How the U.K. Power System Can Be Mismatched to Climate Goals

(Bloomberg) -- A spell of cold temperatures last week revealed a mismatch between the U.K.’s goal to decarbonize and actions taken in order to keep the lights on.

Low wind output was a factor that caused the narrowing of margins between supply and demand of electricity according to National Grid Plc. Instead of using the cheap wind generation available, on the afternoon of Jan. 6, one of the U.K. biggest wind farms switched off, while National Grid paid an Electricite de France SA gas plant 3,000 pounds ($4,071) per megawatt-hour to produce power.

The actions show the difficulties of delivering ambitious climate policies as well as preventing blackouts. That said, Britain’s power system is getting cleaner. Last year was the greenest year on record according to the network operator. For every kilowatt-hour of electricity the U.K. generates, it now produces 60% fewer carbon emissions than 2013.

As more parts of the economy electrify, utilities and trading houses are expanding to find an edge in Europe’s $430 billion power market. Last week’s activity shows that trading can come at the expense of what’s best for the climate. National Grid takes these decisions in the balancing market, a part of the power system where the grid operator fine-tunes supply and demand.

The cost of balancing the power system jumped last year as the pandemic hit demand -- now it’s struggling with low wind, outages at nuclear plants and a prolonged cold snap.

“In the future prices will become more extreme at certain points – either super-high prices like last week or super-low prices when renewables are running at maximum output,” said Phil Hewitt, director of Enappsys Ltd.

In the balancing market, generation that isn’t already running can offer its output into the market or get paid to switch off. National Grid tries to find the most economic way to get what it needs to keep the system balanced, a spokesperson for the company said.

Separately there was low availability from EDF’s nuclear fleet including a unit at Heysham-1 that was due to return to the grid last week but didn’t switch on. That helped create conditions that allowed EDF to secure the high price granted to its gas plant.

Wind farms can also be asked to turn down when a surge of electricity threatens to overwhelm the grid. However, that wasn’t the case with SSE Plc’s 588-megawatt Beatrice wind farm on Jan. 6.

The site, one of the country’s biggest offshore wind farms and capable of powering about 450,000 homes, has a so-called contract for difference to sell power for about 162 pounds per megawatt hour, about four times the average market price for power. If the market price for power goes above the contract price, then the wind farm owner is meant to pay the difference back.

The contracts, which are a government subsidy, were critical to scale up the offshore wind industry by giving developers certainty while also cutting costs for consumers. The idea is that once wind farms are cheap enough, they won’t need support.

But last week showed that the contracts won’t always work as planned. Day-ahead power traded for Wednesday evening surged to 1,000pounds per megawatt hour. If the Beatrice wind farm sold power then, it would have to pay back 837 pounds per hour for every unit of electricity produced.

Instead, Beatrice made a deal with the grid. It paid a price to not produce any electricity. That effectively removed the wind farm from its contractual obligation and so could make money at the higher price.

An SSE spokesperson declined to comment.

After allowing SSE to turn off Beatrice, National Grid paid EDF to fire up its West Burton B gas plant. On Jan. 8 the same gas plant earned 4,000 pounds a megawatt-hour for two units.

Balancing prices are usually higher than those in the market and ultimately the consumer pays these costs.

“To meet our emission goals we need to be considering the carbon impact of these actions as well as the cost of supply,” Adam Lewis, a partner at Hartree Solutions said in a report. A system that “favors keeping prices down over carbon intensity and can act as a handbrake on the U.K.’s success in continuing to reduce power emissions.”