U.K.'s Wind Record Could Have Come 14 Months Sooner

 

• EDF was paid more in 3 days than in all of Q3 by National Grid to balance the system

• National Grid forced to buy power at £4,000/MWh, some 70 times greater than the average price paid over 2020

• EPH achieved the highest average sales price for any day in the Balancing Mechanism of over £3,600/MWh

 

A Perfect Storm for Generators

A perfect storm of peak winter demand, low wind generation and delays to supplies from the continent saw record prices for UK power last month. Generators were quick to cash in on this tightness with National Grid forced to pay EDF nine times more than the previous year for their flexibility in January, averaging sales¹ of £473/MWh compared to £53/MWh. Meanwhile, EPH and Drax settled for £387/MWh and £303/MWh.

 

Record Sales Prices

When the margins were especially low on January 8th, generators were able to drive a hard bargain for their much-needed megawatts. EDF was paid more in three days in the balancing market² than in the three months through September as National Grid was required to procure their power at £4,000/MWh, some 70 times greater than the average price¹ paid over 2020.

 

First Mover Advantage

It was EPH on 13th January that achieved the highest average sales price¹ for any day in the Balancing Mechanism² (BM) of over £3,600/MWh during the second week of tightness. However, we can observe that EDF was quickest to react to the supply scarcity, achieving the highest average sales prices¹ in the BM for the three initial tight days. On the last of these, the EDF owned West Burton B recorded the highest ever price paid in the BM contributed to an average sales price¹ of over £3,200 /MWh that day.

The weekend allowed for a brief interlude to high prices as demand edged lower. But just three days later, as demand rose again, both EPH and Uniper responded to the market dynamics adopting a similar strategy in the BM and surpassed EDF’s average sales prices¹ for the remainder of the week.

 

Withholding Power

With high prices available in the markets, most generators sold their power in advance, locking in huge profits well before the power itself had to be delivered. As a result, the amount of unscheduled generation available was minimal, leaving National Grid with few options to balance the system.

On 6^th January, the first day of tight margins, National Grid’s actions made up just 3.6% of total volumes compared to 19% for January 2020.

As power prices hit £1,500 in the day-ahead auction, all generation sources will have been well in the money a day before delivery. Unsold volumes will either have been a prudent decision against plant failure or a commercial decision in the hope of achieving far greater profits. In the case of West Burton B, EDF offered these withheld volumes to balance the system at a huge £4,000/MWh.

 

Stations Profiting from Low Margins

There were just a handful of generating stations that exploited these low margins including the SSE owned Keadby, the EPH owned Langage, the EDF owned West Burton units, the Uniper owned Connahs Quay units, and the Drax owned Rye House and Draxx-5 coal unit.

It was the EDF owned West Burton B that achieved the highest daily and monthly revenues from BM sales across January, receiving over £7.5m in a single day.

Throughout January the cost of these purchases, despite the low volumes, was over £100m with West Burton B making up over £20m or 21% of that total spend. Costs that are ultimately borne by consumers and generators alike.

 

Estimated Generator Revenues

Whilst there is no information available to show how much volume each generator had presold coming into January, those who presold the lowest volumes will have fared much better. Suppose we estimate scheduled generation revenues using the Day-Ahead auction as an income metric. This case shows that operators such as RWE and Uniper could have seen their revenues from gas, coal, and biomass plants triple compared to the same time last year. Similarly, estimated revenues of Drax, SSE and EDF’s units nearly doubled year-on-year.

 

Scarcity Pricing

Ofgem has already announced⁶ they will examine these high prices to fully understand the scarcity behind them, adding “Given our findings and penalties in the past year regarding manipulation in the balancing mechanism, the market knows that Ofgem takes any manipulation very seriously and that we monitor the market closely.”

However, it’s worth noting that scarcity pricing is a part of the market design. In periods of low margin, scarcity pricing acts to ensure that the cost to the country of a blackout is correctly priced into imbalance prices. For example, on 13th January the National Grid calculated de-rated margin⁷ was just 836MW representing the unused margin on the system⁸ available before a power outage. This value is then fed into a probability calculation representing the likelihood of a blackout. In this case, it generated a 14% probability. Finally, the cost of a blackout is estimated at an equivalent of £6,000/MWh, so bringing generation on at prices lower than this to avoid a blackout is the better financial option for the country. Applying the probability against the £6,000 cost generated an £835/MWh reserve scarcity price that forms a component of the imbalance price calculation for such hours.

Further consideration should also be given to thermal generators reduced run hours due to the renewable build-out. Generator’s fixed costs make up a large portion of their total annual costs alongside their variable marginal cost of generation. They are increasingly required to be recovered over fewer hours, requiring higher prices to do so or risk closure as per the recent Severn Power that in August 2020 went into administration⁹.

Network Constraints

Gas generators provided the bulk of this flexibility to National Grid to ensure supply met demand. However, notably in second place was wind, but for very different reasons. These volumes represent the UK’s inability to handle periods of high winds with National Grid forced to constrain the generation. Consequently, these volumes are replaced with higher carbon sources of power, typically gas that add to the UK’s emissions resulting from the network constraints.

 

What is the Balancing Mechanism?

Whilst generators sell much of their power in advance, they can also offer any unscheduled generation via the Balancing Mechanism (BM). This is National Grid’s tool to ensure supply meets demand in real-time because unlike gas, power has almost no flexibility innately in the transportation and distribution network.

By restraining from selling their power into the market ahead of delivery, operators can instead sell that power to National Grid in the BM. If the system is short of power, this strategy typically achieves a much higher price for that power. But it is a calculated gamble because if the system has excess power or there are lower-priced supply options, the operators miss out on any revenue.

 

The Fundamental Conditions

Temperatures 4°C below normal coupled with metered wind generation averaging just 3.5GW contributed to this power price surge. Demand surpassed last winter’s high by nearly 1GW peaking on 7^th January at 46.3GW and with wind averaging just 3.5GW, left limited unscheduled generation to meet the peak evening demand.

See our latest Market Insight, where we discuss the new records in more detail.

High demand and low winds, together with delays to the start-up of the IFA2 interconnector, an undersea electricity connection between England and France, and an outage of the BritNed Interconnector between England and the Netherlands presented a unique opportunity for power plants to exploit.

 

More Challenges Ahead?

As the buildout of renewable generation continues, the UK power market is increasingly exposed to extreme pricing with no low-carbon alternative to coal and gas units’ flexibility to turn to at times of low wind and solar generation. January painted a stark picture of the UK’s challenges as it seeks to decarbonise its electricity. With weather forecasts pointing to further cold weather across Europe for February, the potential for extreme pricing is not yet over this winter.

These events highlight the rewards of having fully optimised assets to capitalise on these conditions. By partnering with Hartree Solutions, businesses can benefit from the team’s wealth of real-time trading and analytical experience and enjoy on-site, low-carbon generation that turns the potential liability into a performing asset.

 

Footnotes
¹ Volume Weighted Average
² National Grid Balancing Mechanism
³ EPEX Day Ahead Auction
⁴ Data filtered to gas, coal and biomass (flexible thermal) plants and operators with generation volumes greater than 10 million MWh’s in 2020
⁵ Data filtered to gas, coal, biomass, wind and hydro
⁶ As reported by Bloomberg on 15th January
⁷ De-rated margin and LoLP calculation
⁸ Reserve Scarcity Pricing
⁹ Severn Power Administration
Cover image – Drax Power Station

 

 

London, 01/02/2021

This winter has seen record prices for UK power and frequent alerts about supply shortages as the National Grid scrambles to avoid blackouts. All this despite the country still being under the same lockdown with restrictions that caused plunges in demand in spring and summer.

Here at Hartree Solutions, we’ve been following the market’s every move providing insights, analysis and warnings of upcoming supply shortages that ultimately led to some extraordinary prices and volatile swings.

The day-ahead price of UK power surged to just under £1,500 on January 12^th on the N2EX auction¹, which is the highest price ever recorded. This comes against a backdrop of a winter in which the Grid has already been forced to issue six urgent calls for suppliers to provide extra capacity with much of winter still ahead of us.

We have long disagreed with the National Grid’s assumption⁵ of peak demand falling by 4% this winter and have expressed our concerns that the UK was more vulnerable to blackouts than their modelling suggested. Far from falling, peak winter demand this season first surpassed last year’s level on December 7^th before climbing further to reach a fresh high earlier this month.

With the wind now making up a much larger proportion of the UK’s energy supply, at times of low wind the UK is much more vulnerable to periods of tight supply margin, something we have seen played out numerous times already this winter.

In early November, we witnessed National Grid issue two notification of insignificant system margins on consecutive days. Yet even at the peak of this apparent supply crisis with wind contributing the lowest amount of power for 17 days, 12.5% of that wind was curtailed by the system operator. In fact, payments to constrain wind farms in November reached a new record, totalling over £49m and adding up to £220m for the year to date².

This counterintuitive action is the function of a system that still favours price over carbon when deciding the order in which to acquire power supplies. That’s why we’re calling for the UK to widen its priorities and consider the carbon impacts when balancing the system.

Throughout that unusual period in November, we were providing blow-by-blow analysis of the developing picture (on Twitter), including the switching on of rarely used gas turbines, with our forecasts proving accurate. We also made some interesting observations as the UK entered its second lockdown.  Our granular analysis identified an unexpected 200MW demand bump at 10:27 pm on November 4^th as people enjoyed ‘tea and toast’ after returning home from their last evening of freedom!

The market has already thrown up some wild price imbalances this year with Uniper’s Connahs Quay power station being paid £2,750 /MWh on January 8^th, which temporarily set the highest imbalance price ever recorded. However, that record lasted a matter of minutes with EDF’s West Burton gas station being paid a scarcely believable £4,000 /MWh and setting the highest imbalance price ever seen. Yet just a couple of days before that Beatrice, a wind farm, paid £781 /MWh to turn off its generation.

2021 has also seen the decoupling of the UK from European power auctions leaving two separate, independent UK day-ahead hourly auctions post-Brexit. These auctions have seen differences of £500 in their results even though they are just 40 minutes apart. The delta between the two, although not as extreme, has continued throughout January and we have been promoting the reimplementation of a single UK auction post-Brexit to spare consumers having to bear the added costs, risks and inefficiencies of having two unnecessary separate auctions.

These extreme power prices have been limited to the UK while neighbouring interconnected markets have shown a limited reaction to the UK’s volatility. While Belgium, France and the Netherlands have been able to enjoy relatively benign prices this winter, the UK’s reliance on interconnector flows has left it more vulnerable to periods of cold weather and low wind generation.

Gas has also endured a volatile few weeks with huge price spikes as cold snaps in Europe and Asia have coincided with LNG liquefaction facilities around the world being plagued by unplanned or extended outages. This has resulted in Asian utilities battling to buy any cargo they can lay their hands on, seemingly irrespective of price. JKM, Asia’s benchmark LNG contract, surged to its highest on record at $32.50/MMBtu while on the physical market, cargoes have been sold at high $30s.

This is in stark contrast to the situation we had in the summer when JKM was below $5/mmbtu. With Asia willing to pay so much for LNG, Europe has had to rely on storage withdrawals for such an elongated period that the very healthy storage levels at the start of winter are fast disappearing. Last week saw prices across Europe rocket amid fears of storage being almost empty, long before the end of the winter.

With so much volatility in the energy markets, Hartree Solutions’ trading expertise can not only protect your company but ensure you benefit in this unprecedented transition to net-zero. By building, owning and operating low-carbon assets, co-located with your business, we guarantee you cheaper, low carbon power with zero capital investment.

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Footnotes
¹ Nord Pool N2EX
² National Grid Monthly Balancing Services Summary
³ Epex Spot
⁴ ICE
⁵ National Grid Winter Outlook

On 22^nd December we released Part 2 in our series on Carbon in UK Power titled “Is It Time to Prioritise Carbon Over Price?” alongside which we set a challenge to estimate the highest marginal carbon intensity on Christmas day with the winner receiving a donation from Hartree Solutions to their chosen charity.

Because we had two very close estimates, we decided to donate to both these very worthwhile charities.

Tim Walls from Grain LNG was our first winner whose chosen charity was Cancer Research UK. Tim is completing a run to raise funds for his charity, and we are delighted to contribute to those efforts.

Our second winner was Marc Tannous from Silver Leaf Partners. Marc’s chosen charity is the London branch of Help for Children, an organisation whose mission is to prevent and treat child abuse. Again, we are delighted to be able to support Marc’s charity.

In way of a recap, in the Market Insight article, we discussed why we believe identifying the marginal generation unit is important to further reduce the UK’s carbon emissions over the coming decade.

“In the power stack, the lowest cost generation is used first while the last generating unit required to meet demand typically sets the price¹. This is known as the marginal unit or price-setting unit. Our analysis in this second article highlights the key role this marginal unit will play in reducing the UK’s carbon intensity.”

“Any action we take, say via on-site generation, which displaces a marginal unit and reduces emissions from the grid should be the measure against which we consider the impact of that action.”

Through Hartree Solutions’ in-house modelling, we can extract a marginal balancing unit for each hour², rather than an annual basis more typical within the industry. We can do this from both a forward-looking perspective and a retrospective view. Below we chart Christmas day showing our modelled average and marginal carbon intensities.

The peak marginal carbon intensity² was 0.4480 tCO2/MWh_e at 1 pm where UK Power demand also peaked. The average carbon intensity² for this hour was 0.1771 tCO2/MWh_e.

We’d like to thank you all for participating and thus adding to our donations this year. Good luck to Tim with the run and we wish everyone a safe and successful 2021.

 

Footnotes

¹ The unit setting the imbalance price is derived via a complicated calculation as seen in this document by Elexon

² The marginal price setting unit is our in-house modelled estimate along with the average carbon intensity across all modelled running generation

Up until now, the UK has prioritised keeping the lights on and consumer bills down ahead of environmental concerns. In other words, the security of supply and price are put above carbon intensity in the energy trilemma of the UK.

This priority could be set to change as Britain gets serious about its 2050 net-zero target. As we highlighted in our previous article there is still a lot of work to be done to achieve this aim or even the mid-term goal of a 68% cut in greenhouse gas emissions by 2030¹.

Companies are waking up to the importance of sourcing low carbon generation, yet the current design of power markets makes this both hard to achieve and difficult to quantify (something we discuss in a future thought leadership piece). For example, Volkswagen just announced² that its top executives’ bonuses will be linked to its ESG targets and last month Sony hinted³ at leaving Japan due to limited access to clean energy with the carbon intensity of the country’s electricity network more than twice that of the UK.

In Part 2 of this series, we:

• Highlight the challenges the UK faces to reduce carbon from power generation over the coming decade;
• Demonstrate how our choices greatly impact the UK’s efforts to continue to reduce overall carbon emissions;
• Introduce the concept of the marginal power unit in the UK system and its importance on carbon emission reductions;
• Show that measuring carbon on an annual basis is nowhere near detailed enough for the UK to achieve its goal, with a much more granular, half-hourly view on carbon intensity required, just like we have on prices and,
• Underline the importance of working with a market-leading energy partner to ensure businesses achieve maximum emission reduction.

 

The Marginal Unit

Newton’s third law states that ‘for every action, there is an equal and opposite reaction’

In the power stack, the lowest cost generation is used first while the last generating unit required to meet demand typically sets the price⁴. This is known as the marginal unit or price-setting unit. Our analysis in this second article highlights the key role this marginal unit will play in reducing the UK’s carbon intensity.

The relevance of Newton’s third law to electricity is that by turning on a generating asset we are displacing an alternative source of production. Yet these decisions are made based on price and not emissions. But to meet the emission goals we need to be considering the carbon impact of these actions as well as the cost of supply.

Through Hartree Solutions’ in-house modelling, we can extract a marginal balancing unit for each hour⁵, rather than an annual basis more typical within the industry. We can do this from both a forward-looking perspective and a retrospective view.

 

Granular Carbon Analysis

Our highly granular approach gives us a great insight into historic, real-time and forecast carbon emissions. This allows us to design long-term solutions to reduce the carbon content of a company’s electricity use and ultimately completely offset it.

Using this model, when we analyse the relationship between the grid’s average carbon intensity and the power price, we see a good correlation. As power prices increase, the average carbon intensity of the grid also increases.

However, when we look at the carbon intensity of the price-setting unit and the power price, this correlation breaks down. This highlights the impact of a regulatory framework that favours keeping prices down over carbon intensity and can act as a handbrake on the UK’s success in continuing to reduce power emissions.

Further, we are also able to demonstrate the poor correlation between the actual carbon impact of your actions (the marginal units carbon intensity) and the average carbon intensity. This highlights the issues in using the average carbon intensity as the driver for our decisions as it can actually lead to increased carbon emissions in the UK.

When the grid has a high percentage of low carbon generation but still needs some high carbon generation to meet demand, we could be fooled into thinking that we should look only at the low average carbon intensity and that further carbon reductions are not possible. Yet, where we can substitute this high carbon intensity grid generation with lower carbon local generation, we can further reduce the UK’s total emissions. This is why measuring specific consumers and on-site sources of generation against the marginal carbon intensity of the network is key if the UK is to continue reducing emissions at the rate required.

 

Choosing the Right Energy Partner

If you are serious about truly reducing the carbon impact of your business it is essential to work with the right energy partner that is not only able to measure and forecast the carbon-intensity of the network but also able to optimise your energy usage in real-time to benefit you as a consumer. We believe this is a unique skillset of Hartree Solutions.

Most companies and businesses similarly look at their annual carbon intensity rather than a more granular measure. Usually, this is for ease and a lack of data available. It leads to public announcements which boast of ‘purchasing 100% renewable generation’. We believe these can be misleading as it is unclear how their electricity is generated when the wind doesn’t blow or the sun doesn’t shine.

We only need to look back at 26^th Nov ’20 where renewable generating made up only 7% of total generation over the day. On days like these, claims of a grid-connected user’s electricity being 100% renewable are questionable.

 

The Challenges that Lie Ahead

The reality is that the UK network is some years away from being able to provide economic solutions for 24/7 low carbon generation. And this is a reality that we as an industry need to better understand and be more open and transparent about.

Delving deeper still, we have charted the UK power generation units that most frequently set the marginal price and then animated them to be sorted by carbon intensity to further highlight the breakdown in correlation between those aspects.

Any action we take, say via on-site generation, which displaces a marginal unit and reduces emissions from the grid should be the measure against which we consider the impact of that action.

There is also a wide variation in the volume of carbon emissions that are offset depending on the exact timing of the action. All hours are not equal. This becomes clear when we look at a specific day using our in-house modelling between the impact of our action on carbon emitted into the UK atmosphere on an hourly basis.

Much like the total emissions chart in Part 1, we can see the average tCO2/MWhe has significantly and consistently decreased over time as has the marginal equivalent.

 

Additionally, displayed over a 24-hour day we can see the importance of analysing any effort to reduce carbon emissions on an hourly basis both on an average and marginal basis. Again, we see a large drop from 2015 as gas has largely replaced coal as the marginal unit. The impact of Covid-19 has led to a big fall from 2019 to 2020 but our analysis indicates that declining trend is set to halt by 2023.

 

As mentioned in the first article in this series, the easy switches have been exhausted and the real challenges lie ahead. Further evidence of this since we released Part 1 is the prequalification result for the upcoming Capacity Market auction for the delivery year 2024/25. Even four years from now the makeup of reliable generation to insure against blackouts is little changed in its carbon makeup with gas generation continuing to be both relied upon and constructed in the medium term.

Material carbon reductions from a change of fuel type or technology are not on the immediate horizon in the same way we have experienced over the last five years. We must therefore work harder to reduce our impact on emissions. However, the granular approach adopted by Hartree Solutions can make this achievable, certainly from an individual company’s perspective. We measure the carbon savings from your actions utilising new or existing generation assets. These assets can be optimised to reduce costs, carbon emissions or a combination of both. In the latter, of course, there is a trade-off between reducing costs and reducing emissions and how we balance those two desires. This is where we believe our partners should not only have open transparent data to make this decision but also set these goals themselves.

Ultimately, not all emissions can currently be reduced to zero at source in an economical manner. Therefore, we offer a best-in-class set of carbon offset solutions so each customer can strike their own balance.

No two customers will have the same basket of offsetting products. It is an open and bespoke solution to meet your needs, but Hartree Solutions can offer you a complete solution via directly connected additional renewable generation, optimization of flexible assets to further reduce emissions and completed by offsetting your entire business operation.

More Market Insights

 

^{Footnotes  
1} 68% reduction in greenhouse gas emissions
² Volkswagen announcement
³ Sony hints at move away from Japan
⁴ The unit setting the imbalance price is derived via a complicated calculation as seen in this document by Elexon
⁵ The marginal price setting unit extracted from our model is our in-house estimate
⁶ The Christmas Day Carbon challenge is limited to one entry per person. Entries must be received before 00:01 on Christmas Day. Hartree’s modelling will be used to determine the maximum marginal carbon intensity for any hour on Christmas day. The winning entry is the one closest to the maximum value. Where there is a tie the first entry received will be the winning entry. No Hartree or Hartree affiliate employees will be eligible to win. For each unique entry received we will donate £10 to the winners verified charity of choice up to a cap of £5,000.