National Grid spends £30m on spare capacity “just in case”

National Grid paid power stations more than £30m to be on standby this winter, with the vast majority of payouts made to fossil fuel generators whose capacity was never used.

Utility Week can exclusively reveal that around £30 million of the £32 million total payouts were made to old thermal plants which were paid to carry out thorough monthly testing to ensure their reliability.

National Grid moved to secure extra capacity last winter following a string of unplanned outages which eroded already tight supply margins to levels only previously expected in the winter 2015/16 ‘capacity crunch’.

Margins could have shrunk to as little as 5 per cent over the winter even without further unplanned outages if prolonged cold had pushed demand to higher levels. But the relatively mild winter saw forecast margins remain above 15 per cent throughout.

National Grid told Utility Week that the payouts were “prudent”.

“The return of generation as expected, good levels of generator reliability, consistent continental imports, high levels of renewable output and generally milder weather conditions meant we didn’t have to use the two products we procured. However, they were there just in case we needed them, had some of these factors gone the other way,” said project leader for new balancing services Peter Bingham.

The so-called ‘capability fees’ for the power plants owned by SSE, Scottish Power and RWE totalled £23.5 million and were paid to ensure that the plant remain on standby to be ramped up by National Grid in the event of a supply emergency.

In addition, the plants were paid £6 million in total to perform monthly reliability tests over the winter, as part of their supplemental balancing reserve (SBR) contracts, to make sure they would be able to generate as needed.

Utility Week reported in November last year that SSE’s Peterhead gas-fired power plant failed one such test for which it was paid £250/MWh, raising concerns that the SBR plant paid to secure supply might be unreliable.

A spokesman for National Grid told Utility Week ahead of the official report due later this month that the SBR capability costs were in the region of £15/kW, compared to £10/kW paid to energy users which agreed to make demand-side reductions if required by National Grid.

This raises questions over whether National Grid could have saved money by paying users to be on standby to reduce energy consumption, rather than have power stations on standby to produce it. But National Grid argued that in the unlikely event of a supply emergency the supply-side contracts would have been more affordable.

“The upfront capability fees for SBR, which averaged around £15/kW, were higher than the DSBR setup fee of £10/kW, but the cost of running DSBR is generally higher, with prices ranging up to £12,500/MWh at the top end,” he said.

The spokesman added that the cheapest contracts would be called on first to keep costs down.

“The costs of DSBR and SBR were assessed together such that capacity required was bought at the lowest cost to consumers from a mixture of the two,” he explained.

The amount of capacity secured through demand side balancing reserve (DSBR) contracts was far less than the SBR contracts, meaning the demand-side providers received just £2.25 million from National Grid.