The volatility in the energy market has continued this week, with National Grid ESO issuing another Electricity Market Notice (EMN) while day ahead prices just to almost £1,500/MWh.
Just after 16:30 yesterday (12 January), the operator issued the EMN for the period 15:00 to 19:00 today, due to a system margin shortfall of 1,150MW. The cold weather and tight margins led to the shortfall, a continuation of last week's strained capacity.
The same tight margins led prices in the day ahead N2EX margin to jump to £1,499.62/MWh for 17:00 on 12 January. This has barely fallen for the same period tomorrow, with the auction clearing at £1,494.65/MWh as conditions remain tight.
While the EMN was cancelled at 11:10 today by National Grid ESO, it remains significant as it marks the sixth time National Grid ESO has issued the warning this winter.
Following each EMN there has been volatile electricity prices, with highs in the Balancing Mechanism as well as in day ahead trading. On 12 January, four units came on in the BM at £1,000/MWh according to EnAppSys for example.
This follows on from the record high on Friday 8 January, with the imbalance price hitting £4,000/MWh between 19:30 and 20:30. Imbalance prices reached or exceeded £1,000/MWh on seven occasions from 6 to 8 January due to cold weather brought on from the ‘Beast from the East 2’ according to Elexon, following EMNs being issued for both the 6 and 8 January 2021.
Seemingly these dramatic pricing periods are becoming more common, driven by a number of factors including the particularly cold weather driving up demand while wind generation remains low.
Outages and the decline of coal
One of the key causes of the tight margins at the moment is the number of outages currently, including the BritNed interconnector that connects the British market with the Netherlands, which has been down since September 2020.
“There is still no news on the Dutch IC that is offline until 1st Feb but there is a likelihood for that to be extended given the lack of information and nature of the outage and REMITs,” added Adam Lewis, partner at Hartree Solutions.
Additionally, on 12 January “the IFA2 IC announced a delay to commercial operation until at least Feb while it continues to undergo commissioning flows,” Lewis continued.
Market changes over the past year have also reduced margins, including Severn Power Station, Baglan Bay Power Station and Sutton Bridge CCGT power station’s owner Calon going into administration in June.
Meanwhile, the decline of coal continues with just four power stations left in the UK following the closure of SSE’s Fiddlers Ferry and RWE’s Aberthaw B in 2020. This limits the potential baseload contribution for coal, tightening margins during periods of low wind generation such as we have seen early in 2021.
Phil Hewitt, director of EnAppSys highlighted that as well as BritNed and the decline of coal there was currently an unavailability of nuclear and gas assets currently, with all these aspects combining to create “a winter market where demand is high and margins are frequently tight.
“As these assets come back on stream and the weather gets warmer, this should alleviate some of the pressure on the system, although in the next few days the current situation will be exacerbated as markets in Europe are struggling with high demand and low renewable generation.”
Brexit and COVID-19 – new challenges for the grid
There are new challenges facing the UK’s grid currently, from both Brexit and COVID-19. While the pandemic and consequential lockdown drove demand down to record lows in 2020, through winter it has had the opposite effect according to Lewis.
Closures and outages have led to reduced margins “along with higher than market expected demand, something we have highlighted in our Market Insights last year,” he explained. “The impact of COVID-19 on winter power demand has been quite different to its impact on summer demand.”
With the closures of factories and offices during the UK’s first COVID-19 lockdown, electricity demand fell to an all-time low of just 13.8GW in May. But with most manufacturing allowed to continue through the current lockdown, together with increased home energy demands as those who can remain indoors, demand has increased beyond regular winter levels.
Another challenge specific to this winter, is the impact of Brexit on energy trading. With the UK leaving the EU on the 31 December 2020, the market has been decoupled from the continent's energy trading market, EUphemia.
Whilst this does not in and of itself mean higher electricity prices, it does complicate energy trading leading to greater price divergences between the UK’s now two markets – N2EX and EPEX – and the EU’s main market.
“The Day Ahead auctions continue to have large divergences with the N2EX auction clearing at £1,499.62 for 5pm today [13 January], £500 higher than the EPEX auction – the largest spread since Brexit led the UK to decouple from Europe,” highlighted Lewis.
Going forwards, the UK requires more, flexible assets in order to keep the grid balanced and capitalise on demand fluctuations. Till that point, prices will continue to jump when the temperature drops, with Hewitt adding that: “High prices in future winters cannot be ruled out, especially if it takes longer than expected to develop new assets and commercialise new innovations that will help to decarbonise the system.”