London winter

For many countries, energy security is an oft-repeated watchword, with governments the world over working to ensure that electricity supply meets demand in years to come. The goal is to reduce the threat of dangerous and economically damaging blackouts through a range of measures, from developing installed capacity and enhancing grid infrastructure to promoting energy efficiency on the demand side.

The UK has had a particularly strong focus on energy security in recent years, with Secretary of State for Energy and Climate Change Ed Davey recently touting the country’s status as "a world leader in energy security – leading in the EU and ahead of every other G7 country".

Nevertheless, the risk of power cuts in the near future shouldn’t be underestimated. In its Electricity Capacity Assessment Report for 2014, UK electricity regulator Ofgem remained concerned about the National Grid’s ability to meet energy demand in upcoming winters as energy capacity declines due to the closure of ageing plants and demand increases in step with the electrification of heating and transport systems. Ofgem has estimated that in the expected low point of winter 2015/16, the capacity margin – the gap between electricity supply and peak demand – could slump to as low as 2% if demand is higher than National Grid’s projections.

Securing short-term supply

The UK government certainly hasn’t taken the threat of power shortages lying down. It has implemented a wide range of policies to help counter the risk, including further development of gas production on the UK Continental Shelf, securing international hydrocarbon supplies and investing in reliable networks.

National Grid has also been working with Ofgem and the Department for Energy and Climate Change to create new short-term mechanisms to balance the supply/demand equation at times when margins get tight. An industry consultation process in the second half of 2013 led to the development of two balancing services.

Schemes such as real-time pricing represent a complex new frontier that brings risk as well as reward.

The first, dubbed the Demand Side Balancing Reserve (DSBR), reflects the fact that when considering the capacity margin, reducing demand is just as effective as adding supply. The measure provides an option for intensive energy users to reduce their electricity use during the peak hours of 4pm – 8pm on winter weekdays, using efficiency measures or perhaps switching to back-up generation, in exchange for a payment.

The Supplemental Balancing Reserve (SBR), meanwhile, will issue contracts for reserve power from plants that would otherwise be at risk of mothballing or outright closure in the face of unfavourable market conditions. These plants would be paid to make reserve energy available between 6am and 8pm on winter weekdays, in case it is needed.

The SBR and SDBR were originally planned to be tendered with a starting point of winter 2015/16, although at the beginning of September the SBR was brought forward for implementation in winter 2014/15 due to uncertain supply in light of fires at the Ironbridge and Ferrybridge power plants and the upcoming closure of Barking power station. "This is a sensible precaution to take while the picture for this winter remains uncertain," said National Grid’s director of UK market operation. "At this stage we don’t know if these reserve services will be needed, but they could provide an additional safeguard."

These reserve systems are designed to safeguard energy supply in the short-term future, as a stopgap before the implementation of a more permanent solution in the form of the UK’s new capacity market, which will likely supersede the DSBR and SBR by the winter of 2018/19. The capacity market plays a central part in the UK’s Electricity Market Reform, an overarching policy intended to "deliver the greener energy and reliable supplies that the country needs, while minimising costs for consumers in the long term".

The UK’s new capacity market

Capacity markets are gaining increasing traction as a means of mitigating the risk of energy supply interruptions and power cuts. In contrast to the traditional energy-only markets, which pay an immediate, dynamic market price for power, capacity markets – also known as forward markets – contract utilities to provide adequate energy capacity a few years in the future, especially when it is needed during peak demand, with financial penalties for companies that fail to meet their contracted commitment.

"Ofgem remains concerned about the National Grid’s ability to meet energy demand in upcoming winters."

Capacity contracts are awarded in advance through capacity market auctions, the intention being that more predictable long-term electricity pricing will encourage investment across the energy sector, while also providing a more solid guarantee to consumers that supply will meet demand when it’s needed.

The establishment of a capacity market was the last major component of the UK’s energy security strategy, and the government set out its plans in greater detail in 2014. The first capacity market auction is scheduled to take place on 16 December 2014 for delivery in 2018/19. Contract terms will last 15 years for new capacity, with existing plants to be offered rolling one-year contracts; the list of providers that have pre-qualified to bid will be made public at the beginning of October. At the auction the government will procure a total of 53.3GW of energy capacity, which represents more than 80% of Great Britain’s current peak electricity use. Demand side reduction will also be factored into the auctions, allowing major energy users to receive payments to switch to back-up generation during peak hours.

"There was a real risk back in 2010 that an energy crunch would hit Britain in the middle of this decade and lead to damaging power cuts," said Davey. "With today’s announcement we have the final piece of the jigsaw of our detailed energy security plans and can now say with confidence that we have defused the ticking time bomb of electricity supply risks we inherited."

Will the capacity market flourish?

Wider reception of the capacity market concept has been mostly positive, with a few dissenting voices. It’s generally popular with industry as it has the potential to secure steady revenue for plants that are failing in the energy-only market, while the system’s approval by the European Commission earlier this summer opens the doors for the likes of France and Germany to follow suit, the latter of which has announced that it will detail its own capacity market plans by 2016.

Norway initially lodged a complaint about the UK’s capacity market on the grounds that it would exclude Norwegian exporters, but the EU’s approval has put paid to those objections. Environmental campaigners have also described the capacity market as a step back in terms of green energy, as it throws a lifeline to old hydrocarbon plants.

On 18 September the people of Scotland will decide whether to extend the 307 years that it has spent as a member of the United Kingdom or to exit the union and become a fully independent country

"It’s hard to believe that a country which has just reaffirmed its commitment to tackling climate change by committing to the fourth carbon budget is about to introduce a policy which could lock in vast payments to its oldest and dirtiest power stations until the 2030s," commented WWF-UK’s energy and climate change specialist Jenny Banks.

And there are still uncertainties about certain aspects of the capacity market’s implementation, especially its ability to provide energy at a good price. Western Australia, which runs a capacity market, has provided a cautionary tale, with critics noting that excess capacity is still being built without any real expectation that it will be used.

If these sorts of uncertainties are rigorously addressed, there is every chance that the UK’s new capacity market could prove a high-profile success for the country and a springboard for implementation elsewhere. It might be open to criticism on environmental grounds, but the government’s recently-finalised Contracts for Difference scheme should help redress the balance by providing long-term price stabilisation for low-carbon generators, encouraging growth in the renewables sector. And considering the UK capacity market aims to reduce the risk of power supply disruption from once every four years to once every 31 years at worst, in this case the ends might justify the means.

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