Wholesale electricity prices rocket to £2,500 MWh as winter power crunch begins to bite

Electricity grid infrastructureTightening electricity supply and demand margins in recent days have seen considerable spikes in wholesale electricity prices as the electricity market system struggles to meet demand.

This has required significant intervention by the National Grid and the use of strategic reserves not expected to be used in these mild weather conditions.

Power prices reached almost £200/MWh – against a norm of £40-45/MWh – last week as levels of margin tightened noticeably during periods of low wind. On Wednesday prices as high as £2,500/MWh were being accepted to bring additional generation on stream.

These circumstances were the result, not of any reductions in installed capacity within the system as a whole, but rather reduced levels of supply availability, with many power stations opting to keep units offline or at reduced levels of availability, in some cases in order to reduce costs.

Paul Verrill, director of energy sector data analysts Enappsys, commented:This year has so far seen low levels of wholesale power prices and the impact of this has been a reduction in earning potential at generating units. This has prompted decisions to close some of the plants on the periphery of the market.

“Overall, these plants also now have reduced numbers of generating hours for much of the year as renewable generation output has risen and, until now, when margin has been squeezed, the price of wholesale power has not increased to reflect this tightening.

“Ultimately the high prices we have seen in the past couple of days may encourage units to increase their participation in the market, making more of their capacity available, but the main change in the market that will benefit peripheral generators will be a change to system pricing which went live on 5 November.

“This change is specifically designed to bring higher prices into the market during times of peak demand and will hopefully encourage plants considering closure to remain active in the market. It will then be up to these plants to make the most of the opportunities these price and market changes will bring.

“In the medium to long term, without these better market conditions, new build power capacity might simply push those plants that are currently comfortable in the market to the periphery and then potentially out of the market all together.  While the electricity market can only support a certain sized fleet at a sufficient level of run hours, any additional installations will only exacerbate the profitability issues at marginal plants.

“For a number of years the market has been shifting away from a model in which large and efficient power stations deliver power based upon baseload or peak profiles and the growth of renewables has resulted in a more fractured market with a requirement to adapt to changes and account for uncertainties.”

“The issue for the power sector is therefore not necessarily about the need for new capacity, but that the market is moving away from the old base loading model to a more dynamic and flexible system at a time when much of the existing system is still set up for the ‘old world’ system and still in a state of transition.”

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