UK regulator mulls National Grid request to cover costs
By Paul Homewood
And so the ratchet turns another notch. PEI report:
Britain’s energy market regulator says that it is consulting on National Grid Plc’s request to recover the rising costs of two contracts for grid services that it agreed with SSE Plc) and Drax Group.
The move comes due to concerns about Britain’s ability to keep the lights on this winter.
EnAppSys analyst Rob Lalor says that given the scenario being presented it is important to maintain the existing coal-fired power plant fleet to cope with the winter ahead, and avoid the potential for blackouts. He added that few gas-fired power plants would be built under present conditions under the capacity mechanism.
Black start is a procedure whereby certain generators start up and provide electricity to the transmission system without an external power supply.
The contracts are worth £113m ($164.4m) and included services such as black start, the regulator said on Wednesday.
Ofgem said that it had set a cost target for National Grid for these services and that National Grid has spent significantly more money than the agreed target. The cost of black start services, traditionally the preserve of Britain‘s coal-fired generators, has grown as coal plants have closed and operating costs risen.
Ofgem must decide whether to grant National Grid’s request in part or in full.
EnAppSys analyst Rob Lalor told Power Engineering International that Ofgem will look at the black start contracts and will probably base any decision upon whether they think better solutions could have been found and based upon whether they think the changing situation with coal stations (as gas prices have fallen) has created an unforeseen barrier to National Grid managing the system within their set out targets.
“Clearly National Grid feel they need the contracts and ahead of what could be a fairly tight winter, it is important to keep Drax and Fiddler’s Ferry online as following recent closures both plants will be needed to provided capacity when required; with both having been at risk of closure ahead of these contract awards. Although there is a very high associated cost, it has to be said that these contracts do minimise risks this coming winter and as the market transitions into the winter periods covered by Capacity Mechanism contracts.”
With the benefit of hindsight it probably would have been more prudent to have contracted Capacity Mechanism contracts through the period from the first auction through to 2018/19, as while this would have increased the expected cost of the Capacity Mechanism, this probably would have reduced the costs required for contracts like these in this bridging period and increased certainty within the system.”
A lot of the plants that failed to win Capacity Mechanism contracts have already closed having not seen a future for their stations. At the same time the current economics for coal plants are not good, so many of these plants have closed earlier than expected in the knowledge that the government doesn’t see a role for them in the market beyond 2025. For both sets of stations, knowing they don’t have a long-term future means that they either need to make money in the short-term or should exit the market.
“The current market with declining running hours and low wholesale power prices off the back of increasing interconnector imports, renewable growth and declining electrical demand does make it hard for power stations to make money in the market and contracts from National Grid provide an increasingly important revenue stream for plants with low running hours that makes their financial future marginal.”
“This also makes it unlikely that many new gas-fired plants will be built without much higher Capacity Mechanism prices due to the fewer operating hours available,” added Lalor.
With many coal stations having closed or being close to closure, it is important the keep the remaining plants available in the winter months and at the same time it is important to ensure that there is enough income available for plants on the margins on the market as these are the plants that make the difference between the lights remaining on or not. As renewables continue to grow it will only get harder for these plants to make money and in order to cover fixed costs on fewer hours these plants will require a higher level of income per hour of generation.”