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.
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.
“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.
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