National Grid has confirmed that next winter (2016-17) will be the first time since the current market arrangements began in 2001 that it has not forecast a surplus margin of spare power plants in the UK market and has instead forecast “negative margins”.
As a result, it has already contracted for significant additional capacity to come on stream to make sure the lights stay on.
Consequently, tighter electricity supply margins forecast for this winter could bring a considerable increase in wholesale electricity prices.
But this could prove to be a double-edged sword for many generators, according to energy sector monitoring specialists Enappsys.
Recent closures at Eggborough, Ferrybridge, Longannet and Rugeley coal-fired power stations have increased the strain on National Grid to maintain healthy levels of available system margin. This in turn has increased the need for ‘back up’ generating options at times of high demand.
In the circumstances, some coal plants that have decided not to close or convert to biomass have opted to limp-on through ‘Supplemental Balancing Reserve (SBR)’ contracts.
Under this arrangement, power plants that would otherwise have closed and have surrendered their transmission entry capacity are entering into SBR contracts to be available in the winter months of November 2016 to February 2017 when the system could be under significant stress due to under supply.
If National Grid calls an SBR action, the station is paid its contracted utilisation price but a default price of £3,000MWh is used for much of the volume entered into the system pricing calculation. This in turn raises the overall system price, enticing other units to generate via market feedback mechanisms.
When an SBR is called the default price essentially sets a new cap on the system price of £3,000/MWh and because the use of SBR is a last resort then power stations could use the £3,000 as an effective ceiling price for the balancing mechanism as grid is obligated to take them first before SBR.
This should lead to increased profits for marginal stations at times of system stress and potentially more extreme system prices. As system prices feed back into wholesale prices this could lead to a very heated market around system stress events.
However, a negative by-product of this action can be created for generators already in operation when an SBR action is implemented. In this situation, if a power station fails to meet its supply position due to a unit trip or other unforeseen problem during an SBR, it will face a penalty at the much higher system price created by the SBR action.
For example, at a 1GW power station, the £3,000/MWh price could result in a penalty charge of £3m per hour if they encounter issues that prevent them from generating during these periods – well in excess of the normal operating margins earned which may be less than usual £5/MWh.
It is therefore entirely conceivable that this risk will make generators reluctant to sell power through conventional means, prompting generators to hold back their electricity unless they are able to sell it at a price that will justify the risk of failed delivery.
This in turn could drive power prices within the market up to prices well in excess of £1,000/MWh and reaching unprecedented levels.
Phil Hewitt, director of Enappsys, explained: “The warning signs were provided by last winter’s periods of tight supply and spare margins.
“On those occasions National Grid spent millions of pounds a day procuring extra margin by bringing plants online whilst simultaneously turning down other generators to their minimum export levels as a safety net should any additional power be needed unexpectedly.
“This meant that on the days that saw the highest system prices, there were actually more units being turned down than there were being brought up by National Grid; a clear indication of the attempt to maximise the amount of reserve power mechanisms available to deliver additional power to the market quickly and reliably.
“On days with low levels of solar and wind generation which now play an increased role in Britain’s power generation mix, these SBR units that were active within the market last winter may well play a key role in facilitating a well-supplied system, in turn bumping up system prices and subsequently taking market prices ever higher.
“As a result, one positive effect of increasing the rewards for generating on days of tight margins, could be to slow plant closures where insufficient margins have previously been the primary problem. However, in the precarious world of power sector economics, for some supply units, an unforeseen fault or trip when the penalty price is so high could mean serious cash flow issues and potentially plant closures; for some the question will be if this really is a risk worth taking.
“All this increases the stakes for winter 2016-17 and while many generators could win big, profit greatly and keep their least viable plants open as a result, less diversified generation portfolios could be heavily exposed to the consequences of high and potential unexpected system prices.
“Time will tell who will win and lose from this activity, but for the sake of the market, it is hoped that generators and suppliers are able to navigate through the winter without getting hit by a knockout blow.”
*EnAppSys is an independent energy specialist company that provides electricity and energy market data, systems and consultancy services.