Do we have enough Electricity Margin Notices?

This winter we have had four Electricity Margin Notices (EMNs), alerts from the electricity system operator NGESO to warn the market that the system operator wants more power available. Why is this so rare?  It might help if it happened more often.

An EMN doesn’t mean blackouts. It means that for a period, usually on the day following, the SO has less spare capacity available (‘margin’) than it would like. This week it was colder than forecast, some of our aging nuclear plants are out of action, some of our gas plant is off the market because the owner is in administration and we have less wind power than we might do.

This week’s warning was cancelled the following day. Forecasted demand was slightly lower and more plant became available – plus prices rose for the tight period. And anyway alerts tend to fade away. NGESO requires less margin as it gets closer to the period in question – the margin is to cover uncertainty, and both demand and supply are easier to pin down for today than they were when looking at it yesterday. Plus the market responds to price spikes.

But maybe the rarity of margin notices is a problem.

First I’d argue that we are in danger of  gold-plated our system.

This winter, according to BEIS’s annual security of supply report, the so-called ‘loss of load expectation’ (LOLE) is below 0.1 hours per year. The LOLE, it should be said, marks periods when the system operator has to take action to add to supplies – again, not an actual power cut. But the loss of load that is allowed by statute is much looser than that  - in fact more than ten times bigger. BEIS has set it at 3 hours per year.

Beating the statutory requirement is not cost free. UK consumers are underwriting security of supply, largely via the Capacity Market.

You may argue that an LOLE below 0.1 hours per year would be worth the extra investment. In that case, BEIS should propose tightening the standard and consult on it – and demonstrate that the cost for hard-pressed customers is justifiable.

But the bigger picture also suggests we should have more margin alerts.

We are trying to move to a flexible power system where demand response plays a significant part in managing supply and demand. But why would customers take part in that market if there are never any periods when the market is short? Why make any investment in offering demand flexibility, if it is never called on?

To grow demand side response there has to be a market for it. That market is low margin. That means we can’t have a system where market notices are so rare they hit the headlines. They have to arise often enough that big customers think it is worth building in the ability to respond, and take advantage of price movements.

In the end, we have to think of it as a system  that involves supply and demand, not just supply. Then more market alerts – ones that prompt response from the demand side – might be comonplace, and a signal of security.

 

Further reading

Should we underwrite new gas storage? Think about the ‘smart, flexible’ system plan first

 

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