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Stability and security of the electricity network is a growing preoccupation among policymakers, regulators and utilities, and the media and public, as an energy sector transformation continues.
That transformation is all about the impact on traditional gas and coal power of growth in variable renewables such as wind and solar. It is also about the impact of climate policies which drive a more rapid retirement in coal generation, for example as a result of carbon prices and pollution standards.
The worry is that too rapid decline in coal, coupled with a rise in wind and solar, will tighten reserve margins (the surplus of supply over peak demand), and make electricity supply too volatile. A rise in renewables has already suppressed wholesale power prices, thwarting new electric infrastructure investment. The fear is that blackouts are around the corner, without massive ratepayer funded payments to coal, gas and nuclear generators to keep the lights on (read, “capacity markets”).
This is the narrative behind a recent Goldman Sachs report on German utilities (“Higher prices or subsidies needed to stop the lights going out”), which supported a capacity market in Germany, and less ambitious targets to reduce carbon emissions.
What better backdrop to view the impact of a massive decline in coal generation in the UK last year (see Figure 1 below)? Preliminary data show that coal generation declined 60% (by 46TWh), to supply 9.1% of all electricity, down from 22.3% in 2015. That decline was about coal power plant closures plus deteriorating economics of remaining plants versus gas.
It was the prospect of this kind of decline that has fretted policymakers, prompting them to introduce a capacity market in 2014, to make sure existing gas stayed on the system, and to drive investment in new gas to replace coal. To date, that scheme has shelled out £3.4 billion and failed to incentivise a single new gas power plant.
And yet, the grid coped well. Naturally, with such a fall in coal you would expect narrowing margins: the UK’s grid is tight, and needs new investment. A new report today by the U.S. non-profit research institute IEEFA, which I helped produce, argued that the UK needs new renewables, interconnection and flexible generation including DSR, storage and gas peakers, and that these can be incentivised more cost-effectively in other ways (read the report, “A U.K. Electricity Transformation Under Way, But in Need of Better Direction“).
Tighter UK margins, but grid stability, are evidenced in the chart below (Figure 2), which shows how de-rated margins (the difference between forecast supply and demand) fell in the UK during the third quarter of 2016. They reached their lowest level on Oct 31, the day before clock-change, at just 387 megawatts (a margin of below 1%).
And yet the grid operator issued only one emergency margin alert last year (in May, before the drop in coal, balancing data show); and it made no use of a stand-by reserve of last-resort power plants (the supplemental balancing reserve).
Margins are tight in the UK, but that is not a reason to panic into expensive, sticking plaster measures like the capacity measures as currently applied. The IEEFA report argues for a calmer, more cost-effective approach to assuring a secure, low-carbon grid.
Figure 1. UK electricity supplied, TWh
Figure 2. De-rated margins, MW