The UK’s energy crisis is a product of years of policy failures
The last month has seen Northern European electricity prices move from the record lows of last year, to record highs. This has been chiefly driven by a massive spike in the price of fossil gas. The UK has been particularly badly affected, mainly due to the unusually large role gas plays in the energy system and also in setting the wholesale price of energy. However, there is a deeper story here, the UK’s mix of market and government regulation has left it with an energy infrastructure uniquely poorly placed to weather the type of shock unleashed this September.
A global problem
As many have already eloquently highlighted, this problem started half the world away. A recovery in Chinese and Asian Pacific demand combined with supply problems (including a drought) and the decimation of marginal oil and gas industry producers during the pandemic meant that as winter reached Europe, prices jumped. Gas provides such a significant proportion of UK electricity that it now sets the prices for European electricity. So when gas prices jumped so too did electricity.
The problem was then exacerbated as speculators poured in. Putin’s intervention last week, through slowing the relentless charge of gas prices upwards, has still left the commodity trading at peak not seen since 2009. The speed of this price rise, roughly doubling since May, has destroyed a number of energy firms, left many others praying for a government bailout, shut down industries and may yet lead to devastating consumer price rises.
The perfect calm
A number of ministers have been trotted out to claim there was a prefect storm. Their case is not entirely without merit. Northern Europe has been experiencing a period of unseasonably cold weather driving up demand at the same time wind speeds were some of the lowest in the last 70 years. In September wind was able to deliver just 64% of what would normally be expected.
Finally, in a ironic twist of fate an interconnector between France and Britain caught fire taking it out of action. This interconnector can provide 2 GWs of power from across the channel.
Summer holidays a good time to turn of the power?
However, this was not merely a case of bad luck. One of the key factors driving the UK prices above other countries was that much of the UK’s power sector was switched off.
In an extraordinary report, Aurora Oxford suggests that in the first few weeks of September as prices surged as most of the UK’s generating capacity was simply sitting idle. That much of the 25 GW of wind was taken out by low weather has been widely commented upon. Less remarked upon is that 13 GW of gas power was also offline along with over half the country’s nuclear capacity.
The UK peak demand was around 30 GWs during this month. The lack of capacity meant there were points when the National Grid’s margins between capacity available and demand were very tight.
These periods of tight margins are – as the Aurora report demonstrates – a key reason as to why UK prices are high relative to Europe. Prices were £4,000/MwH compared to average prices of £107/MwHin August on the wholesale market, or £40.66/MwH in summer of 2020. These spikes drove the average spot price of the entire cost of electricity upwards towards £100/MwH.
There are a number of reasons – some of them inevitable – why so much of the UK’s power generating infrastructure was offline requiring massive amounts to be handed over to marginal producers. In a large complex system, some parts are always going to be offline. However, the scale of the problem draws attention to the deeply flawed approach the UK has taken.
The old is dying and the new world is not yet born
UK nuclear is rapidly ageing. Much of it was built over thirty years ago – in a different age. Many plants were planed to be closed a decade ago. For all power plants, Covid-19 delayed maintenance which had to take place in the summer. The slightly strange Ofgem seasons incentivised this maintenance to take place before winter kicked in (October-March).
Additionally, the low prices of the previous year that were initially predicted for the summer meant that there was a questionable business case for keeping many of these facilities operational year around. This is partially a result of increased variable generation (wind and solar), but also fluctuating demand. When demand rose and variable generation reduced, the supposed ‘firm’ generators were no longer there, with many of them having been effectively mothballed.
This eventuality was foreseen. Indeed the risk of a calm, cold winter has been an argument used by anti-renewable lobbyists against an energy transition for the UK for at least a decade.
When much of the major power providers for the UK sector were built, demand management meant someone sitting in the power station room watching the football. At half time they would increase generation as they knew a few million kettles were about to be turned on. The world is no longer so predictable.
Gas is not coming from the North Sea but prices driven by events on the other side of the planet. Climate change leads to unpredictable cold snaps for the UK and drought in China – all of which drive prices. Wind and solar bring the potential for cheaper, more resilient carbon free electricity, but challenges for the grid. The old grid is not fit for this new world. Various government reports have acknowledged this.
However, government and regulator policy has dithered and delayed rather than acted with any clarity. This has allowed limited security of supply obligations to be placed on any providers, most notably, the UK has in contrast to other European Countries over the last decade shut down almost all of it’s gas storage. The private sector sees security of supply as a cost, particularly in a system where responsibility is mixed between public and private bodies, The Financial Times quotes Deiter Helm saying “Security is a public good. The private market will never provide it”.
When problems emerge, the tendency has been for sticking plasters, such as the consumer price cap. This creates its own problems. This has allowed the emergence of a bewildering array of firms and other entities that obscure the reality of the system and means any article on the subject balloons beyond a sensible world count.
The dependence on a mixture of private and public decision making means that ensuring a secure energy supply falls through the cracks.
Warning from the future
There are solutions, and they are reasonably widely accepted including by those managing the UK electricity system – at least in theory. More resilience is needed. This means more flexibility, more demand management and more storage. These are all possible. Indeed, during the times when Ofgem incentivises it, the UK has considerable demand management of several GwHs. Last year saw contracts for almost 300MWs of battery storage handed out. However, the UK still ranks at the bottom for system flexibility across Europe, with no clear policy for key forms of storage. Meanwhile, UK infrastructure ages and renewables are not being built fast enough to replace it.
This is a global crisis, but it is one that is the inevitable result of relying on unreliable hydrocarbons as the industry collapses and on a commodity from around the world in an era of growing climate instability. These global crises are going to keep coming.
The UK is more exposed – partially due to bad luck – but also a decade of policy mistakes. More storage, more grid flexibility better organized power markets, properly insulated homes and tidal power are all options that could have softened this crisis. Now the crisis is here the government are mostly powerless in the face of it. This should act as the driver for changes to prevent the next crisis
When energy prices turned negative and renewables were setting records in spring 2020 I speculated in Bright Green that this was the possible future of European energy – future of an interconnected European grid with cheap energy. This winter we are seeing a warning from the future. This is what happens if we muddle through, giving into industry lobbying to go slow.
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