomic, as do inefficient older gas plant (although not at current gas prices), and are left waiting for the wind to stop and the cloud to roll in. They can’t set and forget their generators anymore and their revenues are far less predictable.
Revenue uncertainty spooks investors, so new gas plant doesn’t get built, despite the fact that intermittent power, although predictable to a degree, requires back-up. An energy storage revolution may well solve the problem in years to come, but not yet.
Is anyone doing anything?
The policy supposed to incentivise new gas plant, the capacity market, is paying significant subsidies to existing old power stations and rafts of small diesel and gas generators. They can bid lower in the market’s reverse auction, which pays generators to be available – and again if used – because they don’t have the construction costs of big new power stations and are less exposed to revenue uncertainty. Government argues its approach is technology agnostic, delivering the best price for bill payers. In the short-term, perhaps that’s true. Should insufficient new generation come forward, the policy will certainly force the UK to become more energy efficient, which arguably is policy success.
Meanwhile, coal is being phased out – around 19GW, almost a third of the UK’s power – within the decade. The Institution of Mechanical Engineers warned in January that if the government proceeds with its plan to close all unabated coal fired power stations by 2025, the lights will almost certainly go out. The UK would require 30 new gas fired power stations to plug the gap, but has neither the knowhow, resource or time to build them, warned the IMechE. Whether a new reactor at Hinckley C is steam and mirrors remains unclear. EDF’s struggles with new nuclear in France and Finland make 2025 appear optimistic.
But we’re ok for now?
It’s worth noting the IMechE rarely sounds upbeat. This winter, National Grid calculates a 5.1% buffer between the most amount of power the UK draws and the available power from generators. If short, Grid pays businesses to either shift power loads or switch to on-site generation. It has several gigawatts of power contracted in reserve and more available by asking generators to turn up to maximum output. Interconnectors to the continent will also ramp up because the price will become more attractive.
So far this winter, National Grid has only issued one notice of insufficient supply margin (NISM). It’s a warning that there might not be enough power to meet national demand for a certain part of the day and it’s when power generators or demand-responders can make more money. In November, Grid suggested between 7-10 NISMs may be likely over winter, particularly if it turned colder. There are a handful of other measures Grid can take if there’s still not enough power, but a NISM is when the papers will talk about blackouts and emergency measures – almost 500-related headlines since 2005 (see page 14 of this document). So far, this winter’s been wet and mild.
No margin next winter
While National Grid is procuring more demand side response and reserve power, regulator Ofgem’s predictions put derated margins at between 0 -4% over 2016/17 (see last table).
In its worst case scenarios, with low imports from interconnectors, the margin is actually -1.9%. Loss of load expectation – the number of hours power supply cannot meet power demand – jumps from 1.2 hours this winter, to 10.3 hours for 2016/17 (or between 2 and 15 hours across all of Ofgem’s scenarios). It’s still a relatively small period – 10.3 hours is 0.12 percent of the year, and any turndowns or disconnections, should emergency measures fail, would be controlled, i.e not switching off the whole country.
Panic in the streets of London
The UK system has never suffered a complete system black start. The last serious event occurred with hurricane Michael Fish in 1987 and even then only part of the grid had to be rebooted. As Simon Skillings, former Eon UK head of strategy turned consultant at E3G Trilemma UK says, there is a binary “misconception” in talking about security of supply. Either the lights stay on or there is “some near-Armageddon of darkness and cold”, he told Scotland’s recent energy security inquiry.
Skillings also thinks that the UK power system would cope even if all coal stations shut down earlier than planned. That may be true. But it may be that as capacity margins fall, energy prices go up, which would improve generation economics.
Energy Managers Association chief executive Lord Redesdale said last year he would “put money on brownouts or blackouts” before the end of 2015. An energy services company, Utilitywise, made a bet with him that wouldn’t happen. Its head of strategy, Jon Ferris, duly enjoyed a free lunch. However, the two went mano a mano again last month. Ferris said he probably wouldn’t make the same bet for winter 2016/17. He put the chances of failure at 5%. Redesdale thought the chances of blackouts next winter stood at 80%. Ofgem’s margin estimations, based on National Grid’s own future scenario modelling, give such fears some credibility. But experts such as Skillings suggest everyone should calm down.
The winter after next (2017/18) will remain tight, although less so then the coming winter, according to Ofgem’s figures. It predicts demand to drop further (UK energy demand has declined steadily over the last decade or so) and for more mothballed power plant to return to the system. The regulator expects loss of load expectation to return to somewhere near the acceptable and the margin of available generation over supply to be between 3 and 7%.
Better, but it’s still a slim margin. Economists such as Dieter Helm think at least 10% is a safer level.
National Grid has an excellent record in keeping the lights on and the UK’s resilience is the best in Europe. New technology, embedded generation and increased focus on flexible power use is changing the market structure so that old metrics around peak margins are no longer the defacto. The regulator is confident that the power system operator has the tools to do its job.
That said, if there was ever a good time to ask for an increased back-up generation budget, you probably won’t get a better opportunity.
Box: Coal was going to shut anyway
The IMechE’s warning about the perils of closing coal stations articulates fear that UK policymakers are making a mistake. Energy Secretary Amber Rudd announced last year that ‘unabated’ coal plants – those retrofitted to drastically reduce emissions – would close by 2025 as part of a policy ‘reset’. However, coal plants were to close by then, if not before, due to restrictions placed on them by European legislation.
By reinforcing the message that coal will close, the theory is that investors will look again at building new gas plants. Whether under the current set of energy policies remains to be seen.