Q2 2020: The cost of staying in control

by Dr Iain Staffell – Imperial College London

The cost of keeping Britain’s power system stable has soared, and now adds 20% onto the cost of generating electricity. 

The actions that National Grid takes to manage the power system have typically amounted to 5% of generation costs over the last decade, but this share has quadrupled over the last two years. In the first half of 2020, the cost of these actions averaged £100 million per month.

Supplying electricity to our homes and workplaces needs more than just power stations generating electricity. Supply and demand must be kept perfectly in balance, and flows of electricity around the country must be actively managed to keep all the interconnected components stable and prevent blackouts. National Grid’s costs for taking these actions have been on the rise, as we reported over the previous two summers; but recently they have skyrocketed. 

At the start of the decade, balancing added about £1/MWh to the cost of electricity, but last quarter it surpassed £5/MWh for the first time (see below). Balancing prices have risen in step with the share of variable renewables. The dashed line below shows that for every extra percent of electricity supplied by wind and solar adds 10 pence per MWh to the balancing price. Last quarter really bucks this trend though, and balancing prices have risen 35% above the level expected from this trend. The UK Energy Research Centre predicted that wind and solar would add up to £5/MWh to the cost of electricity due to their intermittency, and Britain has now reached this point, albeit a few years earlier than expected.

This is partly because keeping the power system stable is requiring more interventions than ever before. With low demand and high renewable generation, National Grid is having to order more wind farms to reduce their output, at a cost of around £20 million per month. They even had to take out a £50+ million contract to reduce the output from the Sizewell B nuclear reactor at times of system stress.

[1] The quarterly-average cost of balancing the power system, expressed as a percentage of the cost of generation [2] Balancing price shown against share of variable renewables, with dots showing the average over each quarter

A second reason for the price rise is that National Grid’s costs of balancing are passed on to generators and consumers, who pay per MWh. As demand has fallen by a sixth since the beginning of the coronavirus pandemic, the increased costs are being shared out among a smaller base. Ofgem has stepped in to cap the balancing service charges at a maximum of £10/MWh until late October. Their COVID support scheme will defer up to £100 million of charges until the following year.

For a quarter of a century, the electricity demand in GB ranged from 19 to 58 GW. Historically, demand minus the intermittent output of wind and solar farms never fell below 14 GW. However, in each month from April to June this year, this ‘net demand’ fell below 7 GW. Just as a McLaren sports car is happier going at 70 than 20 mph, the national grid is now being forced to operate well outside its comfort zone. 

This highlights the importance of the work that National Grid must do towards their ambition to be ready for a zero-carbon system by 2025. The fact we are hitting these limits now, rather than in a few years’ time is a direct result of COVID. Running the system right at its limits is having a short-term financial impact, and is teaching us lessons for the long-term about how to run a leaner and highly-renewable power system.

Minimum net demand (demand minus wind and solar output) in each quarter since 1990

1: Starting from March 1990 – the first date from which half-hourly demand data are available