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National Grid’s 2014-15 Winter Outlook

bulbIt’s finally here; the most eagerly anticipated Winter Outlook Report ever. Admittedly there is a short list of competition but there is no doubt that this latest report from National Grid – the owners of the main pipes and wires network that keeps the UK’s energy supply running – is a crucial one.

With the looming problems for Winter 2015/16 having been well known for years, in a short few months since late this Summer it has been Winter 2014/15 that has suddenly become the focal point of National Grid’s thoughts.

With the loss of a raft of EDF Energy’s nuclear reactors facing delayed re-commissioning, the fires at RWEs Didcot B and SSEs Ferrybridge and all out mutiny at Scottish Power and Longannet, the prospect of power cuts over Winter 2014/15 have grown inexorably.

Should National Grid have reported earlier given the unprecedented pressures? Probably would be putting it kindly. But as is usual in the UK energy market, it is archaic conventions that all too often get in the way of spirited and constructive solutions.

The report

Still we are where we are and the Winter Outlook Report for 2014/15 leaves us in no doubt as to our situation. It makes a chastening read for market followers and the uninitiated alike:

  • The UK has the narrowest capacity ‘margin’ for eight years
  • The Capacity Margin of 4.1% is the lowest since 2006/07
  • This ‘margin’ is the equivalent of 58GW
  • Normal winter demand is forecast to be 55GW
  • A 1 in 5 likelihood of a ‘bad’ winter will see this narrow to 2.8%
  • At 2.8% capacity margin, the network would be unable to meet its “basic reserve requirement” needed to operate the system
  • The forecast has tumbled from 6.7% before the recent plant outages
  • Just 3 years ago the margin was 16.8%

National Grid however tell us they have contingencies in place including:

  • Having already undertake STOR (Short Term Operating Reserve measures) to provide additional temporary generation capacity this winter, albeit at a significant cost premium
  • Agreed lucrative contracts with customers willing and able to reduce their demand over peak periods this winter
  • Being close to agreeing a 1.1GW boost to the system this winter

And that in doing so:

  • The forecast margin would increase to 6.1%, not dissimilar to original summer forecasts but crucially this is:
  • Just 36% of the capacity margin available in 2011/12

In addition these forecasts do not assume:

  • Any further supply interruptions from the ageing nuclear fleet or more fires to follow the two major breakouts of the last three months
  • A worse than average winter in the UK
  • Any further deterioration in the Russia / Ukraine conflict and its bearing on gas supply and international prices
  • A worse than expected winter in Continental Europe creating market pressure by reducing imports and prompting increased exports through the UK interconnectors
  • Upwards pressure on ‘saviour’ energy sources such as LPG amid increased global and winter demand

Indeed National Grid’s Winter Outlook Report goes to great lengths to make clear from the outset that its 66 page document:

“Is not a prediction of what could or will happen, but a factual analysis of how the energy sector looks based on the information we currently have. We can’t predict exactly what supply and demand will be this winter, nor can we anticipate unexpected events. What we do know is that we have taken steps to understand what we can know and make sure we have the tools we may need”.

Peter Atherton, of Liberum Capital, summed up the precipitous situation saying:

“[With] historically low [electricity] reserve margins as we head into winter, the nightmare scenario now is that we lose another large power station and we have another of those periods we have had in recent winters of a cold high-pressure system with no wind for several weeks. Then we are in deep trouble.”

The brown out

Within their report National Grid cite their access to “a range of tools” as a critical factor in their ability to ride out such low capacity margin’s including what is known as ‘brown outs’ or the ‘less deadly version of a blackout’ within which an official notice, called a “demand control imminent” is issued to the electricity Distribution Network Operators around the country instructing them to reduce the voltage in the system.

2006 and 2012 saw such notices being issued, 2012 being a year with significantly higher capacity margins than are predicted for 2014/15 yet such preventative measures were needed in order to balance the system and keep it operating.

National Grid claim however that the risk of a full blackout is currently, based on what they know, no more likely than last winter at a chance of just 1 in 31.

It would be a brave sole to bet against the situation remaining insulated from unexpected additional pressures over the coming Winter. However if the status quo held and no further plant outages occurred and we had a pleasant and mild winter then even this long time capacity margin low could see us through.

If any of those elements don’t play ball however then events not seen for two generations since the early 1970s could see the reality of UKs appallingly neglectful energy policy come back to haunt us very quickly.