Consumers Pay £2.6bn To Balance Grid, Thanks To Renewables
By Paul Homewood
The power industry is concerned some companies could be making massive profits on the occasional days when renewable electricity generation slumps.
Generators which step up to fill those gaps are charging record prices to "balance" the supply of electricity as our power grid rapidly shifts towards net-zero.
The costs are paid by the industry, but are ultimately passed on to bill payers.
They make up only a few percent of the total cost of an electricity bill – but the extra burden is coming at a time when energy prices are already soaring.
The latest data, analysed for Sky News, shows consumers will end up paying a record £2.6bn on their bills due to the costs of balancing the electricity grid in 2021.
And it looks set to continue this year, with just one day last week costing more than £40m. Compare that to typical daily "grid balancing" costs of around £2m.
The high prices are in part due to the record high wholesale cost of gas, but there’s evidence that some electricity generators are charging much higher prices to increase generation on days when flows of electricity from wind and solar plants fall.
"The pricing seems very high compared to normal," Darren Jones MP, chair of the business, energy and industrial strategy committee, told Sky News.
"What we need to understand is how much of that is related to the price of gas given the international gas crisis, and how much of that is due to potential bad behaviour of generators who are quite frankly taking the mick in order to make excessive profits."
Ensuring a steady supply of electricity means engineers at National Grid ESO, which manages the grid, have to constantly work with generators to manage supply.
On days, or hours, when there is low wind, National Grid takes bids from suppliers to fill the gap through something called the "balancing market".
But in recent months, balancing market costs have been rising exponentially.
Data shared with Sky News by energy industry analysts LCP found that the 10 most expensive days on record have all occurred since last September.
Overall balancing costs in 2021 were £863m more than in 2020.
In November 2021, the most expensive month on record, balancing costs were £541m – that’s nearly four times the monthly average.
On 24 January, a cold day, with virtually no wind, the bill for balancing the grid was £40.9m.
"We have never seen days like that before," said Rajiv Gogna, an energy analyst at LCP.
Last November’s peak prompted the energy regulator Ofgem to write to energy companies about the issue. National Grid ESO has since launched a review of the market.
"We wanted to ensure the rules and mechanisms of that market were delivering competitive outcomes for consumers," Fintan Slye, Director of National Grid ESO told Sky News.
One thing the review will examine is the timing and the cost of the "bids" made by power generators offering to take part in the balancing market.
Image: Energy prices are soaring as the UK faces a cost of living crisis File pic
Some generators, like England’s few remaining coal-fired power plants, are being paid up to £4,000 per MWH to balance the grid.
Even though that is around 16 times higher than the current wholesale electricity price, the costs are seen as justifiable due to their size. Most are coming to the end of their lives and don’t regularly supply electricity as coal is being phased out.
However, a number of smaller, cheaper-to-run gas powered plants have been following the price signal set by coal plants and charging similar amounts to generate electricity when supplies are short.
"They can bid in at whatever price they feel is appropriate or whatever price they think the market will bear, so it is a competitive market," said Slye.
He told Sky News he expects the review should ensure the best possible deal for consumers but doesn’t expect it to find anyone "acting outside the rules."
Amusing to see the “experts” blaming the wicked energy companies for wanting to make a profit! They obviously have never heard about supply & demand. It is the ludicrously intermittent renewable generators that are responsible for increasing demand for short term balancing.
And it is enforced shutdown of coal plants that has reduced supply. Can’t these people add 2 + 2?
Bit more importantly, what will happen in a few years time, when we have no coal plants left at all, and even more renewable intermittency?
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NOT A LOT OF PEOPLE KNOW THAT 
And the morons who want net zero were never warned this would happen. Except many times….
They just can’t bear to mention the real reason for this farcical situation, renewables.
Exactly.
‘balancing the electricity grid’ is BS. Trying to conceal the intermittency of weather dependent generation.
It is playing with fire to protest the pricing of backup power. You risk killing that which keeps you alive.
The BM system is wide open to speculation, the bigger the shortage of power, the higher the marginal cost, hence the £4,000 per MWh. In an Oligopoly, games theory comes into play, in times of extreme shortage, theoretically the price will rise to infinity until the demand is satisfied. So they wait till it becomes a crisis and then bid, do they collude? What do you think? Those idiots at OFGEM were supposed to look after consumers interests, but under Jonathan Brearley (who co wrote the climate change act with Baroness Worthington) they have gone green. When he was grilled by the Parliamentary Energy Committee recently on the supplier bankruptcies he just said he was just carrying out the governments wishes.
GeoffB, the theory goes as follows for a competitive market (that is, not even for an oligopoly):
With surplus of supply (generation), consumption has choice (strong bargaining position) and in theory drives down price to the marginal cost of the most expensive generating unit required to run. Below this price, consumption would not be satisfied, so the theoretical competitive market will not go there.
With shortfall of supply (generation), supply has choice (strong bargaining position) and in theory drives up the price to the marginal cost of the least expensive unit of consumption which will prefer to switch off. Above this price, supply would return to surplus, so the theoretical competitive market will not go there.
In both cases, there is a margin. This is the price gap between the most expensive unit of supply (marginal cost of generation) and the least expensive unit of consumption prepared to switch off (marginal price of demand).
The only question is who gets the margin. It only depends on who has the bargaining power as per the above two cases.
Some complain about the margin going to supply (generation) and see it as an abuse of bargaining power. What they fail to recognise is the benefit of that margin is enjoyed by consumption at all other times.
With the highly complex rules of the grid code that is no longer the case, because the grid guarantees that expensive units will be run in preference to cheaper ones. It is also not the case for consumers, few of whom are truly exposed to marginal cost pricing as of yet. We have made do with the shrinking element of half hourly metered industrial customers to provide the supposed marginal consumer, but in practice all they usually do is switch to cheaper self generation rather than pay grid marginal prices.
Yes but consumers don’t know the price and can’t not consume hour by hour. Although consumption varies, it varies in a highly predictable manner and previously supply was easily variable within that consumer variation. That means prices were highly predictable. Both consumers and producers could plan/budget sensibly and household consumers didn’t need to bother much about when they consumed. It also created opportunities for off-peak , marginal consumers to take advantage of over-supply. That kept costs low for all consumers. But the huge intermittancy of renewables has thrown that into chaos. We cannot predict supply so we cannot predict price. That is disastrous in a market that cannot react to hour by hour pricing. Marginal consumers cannot plan, household consumers face roller coaster bills and some producers are given the opportunity to make huge windfall (pun intended) gains. Thus the marginal consumers disappear, which raises prices for everybody, and high consumers also disappear as they cannot compete with businesses in countries with lower costs. That eventually lowers prices but in the meantime we have overcapacity which has to be paid for.
Previously we had a system in which other than gas/coal costs it was difficult to increase prices and in which the natural variation in demand was optimised with everybody gaining. Now we have a system in which renewables investors get guaranteed returns, marginal producers make huge profits and the consumers get done over either by price or by reliability or by both.
IDAU. You say ” the grid guarantees that expensive units will be run in preference to cheaper ones”. This is not how I understand the (self dispatch) Grid Code pre-Gate Closure processes.
A generator will make sales through forward contracts which result in Account Bilateral Contracts being registered in its Energy Account. The generator then has an incentive to match these with Account Credited Energy, or face expensive cash-out costs.
The generator also notifies physical planning data to National Grid (the Final Physical Notification) to a standard of Good Industry Practice. The FPN should therefore reflect the Generator’s Account forward sales.
The same self-dispatch process for all participants and I cannot see how this could be described as a “guarantee to run” for any particular generator.
Subsidy may well distort the economics for some generators, but that’s quite a different thing.
But not by the RIGHT PEOPLE!
If di Caprio or Thompson or Thunberg had been saying this be sure they would have listened!
But never mind. If Sky is saying these things (at last) then there is hope yet. There are vague creaking noises coming from the climate edifice and the more we can insert a chisel in some of the weak spots the greater chance of hastening its collapse.
A proper cost-benefit analysis of net-zero would help and if we keep comparing the Covid computer models to the climate ones …
Hard slog still but if we keep at it …
I’m afraid they will just gaslight us and pretend that the problem is too much reliance on fossil fuel.
Labour MP fails to understand that if the govt. creates a shortage by putting suppliers out of business, the price goes up from those left standing. I am shocked.
I have to say Harry, I have some sympathy for Centrica on this one (I have no connection with them). For some years now, Centrica has had its market share eroded by newcomers who did not understand their business and thought they could beat Centrica on price. Centrica knows how to price its products according to risks and liabilities, but others chose to provide the same products to customers below this level. The only beneficiaries were the consumers who got cheap energy for a short while. Centrica’s share price collapsed, not because Centrica was poor managing its business. The shake out of the market is just its way of returning to the fair retail price of supply – look at Centrica’s tariffs if you want to find out what that is.
Those who cause the imbalance; those that require the need for backup: they should be required to pay, not the consumer. And MPs who voted for such a system should be made to beg for re-election by their constituents – which means that voters need to know (not from the BBC) which MPs are responsible for their bills.
The ones who caused the imbalance are BEIS and National Grid, who failed to procure adequate capacity, because they were determined to push as much coal capacity into closure as quickly as possible, and OFGEM who set the rules that are designed to minimise coal use.
“could be making massive profits on the occasional days when renewable electricity generation slumps.”
“Occasional”? My a*se!
More hideously biased rubbish from the wokerati at Sky. And as for blaming the generators, well Paul H has nailed that nonsense.
Of course, it has one advantage – helping to kill off demand (ignoring the consequent effect of killing customers and ruining businesses)
Yes, well when we’re all dead, we will officially have achieved Net Zero.
Does anybody have grid balancing costs for the years before 2020?
Try digging around here
https://data.nationalgrideso.com/data-groups/balancing
There seem to be differences between the sum of daily BSUoS data and monthly MBSS report data. The former seem to miss some ancillary services charges. MBSS gives £1.792bn for 2020 and £1.203bn for 2019, with £0.878bn for Apr-Dec 2018.
Constraint payments again.
https://www.telegraph.co.uk/politics/2022/02/19/wind-farms-paid-not-generate-half-potential-electricity/
(sorry if repost, can’t plough through everything)
The record day: Nov 24th 2021: £63,308,500
“…as our power grid rapidly shifts towards net-zero.”
Oh, the sheer irony! 😂
Here are the greens.
“Energy prices are skyrocketing as fossil gas becomes increasingly unreliable. We need a fair energy transition! Everyone has a #RighttoEnergy”
The first question is why are EU “energy prices skyrocketing”? And why exactly are EU “fossil gas” supplies becoming “increasingly unreliable”?
1. This is the type of doublespeak propaganda being heavily promoted by the greens, who not only are pushing for the increased taxation of fossil fuels, but who have also mandated that all future gas and oil exploration be prohibited
2. The same greens who promote unreliable renewable energy generation, forcing EU countries to scrabble for increasingly scarce natural gas supplies to maintain a sufficient quantity of electricity supply (see 1 above)
3. The same greens who support the indexing of all energy generation prices (regardless of how much or little renewables are used) to the most expensive energy generation supplies. Surprise surprise that in Europe this is natural gas (See 1 & 2 above why natural gas is increasingly becoming a scarce and expensive commodity)
No matter its never their fault. Instead they just become increasingly absurd.
Green Utopia, where you have a RIGHT* to energy, will fail in the global marketplace, because it will be utterly noncompetitive.
The UK’s push to Green Utopia is suicidal. Everyone outside sees it.
*CM theory grants rights to people for the use of other people’s labor or property.
The renewable crowd doesn’t recognize backup requirements. Even 100% fossil fuel grids plan for excess usage.
Contributors to this blog were ahead of government Policy. BBC news today
Boris Johnson says shifting away from Russian oil and gas would help with the UK’s energy security.
He says the volatility in gas prices in Europe is a “consequence of that failure” to stand up to Russia in 2014 when Crimea was annexed.
The PM says: “In the UK we have been able to reduce our dependency on Russian gas very substantially. Only 3% of our gas supplies now come from Russia.”
Johnson says the response includes granting licences for UK gas reserves but also shifting to low-carbon energy, including nuclear power.
He added: “The faster this country can be more self-reliant on our own energy, the more prosperous we will be, but also, of course, the more sustainable our energy prices will be, and that will benefit the UK consumer.”
The volatility is of course due to the failure to promote gas production at home and abroad in competition with Russian supply, and with moves that result in increased reliance on gas through closure of alternative coal and nuclear capacity. It has been exacerbated by encouraging China to become an important buyer of LNG and pipeline gas from Russia, giving Russia an alternative market.
If there were no renewables, the balancing costs would largely disappear. The need for huge balancing costs arises only because of the intermittency of renewables
Even without renewables (meaning wind), there would be balancing services costs for providing a range of things. Includes reserve (operational and standing including cover for “infeed loss” which is unexpected loss of generation), for resolving network constraints, to support voltage at different locations on the network (voltage services don’t travel long distances) to provide frequency response (a particular form of operating reserve) and short circuit level to “ride through” lightening strikes.
I could probably name quite a few others. The pre-Gate Closure contract market doesn’t address these detailed points of operating the network, and treats the network as a so-called “infinite busbar”. National Grid uses the Balancing Mechanism to reconcile the detailed practicalities of network operation (balancing services).
Absent wind, balancing costs would probably be a small percentage of the forward price on average. Maybe sub-4%.
The £2.6bn bill is effectively around £100 per household, even if some of it comes in higher costs of things we pay for (some including 20%VAT) rather than directly in household bills. The much higher levels that started when the French interconnector failed last August have persisted through the winter so far, and are going to be extended by further coal and nuclear closures. We have nowhere near enough capacity to prevent it, and frankly BEIS, OFGEM and National Grid are still asleep at the wheel over the provision of adequate dispatchable capacity. This year’s bill could easily be £4-5bn if we get into bidding wars for interconnector supply.
Adding to the woes, FERC (the US regulator for the transport of energy) has just expanded its remit to include all sorts of environmental aspects which is going to make it all but impossible to build new gas pipelines.
So we shouldn’t count on expanding US exports of LNG as they will be strangled.