In this week’s edition of our Current± Price Watch series – powered by LCP Enact – we take a look at the concern around interconnector availability over the upcoming winter and the role this could have on keeping the lights on.
Day Ahead: Availability of gas-fired stations increases
The day ahead price hit a high of £483.7/MWh last week on Tuesday 20 September. It dipped down to a low of £63.4/MWh this morning (26 September) as the wind picked up, after a number of low generation periods over the last week.
“System margin was pretty healthy across the [last] week, as increased availability from gas-fired power stations helped to ensure adequate supply despite some periods of low wind output and with interconnectors generally exporting significant volumes,” said LCP Energy consultant Tim Sparks.
LCP last week unveiled its market outlook for the coming winter, with continued interconnector exports likely as European countries continue to struggle with the impact of the gas crisis as well as nuclear outages and climate change fuelled challenges.
“The irony is that as Europe baked during this summer’s heatwave, it was simultaneously sowing the seeds for further pain this winter,” said Chris Matson, partner at LCP.
“As a result of the extreme droughts and the lack of water that is hitting hydroelectric systems in key interconnector markets like Norway, coupled by the issues we are seeing in France with their nuclear reactors, there are significant doubts about the availability of electricity coming into GB from the continent which is critical to our security of supply.”
The energy crisis has already caused record price spikes over the last 24 months, with Day Ahead prices exceeding £1,800/MWh. Low interconnector availability will likely contribute to keeping these price high.
Intraday: LCP warns of LOLE of ten hours over winter
The intraday price hit a high of £497.02/MWh for last week on 23 September, and a low of –£39.15/MWh today.
While these rates are fairly steady, much of the focus in Britain remains on ensuring the country’s energy security as we head into winter.
“In the forward markets, the winter-22 baseload contract gained over £100/MWh across the week to close at £567.17 on Friday,” said Sparks.
“The bulk of this additional premium was added to the spark spread, with gas prices remaining relatively flat. This could be the market factoring in a higher loss of load expectation for this winter now that the retail price freeze has weakened the signal for consumers to reduce their demand.”
On Friday 23 September, Chancellor Kwasi Kwarteng set out his mini-budget, dubbed the Growth Plan, that set out how measures to support customers over the winter will be paid for through borrowing.
Within its outlook, LCP set out its predictions that Britain could experience ten hours of insufficient electricity supply this winter. The company’s modelled loss of load expectation (LOLE) suggests it will be well outside National Grid ESO’s early winter outlook, which forecasted a LOLE of 0.1 hours, and outside of the country’s reliability standard of three hours per year.
This is in large part because the ESO’s outlook did not include the “very possible scenario” that Britain won’t receive imports through its interconnectors from Europe.
If the country were to be without imports, there could be a LOLE of 29 hours. But the ESO has already signed contracts with two coal fired power plants – EDF’s West Burton A (2 x 400MW units) and a Drax site (2 x 570MW) – helping to boost the outlook, and bringing LOLE to ten hours.
“While our analysis has looked at where GB’s electricity will be generated, the current market pricing for the winter months ahead is factoring in a much bleaker outlook and the possibility of gas supply issues across Europe,” said Matson.
“The market is clearly not ignoring this risk and factoring it into their current pricing for the winter; with the scarcity value of electricity driving prices to exceptional highs, far beyond the level explained by gas prices alone.”
According to LCP, Winter-2022 commodities are trading exceptionally high, with power at £494/MWh, gas at 496p/therm and UK ETS at £80/t. This implies clean spark spreads of c. £100/MWh.
Imbalance: Sector awaits Demand Flexibility Service details
The imbalance price hit a high of £662.76/MWh last week on 22 September, and a low of -£68.73/MWh today.
Over the last 24 months, record high prices have been seen in the Balancing market too, reaching £4,000/MWh. With the winter period looking tight, these are expected to stay high and the flexibility of the grid will be key to managing demand and generation.
“On the Demand Flexibility Service, we’re still waiting for all the details to be finalised, but we do know that volume will be procured at the day-ahead stage with prices and volumes published to the market shortly after procurement (via BMRS and NGESO’s data portal),” said Sparks.
There is a Guaranteed Acceptance Price set at the prevailing rate of the Ofgem price cap, therefore £340/MWh, LCP explained in a webinar last week. They are looking for 1MW – 100MW unit size with ability to respond to instructions for day ahead delivery.
To find out more about LCP Enact, click here or follow them on Twitter or LinkedIn for the latest market updates.
