Will the lights go out?

Just a few weeks ago, National Grid warned that Britain faces a series of 'brownouts' after closures of coal-fired power stations to meet EU targets, leading to a gap between capacity and peak demand of 4.1%, the narrowest since 2006/07.

Posted on 04 December 2014.

But this safety margin could be wiped out in extreme cold snaps during winter and National Grid said that it may occasionally be necessary to ‘reduce voltage’.  National Grid's assessment, made in its 2014/15 Winter Outlook report, is that Britain faces its greatest risk of power shortages in almost a decade.

Since the publishing of National Grid's report, however, the likelihood of general power cuts this winter has receded somewhat, as the organisation has been actively concluding contracts with generators and large industry to either increase generation or reduce demand respectively. It would have to be a very severe winter for a prolonged period to force all businesses to reduce demand so that essential services, e.g. hospitals, and dwellings are not subjected to power cuts.

So, relief all round for this winter, but this represents a short term fix at best, with planned new nuclear power stations still years away.  If for no other reason than this, we should all be focussing on what we can do to reduce energy consumption, whether at home, at work or at play, and pressurising our Government to put in place a clear long-term strategy for sustainability.

Energy Market Update

OIL

Brent Crude prices have recently dropped to a five year low and today are around $70/bbl. The main reason behind this huge drop in prices is OPEC’s recent decision to defend output and let prices be dictated by the market. This will inevitably hurt U.S. shale and Canadian Tar Sands production as the costs of producing from these sources is around $100/bbl. However, it may be politically expedient for the West to continue to maintain output from these high cost sources, even though this means operating at a significant loss.

The hurt will also be felt some OPEC producers, such as Venezuela, Iran and Algeria whilst two other members, Nigeria and Iraq, have already lowered their prospects for 2015 GDP due to the fall in prices. Russia will also suffer and has recently announced that its budget for 2015 will be lowered significantly

In the Government’s latest Autumn Statement it has been announced that the Fuel Duty Escalator will remain frozen for the rest of this Parliament, namely mid 2015.

COAL  

Current prices have fallen back again to $70/tonne for API2 quality for calendar 2015 due to weakening worldwide demand especially in China and the move by some electricity generators in the U.S. to burn unconventional fuels, i.e. shale, oil and gas, which are available in large quantities although today at a loss to the costs of production.

This further reduction in price has encouraged some UK electricity generators to increase their coal use, yet again, and potentially bring forward the closure of some plants under the EU Large Combustion Plant Directive which does not allow operation beyond 2015 if the total operating hours reach a given level.

NATURAL GAS

Winter gas supplies are looking relatively healthy with long term storage capability at more than 90% full. The mild weather experienced in early 2014 led to stocks not being depleted at the usual rate and allowed an early re-build in readiness for the winter of 2014/15.  The two main pipeline systems into the UK, Langaled from Norway and BBL from The Netherlands, have from time to time in 2014 not delivered to their full capability but longer term contract prices have not been affected.

UK prices, are lower again than they were compared to this time last year, but have not declined in line with oil prices due to seasonal effects.

Quarter one 2015  prices have fallen from around 60p/Therm at the start of the heating season to around 56p/Therm which is significantly less than a year ago when spot prices touched 72p/Therm..  The market is also currently indicating a similar price of around 57p/Therm for the whole of winter 2014/15.

ELECTRICTY

The quarter one 2015 price has fallen by around 12% since earlier in the year and it now stands at around £48/MWh, with the price in February higher, yet again, than that for January by around £1/MWh.

The National Grid statement at the start of the Winter period in respect of “System Margin” indicating a cushion of c.5GW, significantly less than in previous years, has been to a degree offset by the uptake of Demand Side Response contracts with CHP providers and large industrial users who can reduce demand for availability and operational payments. The weather will trigger whether these contracts need to be activated.