UK energy system sees historic price spikes

  • Energy price volatility in January saw National Grid paying £4,000/MWh to secure energy supplies – a level not seen since 2001.
  • Prices driven to extremes due to reduced electrical capacity.
  • Capacity margins squeezed due to a ‘perfect storm’ of low generation asset availability, low temperatures and a sharp fall in wind generation. 
  • National Grid issued rarely used market notices as a measure to ensure uninterrupted supply.
  • David Henderson, Chief Commercial Officer at px Group, says: “Wind and solar variability coupled with a reduced and ageing generator fleet may cause difficulties as we transition to a greener future, with end-users potentially picking up more costs on that journey.”

Energy price volatility reached its highest level in the UK since 2001 earlier this month, with the price of electricity in the Balancing Mechanism hitting £4,000/MWh on Friday, January 8, says px Group, the leading energy management services provider.

Having hit that peak, the imbalance price dropped dramatically only half an hour later to just £50/MWh, illustrating the volatile nature of the UK energy situation.

px Group says that the volatility is down to a mix of factors including low availability of conventional generators, an interconnector outage and cold weather. The winter peak power demand in the UK generally occurs around 5pm to 6pm when lighting requirements and cold weather cause the nation to use more energy. The situation on this occasion was exacerbated by a lack of significant wind power generation, with wind supplying an increasingly important proportion of the electricity mix in the UK.

When supply of energy via increasingly significant renewable sources such as wind is reduced and demand increases the UK then has to typically rely on more traditional and secure sources of energy, such as coal and gas. These have received a comparative lack of investment over the last decade as the energy transition focuses on important new technologies such as storage and interconnections with neighbouring countries.

Another factor in the imbalance volatility is the UK’s energy trading mechanism. Following Brexit, the UK’s energy trading mechanisms are no longer integrated into Europe’s day-ahead allocation system resulting in more complexity and potentially less efficient operation of the interconnectors.

Impact

When these issues arise, the National Grid has to rapidly seek additional energy to ensure secure supplies. These are a mix of smaller ‘peaking’ assets and larger, traditional sources that are therefore switched on or ramped up at short notice, which contributes to volatile pricing in the market.

Henderson continues: “When the weather conditions aren’t favourable for renewables such as wind and solar, the National Grid has to rely on more traditional ‘peaking’ supplies of energy and our interconnectedness with Europe. Both our ageing fleet and competing pressures in other countries for electricity supply can lead to tight system margins which cause prices to rise and consumers may see this passed on to them.”

“The energy transition is very important and as we move forward we need a strategy that includes a balance of renewable and new technologies alongside consistent and reliable sources of electricity, which will enable an energy system that works for everyone and provides energy when most needed.”

“For the short to medium term, flexible and higher efficiency traditional power generation still has a place as a key enabler allowing us to move through the energy transition, whilst renewable technologies develop, towards our net zero goal. In the medium to long-term that development needs to deliver an increase in the country’s energy storage capacity through various technologies – so that we have energy on demand, from those key green sources for those times when there is no sun and wind.  Ultimately this will provide a better deal for UK bill-payers and deliver a greener energy system for the future by diversifying the energy mix and reducing the frequency of price spikes.”


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