Dependency culture: how secure is the UK’s electricity supply?

An analysis by PA Consulting makes grim reading for future UK security of supply. By Piergiorgio Chelucci and Duncan Steen.

The key energy question for policymakers is whether the lights will stay on this winter and in coming years. National Grid’s Winter Outlook Report 2015/16 suggests there is sufficient capacity in place to meet demand this winter and that the risk of blackouts is low. However, PA’s analysis suggests there are some major barriers to securing supplies in the immediate future and this winter it could be more challenging than normal if it gets very cold.

The outlook sets out a detailed analysis of the supply and demand picture for both gas and electricity for this winter. From this, National Grid concludes that the electricity margin above peak demand will be tight at 1.2 per cent. This capacity will be increased by an additional 2.4GW of supplemental balancing reserve, which National Grid has procured to boost the margin to 5.1 per cent.

The challenge comes from the fact that, given the limited margin, the uncertainties in supply and demand could put the UK electricity system under pressure. For example, a cold period without much wind power generated in western Europe could result in higher than expected demand and lower than expected available generation. This would make the system vulnerable, even with the extra reserves procured by National Grid.

However, there should be much bigger concerns about security of supply for next year and beyond. PA’s analysis of the supply outlook for 2016/2017 shows that actions will have to be taken to minimise the risk of the lights going out. Our forecast, based on National Grid’s future energy scenario “Slow Progression”, shows that the reserve margin, excluding any system balancing reserve and demand response measures, will be negative at -5 per cent.

This reflects the announced closure of 5.7GW of coal capacity (Longannet, Eggborough, Ferrybridge, Fiddler’s Ferry). These closures arise from the GB market’s high emissions price and cheap imports via continental interconnectors. These plant closures more than offset the expected increase in renewable and gas generation capacity. As a result, to achieve the same reserve margin as this year (5.1 per cent), National Grid would need to procure over 6GW of supplemental balancing reserve capacity. This would be a challenge, given that for this winter it has been able to secure only 2.4GW, which is below their initial procurement target.

National Grid is aware of this issue, as it has applied to Ofgem to extend the supplemental balancing reserve scheme beyond this winter, although the scale of the shortfall has not been publicly acknowledged yet.

Looking further ahead, PA analysis shows an increase in the reserve margin to around 5 per cent by 2020. This will depend on new capacity coming on stream from gas and wind and new electricity interconnectors.

The results of our analysis highlight the need for a serious and objective review of the effectiveness of the measures introduced last year in the context of Electricity Market Reform (EMR).

One of the pillars of EMR, the capacity market, is aimed at securing the future of UK electricity supply by incentivising new power plants to be built and existing plants to stay online. The current insufficiency in capacity indicates that EMR is failing and our analysis indicates three clear reasons.

First, the hiatus involved in establishing the capacity market has delayed investment because of the market uncertainty. Second, the initial capacity auction last year cleared at a low price and only included a single new generation project, which has recently announced that it will not be online in time for winter 2018 as it has been unable to secure investment. Third, the structural imbalance between the GB market and the European markets makes investment in British capacity unattractive once the proposed new interconnectors come online. Our recent study showed that far from improving generation capacity margin, with the current market arrangements, greater interconnection could lead to increased dependency on foreign capacity and further closures.

Piergiorgio Chelucci and Duncan Steen are energy experts from PA Consulting’s energy markets modelling and analytics team