Welcome to Hartree Solutions’ Market Insight Video.
Today we share with you our in-house modelling as we take a look at this week’s UK power market. We use this same analysis to build, own and optimise assets for the benefits of our customers.
In this video, we give you an insight into our scenario analysis where we identify tightness in the UK system this week. From Wednesday the 4th November, our analysis shows a high number of scenarios where power prices exceed £150 and in some cases much higher.
UK at Risk of Winter Blackouts Despite National Grid’s Assurances
The UK is at much greater risk of blackouts this winter than the National Grid…
The UK is at much greater risk of blackouts this winter than the National Grid has forecast1 with market prices showing that expectations of being able to rely on imports from continental Europe to meet demand shouldn’t be taken for granted, according to the analysis of National Grid’s Winter Outlook1 by Hartree Solutions, with market spreads at times implying a 99.7% risk of blackouts.
Whilst historic flows show that the UK typically imports during the winter, market prices point to a much tighter scenario with the UK likely to be exporting for many of the high demand periods creating a lower margin and thus a greater risk of supply problems as a result. This makes it difficult to see why National Grid is so confidently expecting imports this year without considering the market’s expectation for much of this year.
National Grid’s Winter Outlook1 states that “the margins on the electricity system are lower than last winter but forecasts are well within the national Reliability Standard’’ resulting in there being “sufficient generation and interconnector imports to meet demand throughout winter 2020/21”. This assumption is based on GB baseload forward prices being higher than those in France, Belgium and the Netherlands and therefore providing net imports via the interconnectors of 3GW, according to the Grid’s base case scenario.
Yet analysis by Hartree Solutions2 shows that although the UK baseload price for January has recently ticked over into a small premium against the equivalent French price the majority of the peak hours are still indicating interconnector exports.
Refinitiv2hourly fair value curves for January ’20 working days as of 10.10 am 16th Oct ’20 expressed over a 24 hour day. Hartree average demand forecast for January ’20 working days.
Ever since the end of February, the market has been pricing in France at a premium to the UK this January. Indeed, for parts of the summer, market prices were pointing to Belgian prices also being above the UK for that peak winter demand month.
Refinitiv2 FV spreads for 5 pm (the UK’s peak demand hour) as assed each day throughout 2020
If the UK is exporting across the interconnectors, according to the market view and against National Grid’s view, margins will be 3GW lower than forecast in the Winter Outlook1 giving a revised margin of 1.8GW. This figure includes the start-up of a second interconnector to France, IFA2, that’s due to come online in November which would potentially increase the flow of exports.
Analysis of the UK and continental price spreads for the UK’s peak demand hours this winter shows that expected flows have varied from 4.25GW of imports to 3.75GW of exports over the course of the year so far. This is in stark contrast to National Grid’s Scenario analysis1 of 2.86GW imports to 0.75GW of exports, leaving a 3GW delta between the market’s view2 and the Grid on the likelihood of exports this winter.
Interconnector Implied flows using Refinitiv2 fair value 5 pm price spreads for Jan ’20. National Grid’s1 Interconnector Scenarios overlaid.
Hartree Solutions’ analysis shows that the National Grid’s modelling assumptions do not appear to be robust enough and place the UK at greater risk of blackouts this winter. Rather than the comfortable picture that Grid looks to be painting, the market’s2 most extreme forecast Interconnector flows would see the UK’s margin shrink to -1.95GW giving a 99.7% likelihood of a blackout using National Grid’s Loss of Load Probability3 (LoLP) calculation.
In a follow-up Market Insight, Hartree Solutions will delve into National Grid’s Covid-19 demand assumptions this winter along with our own analysis that warns there’s a demand shock in store.
Real-time insights such as these show the value of partnering with Hartree Solutions and benefitting from our trading and risk-management expertise. We give businesses the freedom to concentrate on what they’re best at and turn a potential liability into a dynamic asset.
National Grid’s Covid caution cost consumers £72.7m and led to a 24% increase in blackout risk
On Tuesday 15th September National Grid issued only its second Capacity Mechanism (CM) warning1 indicating a…
On Tuesday 15th September National Grid issued only its second Capacity Mechanism (CM) warning1 indicating a lack of margin on the system whilst also publishing the probability of a blackout was 36.9%2 via its Loss of Load Probability (LoLP) calculation. (See our Market Insight covering the events of this day in detail). However, if we rewind the clock to 6th May, National Grid contracted Sizewell Nuclear power plant3 to half its generation in reaction to Covid led lower demand.
Our analysis at Hartree Solutions concludes that these actions, through higher power prices led to:
increased costs to consumers of £72.7m,
additional wholesale costs of £3.8m on the 15th September,
a 24% increased risk of a blackout,
an increase to the Reserve Scarcity Price of £1,442, and
the issuance of a CM notice
On the 6th May 2020, the market had just observed a 14% demand loss4 for UK electricity as a result of the Covid-19 lockdowns. As a result, National Grid announced it had contracted with EDF to reduce the generation of its Sizewell nuclear power plant to 50%, a reduction of 600MW, to counter periods of low demand and oversupply5. Additionally, National Grid created a new product ‘Optional Downwards Flexibility Management’ (ODFM)5 that reduces embedded generation resulting in increased demand during these challenging low demand periods.
As the summer progressed and the observed demand loss directly associated with Covid decreased from 14% to just 1% by August6, National Grid decided to extend the Sizewell contract on 6th August out to 24thSeptember7.
During this time, National Grid had only utilised its ODFM service a total of 5 times with the last date of usage on 5th July8, possibly an indication of the reduction of system stress from lower demand. Below we have highlighted the Covid-19 demand destruction alongside National Grids usage of ODFM. As the demand destruction eased the requirement to use such products diminished and arguably their value. As a result, some may view the decision to extend the Sizewell contract a puzzling one.
Assessing the value of such contracts is complex and requires the consideration of several factors such as the impact on market prices, the costs of balancing the system and the cost of the Sizewell contract itself. Due to lower demand and the increased oversupply of electricity generation, National Grid’s balancing actions have both increased in volume and costs9. In such low demand periods, balancing costs will have been reduced by the lower generation levels of Sizewell. The realised benefits of this can only be valued by National Grid, numbers that are not readily available at the time of publishing this Market Insight.
However, at Hartree Solutions, we use our in-house models to analyse the impact of the Sizewell contract on wholesale power prices. To do this we enabled both Sizewell units to be fully operational in our model and then compared this power price forecast with that of our base case forecast (using just one unit available as contracted by National Grid). As you would expect, removing a baseload 600MW generation unit from the market results in higher power prices. Below we express these as both a daily cost to consumers as well as the cumulative cost from 1st May to 16th September. This cumulative increase in wholesale power prices resulted in additional consumer costs of £72.7m4. (See chart ‘Cumulative Industry Costs’)
Whilst National Grid contracted Sizewell off to avoid the risk of blackouts in low demand periods, on 15thSeptember this blackout avoidance contract had the opposite effect leading to an increased risk of a blackout by 24% from 12.9% to 36.9% as the UK experienced low winds and high generation4.
The 1-hour LoLP as published by National Grid2 on this day was 36.9% at its high, representing the likelihood of blackouts. As we know, National Grid had contracted 600MW of Nuclear generation not to run during this period. The LoLP calculation is a dynamic hourly calculation. Hartree Solutions have modelled this calculation and estimate that had Sizewell not been contracted off this probability would have dropped to 12.9%, a 24% reduction of a blackout risk as demonstrated above.
The LoLP calculation also feeds into the imbalance price calculation as it is multiplied by the Value of Loss of Load (VoLL) of £6,000 creating the Reserve Scarcity Price (RSP)10. This value was £2,213 for period 37 on 15th September. Using Hartree Solutions calculated LoLP assuming no Sizewell contract leads to a reduced RSP of £1,442 to £771 MW/h.
Further, from our modelling (as shown below), we demonstrate the market power price impact on this day from the Sizewell contract4. As a result, wholesale power prices were significantly higher leading to increased consumer costs estimated to be £3.8m.
We also analysed the rules of issuing a CM notice concerning the events of this day. Our analysis shows that had Sizewell not been contracted off no CM warning would have been issued due to the greater margin available.
This analysis demonstrates that in times of system stress, relatively small volumes and events can have a large impact on prices. To manage these risks, it is essential to have a detailed real-time understanding of the mechanisms and drivers of pricing. At Hartree Solutions, this is our day job. Using these skills, we can partner with large energy consumers to mitigate these risks for them and guarantee energy bills up to 30% lower.