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MPs grill National Grid over winter electricity supply

A tightening reserve margin could see prices peaking in the UK electricity market this winter as National Grid outlines measures to keep the lights on

Following publication of National Grid’s Winter Outlook in mid October, MPs on the Energy and Climate Change Committee this week grilled executives from National Grid over security of UK electricity supply this winter. The average cold spell peak power demand is forecast to hit 54.2GW this winter and the reserve margin is forecast to be 5.1%, down from 6.1% in 2014.

The tight supply-demand margin has already affected the network. On 4th November National Grid issued a “Notification of Inadequate System Margin” or NISM, which informed the generating sector that the reserve cushion was too low. In the case of such an event market responses such as an increase in generation or demand reduction are then monitored to determine whether further action is needed from National Grid. The system operator has a "toolkit" of further measures that it can employ including balancing reserves and  requesting more power from European operators through the interconnector.

"We expect to issue NISMs this winter, if you look at history you might see that they could be in the range of 7 to 10,”

Cordi O'Hara, director, National Grid

A side effect of the NISM on 4th November was that generators pushed up their prices to take advantage of the need for short term capacity. National Grid said it was still calculating the exact cost implication of issuing the NISM but that reports of an additional £2.5 million were broadly correct.

Director of UK system operator National Grid Cordi O’Hara said that the firm was expecting to issue more notifications in the coming months. “We expect to issue NISMs this winter, if you look at history you might see that they could be in the range of 7 to 10,” she said explaining that this was based on a winter period with a similar reserve margin. However she highlighted that the system today was very different to previous periods. “We have more embedded generation in distribution networks so it is very hard to be predictive, it could be caused by a number of weather events which we are forecasting for. At periods of similar tightness we have good experience of using NISMs.”

The last time National Grid issued a NISM was February 2012. “The market has been in a stronger supply position over the last few years, what we saw coming into this November was a number of power stations still on outage – still undertaking maintenance work," said Duncan Burt, head of commercial operations at National Grid who explained that it is usual for plants to close for maintenance during summer months when demand is lower.

“Through the morning of the 4th we saw a good amount of plant loss with generation coming off late morning and that caused us to issue a notification of inadequate system margin. That doesn’t mean we immediately have a problem. It just means that we don’t have the reserve we would like to have running into the teatime peak at 17:30. It is really about giving information to the market.”

However one of the side effects of the notice was a price hike from one generator in particular. “Shortly after 4pm we were alerted that their price had increased significantly, up to £2500 (per MWh). Our job is to maintain security of supply at minimum cost for consumers. So the engineers responded by looking at the other options available that didn’t involve that plant and developed very quickly a strategy that meant we could cease our purchase of energy from that plant as soon as it was feasible.”

MPs questioned whether electricity generators were able to play the system to maximise their prices following the issuance of a NISM. “The market is overseen by Ofgem in terms of any perceived market abuse and that is their role versus ours which is the physical balancing of the position on the day with our incentives to keep that as low as possible,” said O’Hara.

Looking ahead O’Hara said that demand side management was an important part of the strategy with the company contracting directly with firms who are incentivised to lower their demand during peak times. “We do see that as an opportunity for businesses to lower their cost as well as to contribute to our role of balancing the system. With smarter technologies enabling businesses to better understand their demand this is an opportunity for businesses to move production away from peak periods. If we can harness more of that intelligence use of electricity and pay energy users to do that we will actually avoid the unnecessary build of generation and infrastructure.”

However MPs expressed concern over the strategy highlighting that the high cost of power in the UK was already having a detrimental effect on some industries such as manufacturing.

View the evidence session here