Price spikes, not blackouts, are the biggest risk this winter

We are not at high risk from blackouts this winter. That is the strong response from New Power’s panel of energy industry experts in a survey carried out in October. Experts said that although the supply margin was relatively low, the market would respond, to provide power when needed. But they said part of the reason was that prices would “spike” – shooting up for periods that could be as short as half a hour – and that could have dramatic effects on industry players, possibly driving them into financial distress.

The effect of price spikes will be increased, because so-called “cash-out” arrangements are changing. In the new system, which takes effect from November, market participants who are “out of balance” (using or supplying less or more than planned) will pay much greater penalties (for more detail see previous article: November’s ‘cash-out’ changes could hit small generators, PPAs, I&C supply contracts).

New plants are not a solution to price spikes, which may last for just a half hour. To manage price spikes “ rapid response generation and demand reduction plans” are needed.


Price spikes “will hit small suppliers”

Who will be hit by price spikes? New Power’s panel said: “The most vulnerable are some of the smaller suppliers who lack the financial muscle to absorb a series of price spikes.”

Our industry panel also named, “major industrial customers to the exposed groups, especially those buying spot” as well as “Energy intensive users and SMEs who have taken advantage of consistently low prices and low forward prices to move on to variable rate power purchase agreements.”

Another group is: “Intermittent generators, [and] suppliers with intermittent generation … lacking the ability for physical management of risk,” and any generating company whose plant shuts down unexpectedly during a spike,

“Bizarrely”, as one MD said, if domestic customers cut their demand at peak times, although it will help balance the electrical system it will not help manage the financial cost of price spikes. That’s because of the way charging works in the industry (for an explanation, see previous article, The CMA, P272, and why consumers can’t take the full benefit of smart meters).

But the cost of managing price spikes will work through to the customer: “Price spikes will impact suppliers and ultimately end consumers- suppliers will start to price in volatility to rates.”

Managing that – and relieving the pressure on supplies – could best be achieved with measures on the demand side, most respondents said. But current market structures and demand side offerings are not enough to bring new players into that market.


Blackouts unlikely – “stop panicking”

Price spikes were seen as far more of a problem than the low margin. One managing director said “We always get scare stories about power cuts at this time of year,” and told the industry to “stop panicking and shut up”..

We asked New Power’s forum whether the expected margin over the next two winters was a cause for concern. Over 70% of respondents thought that the situation was either business as usual (28%) or tight, but manageable using only National Grid’s regular tools (57%).

A further 8% of respondents thought that the additional tools already put in place by National Grid – Strategic Balancing Reserve (SBR) and Demand Side balancing Reserve (DSBR) – would be sufficient to manage the tight situation.

Only 21% of respondents thought extra measures would be needed.

One respondent said “will be tight this winter and next, but this is not without precedent. Depending on the weather, the SBR and DSBR may be needed – but at the moment I expect these mechanisms to be sufficient to ensure that there is sufficient capacity to meet demand.”

The panel gave several reasons why the industry viewed the supply margin as far from a crisis: first was National Grid’s modelling, in which “a change to the methodology has contributed to a lower margin”. In addition, the National Grid had used “a demand that has been reached infrequently in last 10 years and is significantly higher than recent winters,” whereas demand has been falling in recent years.

The panel also said of the long term trend, that National Grid’s viewpoint, which focuses on the transmission system, “is progressively a lesser part of the whole”, because of the increase in distributed generation, a steady decline in demand, more small peaking capacity, and more possibility to import via interconnectors.

The industry was not unanimous: one said, “We cannot continue in the hope that we have a mild winter. Any relatively severe weather will put severe stress on the system.” But the concerns that were expressed were more over general policy direction than the coming winter.


New Power polled industry members in October with the help of market research company Accent.

Subscribers: read more detail on our survey results in the November issue, out next  week

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