Analysis: Grid is ready for winter

Capacity margins this winter will be bigger than forecast, but they will still be tight enough to see prices soar if there is any wobble in supply. Tom Grimwood reports.

Despite the tendency of the national press to raise the spectre of blackouts whenever capacity margins are mentioned, as most people within the energy industry know, they are in fact unlikely to be the result of a lack of peak generation. National Grid’s latest Winter Outlook confirms this.

On the demand side, the system operator forecast an average cold spell peak demand of 52.7GW. It added 0.9GW to the figure to cover potential losses from embedded generation, which is “not directly visible” on the system, to reach a total of 53.6GW.

In terms of supply, it predicted that a total of 73.7GW of capacity – including the supplemental balancing reserve (SBR) – would be available over the winter, falling to 55GW once de-rated. It added 2GW to this figure to take account of expected net imports via interconnectors (2.5GW of imports from continental Europe and 0.5GW of exports to Ireland), to reach a total of 57GW.

Subtract demand from supply and you’re left with a capacity margin of 3.4GW – or 6.6 per cent.

It could have been a lot worse. After the publication of last year’s Winter Outlook, Utility Week was told by analysts that 6GW of coal closures in 2016 could leave the UK with a negative margin of as much as 5 per cent.

Longannet, Ferrybridge and Rugeley have all closed as expected, cutting capacity by around 4GW. However, Eggborough delayed its closure by a year after one of its units was contracted into the SBR. SSE was also awarded an SBR contract for one the units at Fiddler’s Ferry, and later backtracked on plans to close the rest of the plant after it was awarded a black start contract by National Grid.

Take the 3.5GW of spare capacity procured through the SBR out of the picture and the margin for the coming winter falls to just 1.1 per cent.

The margin has also been improved by the commissioning of the 880MW Carrington gas plant over the summer, and it has increased since July when National Grid made its preliminary forecast of 5.5 per cent. The rise was the result of 430MW of capacity from Eggborough re-entering the market and a 250MW reduction in expected exports to Ireland due to an outage on the East West Interconnector.

The end result is that the margin predicted by National Grid is up on last year’s forecast of 6.1 per cent.

Nevertheless, while the chance of blackouts may be slim, the margins this winter are still going to be historically tight, according ICIS Power editor Jamie Stewart; in practice even more so than last year. “This winter’s going to be the tightest winter”, he tells Utility Week. “Next winter should ease up a bit because we have the first year of the emergency capacity market.”

He notes National Grid’s forecasts for a “surplus margin” over the season. This is calculated by adding projected demand and an “operational planning margin”, which provides for a once-a-year loss of load event, and then subtracting both from the forecast for available generation (excluding the SBR).

Stewart says National Grid is forecasting a negative surplus for some days this season: “I don’t think we had negative figures last winter, so that gives you an idea that the actual surplus is tighter this winter.”

This means prices are likely to be volatile. “We’re so close to the supply margin that any tiny little loss in supply is magnified tenfold in the price,” he says.

Already the UK has seen some large price spikes over the past few months, two of them relating to nuclear safety tests EDF was ordered to conduct at its French reactors. Extended outages to accommodate the inspections left the French market tight, and this fed through to the UK market.

“Being able to attract imports from France is very important for supply security,” says Stewart. “So when French prices for the winter spike, the UK has to continue gaining to stay above that level.”

As the nuclear outages in France have already been priced in, there is also the chance of some sharp drops: “We’ve got a lot of risk premiums in contracts now for this winter,” he says. “When we’ve got inflated prices it’s only natural that there’s more potential downside there.

“If EDF’s nuclear operations in France suddenly look a bit more comfortable, and those outages rather than being extended are reeled back in, you’d see an immediate sell-off probably towards the second half of winter.”

At the same time as Britain has lost a lot of coal capacity, it has added renewables. With its intermittent output, this too is likely to add to the volatility of the market.

So it seems this winter is the “hump” season for the UK’s energy system; make it through to other side and margins should start to improve as the capacity market kicks into gear. In the meantime, expect plenty of volatility, and perhaps a few new records for prices.

But don’t worry – the lights should stay on.