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U.K. Turns to Coal as Low Wind Output Increases Power Prices

(Bloomberg) --

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U.K. power prices rose after a coal power plant switched on Monday to make up for a shortfall in wind generation and limited flows on two power cables to Ireland.

Britain is set to end the use of coal within three years and to make power generation fossil fuel-free by 2035. For now the nation is still reliant on coal when the wind drops or demand increases and this winter is set to be even tighter than grid operator National Grid Plc expected.

High gas prices are making coal generation more profitable and capacity cuts on two interconnectors to Ireland are limiting one source of potential imports. The Irish network operator has cited “system security reasons” for restrictions.

“We’re already seeing in times of tightness in interconnected countries that imports to the U.K are constrained,” Adam Lewis partner at Hartree Solutions said. “This differs from National Grid’s Winter outlook assumptions that the U.K. will always be able to incentivize imports.”

The baseload power price for Tuesday rose 16% to 253.67 pounds (298.96 euros) per megawatt-hours on N2EX-exchange. The U.K. has not seen a daily power price below 100 pounds per megawatt-hour since the middle of August. Intraday prices were 248.10 pounds for the 30-minute period to 9 a.m. on Epex Spot.

The nation doesn’t use coal all the time but it is needed when markets are tight. National Grid asked Uniper to switch on a unit at its Ratcliffe coal-fired power plant to help make up the shortfall in wind. The U.K. has burned 2 terawatt-hours of coal this year, about 2% of total power generation, according to data from Fraunhofer ISE.

U.K. wind output dropped as low as 4,416 megawatt on Monday, down from high of 13,396 megawatt reached on Tuesday last week, according to National Grid data. The forecast looks set to decline to Wednesday.

Chart of Bloomberg’s U.K. wind model:

European energy markets swung wildly on Monday with the benchmark Dutch gas contract gaining as much as 8.3% to 94.91 euros per megawatt-hours before dropping to 87 euros on ICE Endex. The German power contract for next month recovered some of its earlier 15% loss to trade 5.1% down at 178 euros, while benchmark for next year added 0.5% to 119.50 euros.

“The big fluctuations seem a bit exaggerated, as they did when the market climbed, and apart from panic, they are attributed to expectations of higher supply, both from Russia and LNG from other continents,” Energi Danmark said in note on website.

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