UK prepares for winter amid high electricity prices
November 14, 2022

This article was collectively written by a small cohort within our UK team including Dr. Carlos Ferrandon Cervantes, Raj Hirani, Jonathan Cervantes, Adam Harper and Sean McConnon. This group meets regularly to collaborate on topical issues of the day, shares the research and writing effort across the team, and presents internally before publishing.

As global electricity demand has been continuously increasing, providing sufficient supply is becoming more and more of a difficult task for developed countries that are keen on decarbonizing their systems but are infrastructurally tied to fossil fuel-based generation. Such difficulty is only exacerbated by recent geopolitical tensions in Europe, whose effects on gas prices are sadly well-known.

In the UK, electricity prices have risen to historically high levels due to this unfortunate combination of restricting supply with domestic generation being unable to meet increasing consumer demand. These factors present unprecedented volatility and uncertainty in energy markets. The UK market is particularly susceptible to these supply-side shocks due to gas shortfalls because of its reliance on gas for generation and heating households. Reliability, by way of the security of supply, is one of Ofgem’s key energy network indicators. The UK government has warned of possible rolling outages and is working on contingency plans for potentially catastrophic upheavals to the system[1].

National Grid’s Winter Outlook

Recently, National Grid released its Winter Outlook 2022/2023, stating that adequate margins will be present throughout the winter. Among the range of measurements that have been implemented is the contract to retain approximately 2 GW of coal-fired generation that was set to be decommissioned, thus improving the security of supply and tackling exogenous factors, such as the impossibility of importing electricity to the UK from continental Europe[2]. This example highlights the trade-off between supply adequacy and meeting reduced carbon generation targets.

Overall, the outlook presents a view of a potential scenario that carries insecurity and instability in the system, with potential margins being incredibly fine outside of the best-case scenario, revealing the flaws in the UK energy structure and susceptibility to compounding shocks.

Although the current tight energy margins scenario is unprecedented in the UK, there is a recent antecedent with the Texas system in February 2021[3]. Albeit different reasons for unavailability, such as extreme weather, the natural step for the control room that oversees the security and continuity of the power flows was to effectively initiate a sequence of controlled outages. A lesson detected in the aftermath of the problem was that the high price of electricity remained for more time than necessary, affecting the electricity bills on top of the unavailability of the electricity resource. If such a situation presents itself not only in the UK but also in continental Europe, the regulators will have to be very attentive to avoid unnecessary volatile prices.

Customer behavior

Due to the inelastic nature of electricity demand and its ubiquity, household consumers may need help to react to this price signal. From the customer’s perspective, the alternatives are essentially twofold: a critical hit to households’ budgets or effectively reducing their electricity usage. Consumers may realize that the causes provoking such a spike in energy prices are exogenous and self-inflicted, hence exacerbating the problem socially and politically.

Solutions and the role of renewable energy in the crisis

The UK government has implemented an Energy Bill Relief Scheme whereby the government provides a discount applicable to the final energy bill to alleviate economic worries for the most vulnerable. However, this support scheme is expected only for a short term of 6 months. The government’s position is currently indecisive due to the uncertainty that is driving natural gas prices further up and therefore, wholesale electricity prices as well. Possible revisions are needed to the current national pricing mode, where a single price of electricity is set throughout the country and the highest marginal cost usually sets this price at that given time[4].

Regarding the role of renewable energy- especially solar and wind resources in the UK- they can support the system on certain days of the week and at certain times. However, increasing the capacity of the most popular renewable energy source in the country, wind, for example, does not imply a higher buffer against the peak demand in the winter season. Instead, the opposite may happen if intermittent sources replace dispatchable generation. Unless the capacity factor of wind generation can be improved, there is a limit on how much wind energy can contribute to the peak demand of the day[5]. On the contrary, low-carbon nuclear energy, with a considerably high-capacity factor, can effectively pick up the slack, displacing combined cycle generators that are based on what is now very costly natural gas. This option, however, is a long-term solution due to the costly and complex nature of developing and commissioning new plants.

While a short-term solution is difficult to identify beyond hope for the de-escalation of geopolitical conflicts, improving the security of supply via the installation of large capacity-factor generators would mean investing in a more resilient future long-term.

PSC’s value of insight

At PSC, we have accumulated expertise and experience in understanding how power systems behave under tight adequacy conditions and in providing technical solutions to the problems that these conditions bring. We have the insight to understand how rolling outages can be deployed while minimizing issues for final consumers in power systems with tight generation adequacy conditions. Likewise, from the policy regulation side, we have an intimate understanding of the regulatory affairs of Ofgem to move in specific directions. This can help our clients hedge against turbulent conditions based on our reading of macroeconomic trends affecting power systems.