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Britain heads for an energy shock

·6-min read
Black and white electricity pilons
Black and white electricity pilons

A recent cold day on both sides of the Channel spelled problems for National Grid operators in the control room in Warwickshire, tasked with keeping Britain’s lights on.

As demand rose on November 24, cheap nuclear power from France was not being sent to Britain through the cable running under the Channel. Instead, electricity was being sent the other way due to high prices that day in France.

Wind speeds, too, were unimpressive. Coal and gas fired power stations did offer to ramp up production - but at a steep price. Shortages in the morning turned into too much power in the afternoon.

By the end of the day, the operators had spent a record £64m on the delicate act of balancing power supplies - asking power stations to ramp up or dial down; batteries to accept and discharge power; cables to the continent to export or import.

It was an exceptionally expensive day, but not without warning. National Grid ESO (electricity system operator), is having to spend more on their responsibility of balancing supply and demand in Britain, heaping costs onto industry and, ultimately, consumer bills.

The costs have triggered alarm in the company and among regulators at a time of steeply rising household energy bills, triggering a review by the ESO and raising questions about the design of the market, the readiness of the system to shift to green energy, and whether power stations are profiteering by bidding in with sky-high prices.

Ofgem, the regulator, says: “Our role is to protect consumers, and we have been closely monitoring developments and share the ESO’s concern over rising balancing costs. We look forward to engaging with the ESO on this review.”

Most of the electricity in Britain is traded directly between power stations and suppliers. Electricity supply and demand must be precisely matched second-by-second, however, which the commercial market does not always achieve.

National Grid ESO steps in to smooth out the gaps, trading and storing power through what is known as the balancing market. This is getting more important as the wind, solar power and cables to the continent built onto the system are intermittent and less predictable.

It is also getting more expensive. The ESO spent £1.29bn on this market between April and October 2021, compared to £986m during the same period in 2020, according to data from market specialist Cornwall Insight. Monthly costs have now breached £200m for three months in a row.

The growing need is part of the picture. But experts also point to the high prices commanded by generators, while National Grid has little option other than to pay.

Power generator Drax, which is contracted to step in when needed, has been paid £4,000 per MwH to switch its remaining coal turbines in North Yorkshire on during particularly cold and still days since September.

The soaring costs of gas has left many power station owners squeezed, while fossil fuel owners are also trying to make the most of limited run-time as they are pushed out by wind and solar. The market is designed to incentivise generators to meet shortages - at steep prices. Yet experts say even within that, the current dynamics are unprecedented, and troubling.

“In January there were about two or three really pricing at that level - now we are regularly seeing ten of those generators being accepted at that level,” says Rajov Gogna, energy analytics expert at LCP Energy.

“That’s why we’ve seen such deep hikes in total costs - you’re procuring these large units, all of whom are doing this high pricing, and they’re being turned on for six hours, not for 10 minutes.”

Gogna and other experts point to stations jumping out of the commercial market during the day, where the wholesale price of power is currently already extremely high at above £200 per MwH, to instead sell power at many hundreds or thousands of pounds to an in-need National Grid ESO.

“When the system gets tight other power stations realise that they can bid a little less than £4,000 in the balancing mechanism and still be cheaper than the coal units,” says Phil Hewitt, director at market specialists EnAppSys.

He believes roughly 4GW was switched out of the commercial market and into the balancing market on the expensive day on November 24. Doing so is not new, he notes, but the prices being fetched in the balancing market are much higher.

The scale at which it is being done is also greater. “Typically this means now that National Grid is paying the equivalent of 20p/kWh to balance the system on days which are not very tight, but where stations have exited the wholesale market to participate in the balancing mechanism,” Hewitt adds.

Others point to another dynamic putting pressure on prices. Adam Lewis, at energy trading company Hartree Solutions, says some plants make National Grid decide early in the day whether they need them in the evening, demanding a certain number of hours’ notice to come on.

“At that time, National Grid’s certainty on whether they need them at 5pm will be low. But what is the risk to not have them in reserve? Often, long lead time plants have been putting some extremely high prices in - £3,000 plus.

“So what the [National Grid ESO] investigation might look at is, do those parameters really reflect their operational constraints? Or are financial motivations behind them?”

The billionaire investor Daniel Kretinsky is known as the Czech Sphinx - CAMERA PRESS/Laif
The billionaire investor Daniel Kretinsky is known as the Czech Sphinx - CAMERA PRESS/Laif

Questions over high prices to generate come as Ofgem is separately investigating two companies, SSE and EP SHP, over the rates they have requested to be switched off - the ESO sometimes asks generators to curtail output when there is too much power on the system.

EP SHP, which owns the South Humber Bank power station in Stallingborough, Lincolnshire, is ultimately owned by Daniel Kretinsky, the billionaire investor known as the Czech Sphinx, who recently took a 27pc stake in West Ham United and owns chunks of Royal Mail and Sainsbury’s.

National Grid’s review may land on the bigger picture of market design. Analysts are not blaming generators for making money where they can.

“The regulatory environment in Great Britain means that power stations can pretty much charge whatever they think National Grid will pay,” adds Hewitt.

”National Grid ESO only has an obligation to balance the system at the lowest cost so will do that even if the lowest cost is very high.”

He points to the system in Ireland, where costs are capped, albeit at a high level.

The picture is complex, however. Allowing generators to charge high prices for short periods can help boost the economic case for plants that would otherwise close, meaning less new capacity has to be built, one reason why they are allowed. “It’s a trade-off,” notes LCP Energy’s Gogna.

One thing is clear. More expensive days like November 24 are on the cards, and intervention may follow. “That the ESO is reviewing the market highlights the exceptional nature of what we’re seeing,” he adds.

Drax, which declined to comment on its bidding strategy, stressed how essential its plants are, saying they “fulfilled a critical role in keeping the lights on at a time when the energy system is under considerable pressure”.

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