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Current± Price Watch: Heatwave could cost Britain £100m extra for electricity

Image: Current±.

Image: Current±.

In the latest issue of our Current± Price Watch series – powered by LCP Enact – we take a look at how record high temperatures across Britain and Europe are impacting power prices.

“Record breaking heatwaves doesn’t mean that our energy crisis disappears,” said Rajiv Gogna, partner, LCP Energy Analytics.

Today we are seeing pricing in GB peaking at £553/MWh, this is a 58% increase on this time last week when we saw prices at £350/MWh. The UK is not the only victim of this trend with France and the Netherlands also experiencing increases around 45%.


Day-ahead: Prices spike as the heat rises

The day-ahead price climbed to a high of £553.7/MWh today (18 July), amid high prices in Europe that saw the N2EX price hit £647.64/MWh.

This is driven in part by the heat wave that is hitting Europe, with temperatures reaching over 40°C in many countries. As such, demand for cooling systems has jumped significantly, driving up prices with it.

“In the short term, the heat wave poses very little risk to the UK’s power system,” explained Iain Staffell, senior lecturer in Sustainable Energy at Imperial College London.

“Electricity demand will be slightly higher because very few homes have air conditioning yet, although it is common in shops and offices. Britain’s electricity demand only rises by 1-2% for every degree it gets hotter. So, today and tomorrow we could expect the peak demand to hit 40GW, compared to 35GW in the week before the heat wave hit. This is much lower than demand during the depths of winter, so we won’t see the same problems as Texas or Japan, with record electricity demand and mandates to turn down air conditioners.”

He added that the UK doesn’t have a history of wild fires sparked by overhead lines such as places like California, reducing the risk of lines being turned off for safety reasons.

However, power generation is affected by the hot weather, with high air and sea temperatures meaning less cooling is available for big power stations.

“This is a key problem in France, causing their nuclear reactors to reduce output recently,” continued Staffell.

“The clear skies over much of the country mean that Britain’s solar panels will be working their hardest, providing electricity during the daylight hours when it is needed most. As France is having problems with power supply, and is also experiencing an extreme heat wave, the UK is supplying as much electricity to the French as is possible at the moment.”

These impacts on generation were a factor in National Grid Electricity System Operator issuing a Capacity Market notice at 14:34 for 19:00 18 July as the margin was expected to fall below the necessary threshold. This was subsequently cancelled by the operator, however at 15:34 it issued another Capacity Market Notice, this time for 20:00 18 July.

Intraday: Heatwave could cost Britain around £100m extra in electricity

Intraday prices hit their highest point in the last week on Monday 11 July, reaching £373.38/MWh. It dipped to a low of £92.88/MWh on 16 July, a sizeable jump from last week’s low of £0/MWh.

Over the coming week as the hot weather continues, we can expect power prices to increase as a result of heightened demand and constrained generation.

“While the extra demand during the heatwave might not be a security problem, it does come at a cost,” said Staffell.

“With power prices being so high at the moment, every extra gigawatt is costing consumers about £10 million per day. A ballpark estimate is that this heatwave will cost the country around £100m in extra electricity purchased over the coming two days.”

As climate change makes heat waves increasingly common, the impact of days such as today on the wider electricity system will need to be taken into consideration, and builds the case for increasing the diversity of energy generation across the system as a whole, according to said Rajiv Gogna, partner at LCP Energy Analytics.

“This needs to be supported by short and longer duration energy storage such as batteries and hydrogen which can plug in and help to provide short term demand during these spikes. While much focus on energy policy for the future has focused on how we provide energy during the winter, particularly in keeping our homes warm, it must also look at the scenarios we are experiencing today, ensuring the UK has the right mix of generation for summer too!”


Imbalance: Batteries continue to benefit into July

The imbalance price hit a high of £522.38/MWh for the last week on 12 July, and a low of £0/MWh over multiple days.

Following on from June’s record high revenues for battery energy storage in Britain, July is also seeing high revenues for the technology thanks to markets like Dynamic Containment continuing to see high demand.

As power prices have remained high and volatile throughout 2022, the government is increasingly looking for ways to better manage the electricity system. As such, it today launched the “biggest electricity market reform in a generation”.

The Review of Electricity Market Arrangements initial proposals include exploring changes to the wholesale electricity market to avoid gas prices setting the price of cheap renewable power.

It follows a number of comments from ministers and industry leaders over recent months pointing towards the decoupling of the electricity and gas markets.

To find out more about LCP Enact, click here or follow them on Twitter or LinkedIn for the latest market updates.

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