TUME Insights

Low System Demand Presents Challenges to National Grid
Published by Kathryn Porter | 27th May 2020

As the country largely remains locked down, electricity demand continues to be low, and renewable generation high, particularly in the current sunny weather. This is creating challenges for National Grid ESO in balancing the electricity system, and so it is introducing new tools to increase what is known as “footroom”.

 

“Footroom” is the term used to refer to low-demand scenarios. Typically in the summer, there is a natural decline in demand as there is less need for heating and lighting, alongside an increase in solar generation. This is complicated by the fact that most solar generation is connected at the distribution level meaning that NG ESO does not have direct visibility of it. This summer, the effect is exaggerated by the fall in demand due to the pandemic. The daily shape of domestic demand is also changing as consumer habits in lockdown are different.

New balancing services introduced

To address these issues, NG ESO has introduced two new measures: the “Last resort disconnection of Embedded Generation” (Grid Code Modification 143) and the new Optional Downward Flexibility Management (“ODFM”) scheme.

The OFDM service allows NG ESO the ability to control output from providers that are not currently accessed through either the Balancing Mechanism or existing Ancillary Services. Eligible participants must be capable of sustaining service delivery (ie continuing reduction of export to the grid, or increase in site demand) for a minimum of 3 consecutive hours, and must be 1 MW or larger (which may be through aggregation of separate assets behind the same Grid Supply Point).

Demand for the service will vary, but up to 3,000 MW of net demand reduction will be required each time ODFM is triggered. Generators must be able to curtail completely and must not be participating in an active network management scheme with their Distribution Network Operator (“DNO”).

The term of the service is from 8 May to 31 August, with an option to extend to 30 September, and the primary delivery window is 23:00 – 07:00 Saturday through to Monday (although the service may be activated outside these core hours if needed).

According to NG ESO, more than 2.4 GW of capacity from 170 smaller generators has been signed-up to the service, including 1.5 GW of wind, 700 MW of solar and almost 100 MW of demand turn-up.

The “Last resort disconnection of Embedded Generation” provision, which was urgently approved by Ofgem on 7 May allows NG ESO to instruct a DNO to disconnect embedded generators connected to its system under emergency conditions and as a last resort. This would only be possible once demand reduction through the Balancing Mechanism and other commercial means had been exhausted. Embedded generators subject to such a disconnection would not receive any financially compensation, so are encouraged, where possible, to participate in the ODFM service to ensure they secure revenues for any reduction in output. This capability will remain in effect until 25 October 2020.

The requirement to exhaust all commercial options before implementing emergency disconnection of embedded generation, the system operator may well end up paying a premium for ODFM services. This could mean that not only will generators be able to cover any loss of income from reducing their output, but may well earn more than they would have done if running normally.

These measures were implemented on 7 May, ahead of the first May bank holiday weekend where demand was forecast to be particularly low. Although it appears that no embedded generation was disconnected over that weekend, the OFDM service was called upon, and delivered a reduction of around 238 MW, primarily through the curtailment of wind generation.

The ODFM undoubtedly presents a revenue opportunity for a number of embedded generators and storage asset owners who previously did not have the ability to access such markets (as they will generally not be parties to the balancing mechanism). However, this potential opportunity needs to be considered in light of existing commitments/restrictions both operationally and contractually, for example in relation to any power purchase agreement obligations to maximise output. This may mean that the scheme is more easily accessible for aggregators or generators who benefit from flexible merchant PPAs or route to market arrangements within their own group,“         Simon Davies, Principal Associate, Evershed Sutherland

As expected, the ODFM was called again over the second bank holiday weekend in May. Ahead of the weekend, NG ESO had expected overnight demand to fall as low as 13.8 GW, with potentially large contributions from distribution-connected solar during the day-times.

In the event, demand was significantly lower than over the same period last year, and the ODFM service was called upon 3 times, as shown below:

NG ESO also entered into an arrangement with EDF to reduce the output of its Sizewell B nuclear plant, agreeing a one-off fixed contract rather than using the Balancing Mechanism, possibly due to the inflexible nature of high capacity nuclear power stations.

Consumer bills set to rise as balancing costs grow…

Most people would think that and excess of supply over demand would result in lower prices for consumers, and indeed, with most commodities that would be the case. However, with electricity, the over-riding need to balance supply and demand in order to maintain security of supply means that the current low demand / high renewables scenario is likely to push prices up as a result of increased balancing costs.

NG ESO expects that its balancing costs for the period May-August 2020 will be almost 2.5 times higher than for the same period last year, but points out that without the introduction of these new services, the costs would likely have been around 3.1 times higher. This significant increase will be passed to transmission system users in the Balancing Services Use of System (“BSUoS”) cost, which ultimately feeds through to consumer bills.

With many consumers currently struggling to pay their bills, both in the domestic and industrial/commercial segments, this is bad news for suppliers, many of whom are finding the current environment even more challenging than usual.

…pointing to a lower carbon/ higher cost future

 

The lock down is beginning to be relaxed, and with schools and businesses starting to re-open, demand is set to increase over the coming weeks and months, and may recover to “normal” levels by the winter. Some commentators have suggested that the lock down has shown the way to a new, lower-carbon future, with demand met by high levels of renewables, and National Grid’s new service innovations are a step towards that.

But there are problems with this view. Even in a low-demand scenario with plenty of renewables available, the system cannot cope without thermal generation – CCGTs are running while wind is curtailed (as described in this recent NG ESO webinar), in the winter, coal still contributes to around 10% of demand on some days, and as noted above, the costs of balancing in these conditions are significantly higher than normal.
 
With the wider economic devastation caused by the pandemic and the difficulties suppliers are facing collecting payment from consumers, it remains to be seen whether this new model is affordable.

Kathryn Porter is an independent consultant who has worked in the financial and energy markets since 1997.  She has experience in physical and financial electricity, gas and oil markets. Kathryn advises clients on all aspects of wholesale gas and electricity markets, as well as supporting them in energy market entry, new business and asset evaluation, energy risk management and financing. Kathryn has previously worked for Centrica, EDF Trading, Société Générale, Barclays Capital, Commerzbank and Deloitte. Kathryn holds a Master’s Degree in Physics from the University of Exeter and an MBA from London Business School, is a Chartered Fellow of the Chartered Institute for Securities & Investment and the Chartered Management Institute and also a member of the Parliamentary Group for Energy Studies Kathryn has been a TUME Associate since September 2017.

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