npower’s Wayne Mitchell’s Energy Blog

Will the capacity crunch equal blackouts? As if businesses don’t have enough to contend with when it comes to energy – with price uncertainty, increasing taxation and lack of clarity […]

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By Geoff Curran

Will the capacity crunch equal blackouts?

As if businesses don’t have enough to contend with when it comes to energy – with price uncertainty, increasing taxation and lack of clarity over future policy all providing cause for concern – now the risk of supply shortages is raising its head.

Back in 2011, we were operating with a supply margin of 16%. But this winter the buffer between supply and demand is set to fall to 5% – with predictions it could drop as low as 2% by 2015.

To be fair, we have operated with a 5% margin for most of the last decade. Reduced demand due to the recession pushed it temporarily into double figures. But the projected fall to 2% has set alarm bills ringing. A study compiled by the Royal Academy of Engineering and released last week reports: “Although the electricity supply is expected to be sufficient to cover predicted levels of demand, it is likely to stretch the system close to its limits, notably during the winter of 2014-15.”

Once you factor in the unpredictability of the British weather or the risk of a power station having to shut down unexpectedly, it’s no surprise that National Grid is also warning that the UK’s capacity margin will be significantly squeezed.

Of course, while it’s hard to predict the weather for next week, let alone a season ahead, we are able to predict our supply capacity. We’ve known since 2001, for example, that a number of existing coal and oil-fired power stations will be closing during this decade, due to the EU’s Large Combustion Plant Directive. According to Reuters, this will leave us with a generating shortfall of around 12 gigawatts in the next two years, with more to follow. Four nuclear plants are also scheduled to close by 2019.

The answer, of course, would have been to build new generating plant. But with so much uncertainty for so long over the UK’s future energy policy, few players have been willing to risk investing. That said, last week, the government finally confirmed a deal that ensures the go-ahead for a new nuclear station at Hinkley Point in Somerset. But until new plant is built and starts generating, it’s little wonder we are heading for a capacity crunch (although our experts at npower believe it’s highly unlikely this will actually result in any blackouts this winter or next).

The answer, according to the Royal Academy of Engineers (RAE) report, is not to wait until the measures being introduced in the government’s forthcoming Energy Bill finally come into play. For example, to avoid a potential “blackout scenario”, RAE experts call for the government to take interim steps to bridge the gap before its planned Capacity Market (CM) takes effect.

While demand-side response commitments of the CM are due to come into force in 2016, the capacity-delivery side won’t be available until 2018, following a four-year gap from the first auction next year. To avoid an earlier shortfall, the RAE report suggests halting any further withdrawal and mothballing of gas-fired plant. Or why not just shorten the capacity delivery timeframe and secure capacity for 2015 in next year’s first CM auction?

The RAE report also urges a speedy resolution of outstanding EMR issues, including Carbon Price Floor compensation. Since April, this UK-only tax has added around £2 per megawatt hour to the bills of large consumers – a figure set to double next year, and double again the year after – with the planned compensation for energy intensives still awaiting EU State Aid Approval.

So, we’ll be watching to see what happens with interest. After all, the RAE report was commissioned by the Prime Minister’s own Council for Science and Technology, so its warnings are more likely to be heeded.

For businesses wanting greater security in the interim, we’re already working closely with many of our customers to install onsite generation and/or develop strategies for managing consumption during periods of peak demand. Come the end of next week, when Triad season officially launches, this will be front of mind for many large businesses – and I’ll be dealing with this in more detail when I focus on Triad management in next week’s blog.

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