Security Of Energy Supply In The United Kingdom

  • Date: 18/02/16
  • Global Warming Policy Forum

Britain has lost over 15.4 GW  of dispatchable electricity generating capacity in the last five years, with no equivalent replacement; this has resulted in especially tight capacity margins.

• Carbon taxes are now over £18 per tonne, over four times higher than prices in the rest of Europe. Alongside other climate change legislation, this is forcing the closure of power plants and putting manufacturing businesses at a disadvantage. The cost of supporting renewables is also increasing dramatically; it is estimated to be £4.6bn by the end of the 2015/16 financial year and may rise to £9.1bn annually by 2020 . The Department for Energy and Climate Change have estimated that electricity prices for large and extra large users are between 73.3% and 78.9%  higher than the EU average.

• The cost of system management is likely to rise because of grid expansion and reinforcement, and though uncertain in cost, is likely to add several billion per year to consumer bills.

• In 2013 Ofgem approved the use of the Supplemental Balancing Reserve (SBR) and the Demand Side Balancing Reserve (DSBR), by the National Grid to address tightening margins.

• The SBR involves paying for power plants to remain on standby in case margins become too low, for this winter the National Grid has contracted 2.56GW of de-rated capacity with a further 1GW held in reserve. A further 2.5GW was offered but was not required.

• The DSBR involves paying businesses to temporarily reduce their demand if system margin is inadequate. The National Grid sees demand-side measures as becoming ever more important as renewables expand and intermittency increases.

• A Notification of Inadequate System Margin (NISM) is used to signal to suppliers that additional capacity is urgently required. A NISM is not the strongest warning National Grid can issue. It falls below a high risk of demand reduction (HRDR) and the highest level: a demand control imminent (DCI) warning.

Winter 2015/16

• The National Grid has warned that the country has just 1.2% of spare generating capacity this winter, although this rises to 5.1% if you take into account temporary balancing measures. The margin was a far more comfortable 15% as recently as 2009, a level that industry sources recommend to avoid the particular risk of multiple power-plant failures (in 2014, four nuclear reactors had to be temporarily shut down after the discovery of a fault in a boiler unit , fortunately this was during the summer when demand was low).

• The cost of paying for extra power stations to be available this winter has added approximately 50p to the cost of each electricity bill. This may seem like a small sum to pay, however measures to prevent power shortages have already cost £36.5  million and only account for 3 hours of energy supply where demand is expected to exceed supply during the year.

• On 4th November, short term energy prices spiked as a result of a NISM. One plant even offered to supply energy at a cost of £2,500 per megawatt-hour. Although this offer was not accepted, electricity prices do spike significantly during NISMs (see below); increasing by nearly ten times after the National Grid issued its warning – from £55 to as high as £500  per megawatt hour. The NISM was triggered as a result of several power plant outages combined with reduced interconnector flows and low wind levels (running at only 1%  of potential). The Demand Side Balancing Reserve (DSBR) was used in full, at 43MW, alongside 600MW of reserve generating capacity and increased interconnector flows with Ireland .

• The National Grid expected to issue between 7 and 10 NISMs  this winter, which would cost approximately £20m . However, unusually mild conditions have prevented the need for any additional NISMs since the 4th November.

• Increasingly tight margins will not necessarily lead to blackouts; there has been only one incident in the past 10 years when a generation failure resulted in a loss of power to customers – on 27th May 2008, which affected 580,000 homes for an average duration of 20 minutes . Faults in local distribution networks are responsible for almost all power cuts in the UK.  Nonetheless, tightening margins are likely to increase the strain on the energy system through the more frequent and costly use of emergency measures; “It is self-evident that the UK power system is under increasing stress. Eventually that stress will manifest itself via security-of-supply events,” commented Peter Atherton, an analyst at Jefferies.
• Back-up generators are being increasingly used to provide reserve power as the margin tightens. These are often diesel generators, and are being clamped down upon by the Environment agency as they have very high NOx values.

Winter 2016/17

• The outlook for the coming winter is expected to be significantly worse, with capacity margins widely expected to fall to negative levels.

• Three coal-fired stations will have closed by the end of March – Ferrybridge C (0.98GW), Eggborough (1.94GW) and Longannet (2.26GW). One is expected open next year: Carrington (0.9GW). However, the National Grid is likely to tender for even more capacity for the winter reserve – coal power stations that close in March 2016 may well bid to operate as reserve capacity for the following winter.

• When Eggbourough Power Plant closes in March, it will cut off supplies amounting to 4% of the UK’s energy needs, and will see a loss of 240 jobs. In describing why they had taken the drastic action of having to close the power plant, owners cited carbon taxes and low wholesale prices as making the plant financially unsustainable.

• When Scottish and Southern announced the closure of Ferrybridge, they said they would have lost £100m over the next five years trying to keep it open.

• On Wednesday 18th November, the Centre for Policy Studies (CPS) reported  that peak transition demand is expected to be 52.4GW during the winter of 2016/17, while average dispatchable capacity will be only 51.85GW, a considerable shortfall.

• Since the CPS report was released, Energy giant SSE has revealed plans to close three out of four generating units at Fidler’s Ferry, a coal-fired power plant, by April. The plant in Cheshire produces enough electricity to power two million homes and the closures would wipe off a further 1.5GW of generating capacity from the Grid, pushing the capacity margin further into negative territory. The move would renege on a Government contract to supply energy until 2018/19, and would trigger a fine of £33m; although analysts estimate that the plant was making losses of between £30 and 50m  a year.

• On the 27th January the Department of Energy and Climate Change announced the conclusion of the latest auctions for demand side balancing. 803 MW of capacity in the winter 2016/17 was bought for £27.50/kW, giving a total cost to the consumer of about £22m. Figures of this order may seem like a pin-prick in a sector so large, but the fact that such emergency costs need to be imposed at all is in itself remarkable, and a clear indication that the UK’s energy and climate policies have created problems that were not anticipated by government, and the significance of which has until recently been treated as minimal by the renewables industry and sympathetic academics .

Future Energy Policy

• On 18th November 2015, Amber Rudd, the Secretary of State for Energy and Climate Change, made a speech entitled “A new direction for UK energy policy” which claimed “Energy Security has to be the number one priority”, and that the “pursuit of green energy at all costs” would be at an end.  The key policy decisions were as follows:

o To close all remaining coal-fired plants by 2025 and restrict their use from 2023.

o To prioritise new gas-fired power stations (CCGTs), in order to replace lost capacity.

o To continue to commit to to supporting off-shore wind, however to make the subsidies conditional on cost-reduction targets.

o For intermittent generators to pay towards the pollution pressures they create when the sun isn’t shining or the wind isn’t blowing.

o There will be a continued commitment to meeting the UK’s 2050 carbon reduction targets as well as the EU ETS targets.

o Every home and business will get a smart meter by the end of 2020, to help them to make energy efficiency savings.

• From 2018 the government will initiate a ‘Capacity Market’ to encourage investment in power generation. The capacity market will replace transitional arrangements that are in place to help balance supply and demand in the electricity market. The capacity market will involve annual auctions taking place four years ahead of the relevant delivery year. The first auction took place in December 2014. Successful bidders have to enter a ‘capacity obligation’, which means they must deliver energy when needed or they will face fines. In return, they will receive a steady stream of capacity payments that are intended to encourage them to invest in new generation or keep existing generation on stream.

• Before the Capacity Market (CM) is implemented the SBR and DSBR will incur significant costs: £31.3m in 2014/15, £34.7m in 2015/16 , and the National Grid has successfully requested that both schemes be extended to 2017/18. While this cost will presumably diminish or lapse when the CM starts, the cost to consumers will not fall, since the CM is expensive in itself, and the problems it will be addressing will be still greater. The Office for Budget Responsibility has estimated that in its first year, 2018/19, the CM will cost some £600m. In 2019/20 this expected this to rise to £1.1bn and then to £1.3bn in 2020.

• The UK will be required to raise its proportion of renewables to 33% of total electricity supply as part of the EU 2020 Climate and Energy Package requiring that 15% of Final Energy Consumption across all sectors: heat, transport and electricity, comes from renewable sources.

Major Challenges Ahead

• While the change in rhetoric from the Secretary of State is welcome, there remain a number of significant stumbling blocks to solving the security of supply challenge:

• As DECC has recognised; essential to the phasing out of coal will be its replacement with gas fired power stations, more specifically Combined Cycle Gas Turbines (CCGTs). However, there aren’t many incentives to invest in such generation at the moment. According to figures from the Institute of Mechanical Engineers (see graph below), new CCGT plants would require a long term spark spread  of between £17-18/MWH.

However, the current spark spread is well below that breakeven level. Instead, the best electricity prices are being received by renewables and existing gas power stations, through Contracts for Difference. These are private law contracts between low carbon electricity generators and the UK Government. A low carbon generator is paid the difference between a ‘strike price’: a price that reflects the higher cost of investment in low carbon technologies, and a ‘reference price’: a price that reflects the market cost of electricity.

• Looking beyond 2017, because of nuclear and coal plants going off stream, there is currently a predicted drop of 40-55% of generating capacity without replacement. This could even be exceeded as gas plant replacement is expensive and takes time: perhaps as long as 6 years to plan and build, 10 year pay-back time and 15 years to repay building costs, although in more straightforward sites these figures may be lower.

• A significant barrier to installing new generating capacity without pushing up energy bills, is the significant competitiveness gap between renewables and fossil fuels. Falling fossil fuel prices will only make this challenge trickier; it will increase the cost of subsidising renewables, because renewables become comparatively more expensive. This problem is exacerbated by the poor-performance of UK renewables:

• The best UK sites should be producing at least twice as much power per turbine, due to better wind conditions . So you would expect wind power to be substantially cheaper than in Germany. Instead, because of generous Contracts for Difference price guarantees from the government, UK prices are substantially higher. Furthermore, the rates paid are up-rated relative to inflation and are guaranteed for 15 years. The strength of the UK’s big six’s bargaining power also pushes up prices. The situation is even worse when it comes to offshore wind – profit margins are excessive there too. Strike prices for new nuclear capacity offer even more uncompetitive prices; an absurdly generous price of £92.50 per MWH was agreed for Hinkley Point C, which is uprated with inflation and guaranteed for a staggering 35 years.

• Energy suppliers want a predictable environment in which they can feel confident in investing in the UK energy sector. However, the situation has regressed to a position in which Amber Rudd was forced to admit that “we now have an electricity system where no form of power generation, not even gas-fired power stations, can be built without government intervention.”

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