Green Energy Policy Gone Mad: £2,500 Per Megawatt Hour

  • Date: 05/11/15
  • Christopher Adams, Financial Times

For evidence of just how close to breaking point Britain’s creaking power supply system has come, look at Wednesday’s sharp spike in wholesale prices.

As National Grid, reacting to what it called “multiple plant breakdowns”, asked power generators to turn on back-up supplies and then offered to pay big industrial users to curb their demand, prices for electricity soared.

The request came ahead of an evening peak in demand. At one point, according to available data, Severn Power sold electricity to the grid at £2,500 per megawatt hour, more than 40 times the normal price of £60. The grid will have footed the bill, but ultimately the costs of such spikes are passed on to households.

The sudden supply squeeze was no emergency, but it was clearly unexpected. The most plausible theory for what happened — the grid did not give details — was that it responded to sharply lower levels of wind power generation by asking coal-fired capacity to come online.

In theory, a lack of wind should be predictable. But industry insiders say levels on Wednesday were exceptionally low — less than 1 per cent of available capacity compared with up to 10 per cent normally — and that Britain is more dependent on wind than in the past. This, combined with several planned and unplanned outages, tipped the balance. When back-up plants failed, the grid’s control room in Reading had to take further action.

The truth is that this is how the market is supposed to work. Under measures introduced by the government a year ago, and to combat the looming supply crunch caused by older, uneconomic power stations being shut down, the grid has agreed contracts with suppliers to bring on idle capacity when needed, but also with big business users to reduce their demand.

Industrial consumers can find this profitable. There were anecdotal reports of payments of as much as £7,500 per megawatt hour.

However, the fact that the grid took this action on a mild November afternoon, long before the dark winter nights and freezing temperatures that would normally trigger such a move, sends a worrying signal.

Dieter Helm, professor of energy policy at Oxford university, said: “There is a very short-term problem and a much bigger, deeper, long-term problem. The short-term problem is we have a very tight capacity margin, not a place any industrialised economy should ever be, and that’s a consequence of the energy policies we’ve been pursuing.

“You can dress up what industrial users are doing here, but basically the grid is asking for voluntary power cuts. That is a reflection of the more serious problem we have: not enough power stations are being built.”

A recent National Grid study shows just how slim the safety cushion of spare UK generating capacity over expected demand has become. This winter’s margin will be only 1.2 per cent, it found, so flimsy that four idled power stations are being paid to come online, lifting the margin to 5 per cent.

The reason for this is that coal-fired plants are being closed at a rapid pace, ahead of a 2023 deadline for compliance with new EU rules on air quality. By March next year, according to the investment bank Jefferies, more than 16,000 megawatts of such capacity will have been shut since 2012.

Indeed, including closures of gas-fired stations and ageing nuclear plants, Britain will have lost 21,400MW of so-called “dispatchable” generation since 2010. During the same period, it has built just 6,000MW of capacity — the result of an earlier absence of economic signals to invest.

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