The electricity supply crunch was a wake-up call

National Grid’s notification of inadequate system margin reiterated how important it is that companies become proactive in managing their own energy supply and demand, says Arthur Probert.

National Grid’s need to use “last resort” measures on 4 November to keep the lights on, for the first time in more than three years, has shown the necessity for both private and public sector organisations to take control of their own energy demand and supply.

It is no longer enough to make sure that the price is as good as possible, or that the use of energy is as efficient as possible; organisations also need to consider when they’re using energy – particularly electricity.

For those companies that have flexibility in when they use electricity, there are opportunities to avoid cost and generate additional revenue. National Grid’s notification of inadequate system margin (NISM) led to a spike in short-term electricity prices, with one plant reported to be paid £2,500/MWh, about 50 times the average wholesale power price.

From one perspective, the timing was fortunate. In future, new rules, implemented the day after this episode, may lead to system balancing prices rising even higher to £3,000/MWh instead of the general intraday peak of £420/MWh that resulted on 4 November.

Power station closures over the past few years have tightened the system. National Grid’s winter outlook report expects there to be a 5.1 per cent margin, but this includes capacity from the last resort balancing services. Without this extra capacity, electricity supplies are expected to fall to their tightest levels in a decade, with just a 1.2 per cent gap between supply and demand.

The supply crunch also demonstrated the need for organisations to generate their own electricity in order to keep their lights on and even feed into the grid.

As well as a tighter system, we need to find more flexibility. Traditionally, large power stations would have been adjusted to keep the system in balance. The closures are creating opportunities for businesses and the public sector to fill the gap.

Many organisations, such as data centres and hospitals, have used their flexibility for some time to avoid transmission charges. As well as reducing their own bills, this has reduced costs for all consumers by reducing the investment needed in generating capa­city, in the transmission network and in the local distribution networks.

The number of price signals is increasing. Distribution charges are banded, with charges during evening peaks around ten times greater than those for consumption during the rest of the day. The costs of the Capacity Market will be recovered from consumption during winter evening periods. And then there is the potential for spikes in short-term wholesale prices.

Faced with this, organisations need to question their approach to energy use and what they can do to avoid these increasing costs. For instance, can they move their electricity demand from peak price periods so they can maintain profit margin? Can they generate any energy on-site? In due course, energy storage solutions will be a part of the answer. Crucially, organisations also need to ensure their energy supply contract allows them to receive the benefit of these actions.

Cost avoidance, however, is only one part of the spectrum of opportunities. National Grid and the distribution companies are looking for new sources of energy flexibility to help balance the system, assist in managing faults and enable more local generation to connect to the network. Offering these services, either by changing demand in response to a signal, or by agreeing to constrain use to an agreed level, has a value.

We are also seeing the first offerings from suppliers that include a mechanism for being paid to respond to signals they provide.

The optimal value an organisation receives from being flexible usually arises from taking advantage of multiple opportunities – providing services at some times, focusing on cost reduction at other times. Companies such as Ameresco can help organisations work out their best way forward.

Recent events have highlighted the need for investment by government, local authorities and private businesses in our energy infrastructure. However, individual organisations should not just sit around and hope that large-scale energy projects will happen.

What happened on 4 November was a wake-up call. The only way private and public sector organisations can now ensure the security of their supply and minimise their energy costs is to be proactive in managing their own energy demand and supply.

Initiatives such as the Energy Savings Opportunity Scheme should be viewed as an opportunity for organisations to improve their energy efficiency, their site resilience and, most importantly, their bottom line.

Arthur Probert, commercial director, Ameresco