Cough Up to Keep the Lights on

There’s a capacity crunch in electricity supply on its way; according to a number of our leading newspapers, the lights are due to go out in 2015 or thereabouts.

This is based on, among other things a rather more nuanced report by OFGEM about the narrowing of margins (installed capacity against likely highest demand peaks) by 2015. Looking at that report, and the energy landscape more generally, it is striking just how far off-beam the capacity crunch claims are. Lurid headlines and a good scare story maybe, but not borne out by the reality of what is being said. For example, OFGEM, for reasons of certainty, does not include the contribution that electricity coming into the country by interconnectors can make to the margins – a potential substantial difference in time of tight domestic generation.

But there is also a wider, rather peculiar dimension to the whole debate. Because in terms of installed capacity across the country right now, that is, power stations that are operational and able to supply, there is nowhere near any sort of capacity crunch looming. There certainly will be a tightening of capacity much later in the decade, as old coal plants close down or run very restricted hours under EU environmental requirements. Although with the extensions agreed for four nuclear plants until at least the end of the decade, that tightening will be less severe than originally thought, and a large amount of renewable capacity will be coming on stream at that time.

The problem lies, really, with a combination of how the grid takes on the power that can be produced at any one time, and whether producers actually feel it is worth their while to produce. Both conventional and renewable producers are, effectively paid not to produce or dump what they can provide at times when balancing is an issue, because there exists virtually no capacity in the system to store what is produced for use at more effective times. Gas fired power stations buy gas in to produce electricity to sell. If the difference between the two prices is poor in their eyes, as it is now, then they simply won’t produce. This has led over the past few months to a number of power stations, perfectly able to produce over the next period, being “mothballed”; that is put under care and maintenance awaiting a better level of reward from electricity production.

So a good part of the capacity crunch is not about capacity per se, but about how the market works in supplying electricity to those who need it, at the right price and at the right time.

This then leads to some rather odd -sounding solutions. The Government, in the Energy Bill, is proposing to introduce a capacity market which will allow producers to bid for a fee at auction to be ready to supply (but not necessarily actually produce) if they are required to do so by the grid. This is a potentially very expensive system which may produce better reliability, but at the cost of a potentially high double payment for being there (they may well have been ready to produce anyway) and income for producing (which they might have done anyway). The alternative is to develop a strategic reserve of plants that can be brought into production when the market doesn’t or won’t produce; either new build or a buy up of older “mothballed” plants. This purchasing of mothballed plants is potentially a much cheaper but non – market solution that I among others advocated in Parliament during the passage of the Bill.

The Government has set its face against a strategic reserve – and is instead set to proceed with capacity auctions in 2014 – for plant to be available in 2018-19. Not the most effective way to proceed, you might think, if you are worried about a crunch from mothballed plant non-availability in the years preceding those dates.

And then …well I never, a proposal has popped up in the last week from National Grid to pay producers a capability fee in 2015 and 16 to keep plants that otherwise would be mothballed primed and ready to go. If all else fails and, as National Grid puts it, emergency actions would otherwise be required they would come on stream regardless of utilisation price. Remarkably like a version of the rejected strategic reserve in fact.
The only problem with this proposal is that, because it is being advanced under the Electricity Act and not the new legislation, it will only be operable for two years or so. Or perhaps until the more expensive capacity market gets under way, risking the creation of some possible up-front costs without keeping the benefit of available plant outside the market in the longer term.

I’m afraid to say that we (consumers that is) may well end up paying over the odds to ensure that we keep the lights on when if we had designed our strategic supply systems a little differently, we would not be facing such a problem in the first place.

This article was first published in Utility Week.