Electricity prices surge to 10-year high

THE UK’S electricity market has followed the lead of surging wholesale gas prices this week to reach weekend highs not seen in a decade.

The power market had avoided the severe volatility which ripped through the gas market this week because strong winds helped to supply ample electricity to meet demand.

But as freezing winds begin to wane this weekend, National Grid will need to use more gas-fired power plants to fill the gap, meaning the cost of generating electricity will surge.

Jamie Stewart, an energy expert at ICIS, said the price for base load power this weekend had already soared to around £80 per megawatt hour, almost double what one would expect to see for a weekend in March.

National Grid will increase its use of expensive gas-fired power by an extra 7GW to make up for low wind power, which is forecast to drop by two thirds in the days ahead.

Wind speeds helped to protect the electricity system from huge price hikes on the neighbouring gas market on Thursday by generating as much as 13GW by some estimates. However, by last night this output was expected to have fallen to 7GW before slumping to lows of 3GW by today, Mr Stewart said.

The power price was already £53/ MWH last weekend even before the full force of the storms hit Britain. That was still well above the more typical “mid40s” price for this time of year, Mr Stewart added. The price spikes across the UK’S energy markets have raised fears of household bill hikes in the months ahead. One industry source said that smaller suppliers may be forced to shut under the pressure of the market surge.

Late on Thursday, Big Six supplier E.on quietly pushed through a dualfuel tariff increase of 2.6pc, to drive the average bill up to £1,153 from April. Bulb has also increased prices by £24 a year for its 300,000 customers.

The UK has suffered two gas price shocks this winter, which is the first since British Gas’s owner shuttered the country’s largest gas storage facility at Rough off the Yorkshire coast.

Freezing weather sweeping in from Siberia has arguably exposed Britain’s dependence on foreign energy sources and its lack of storage infrastructure. Supplies of gas at one stage fell to critical levels as the “Beast from the East” forced households across the country to turn up their thermostats.

Yet, despite some overblown fears of a Seventies-style energy curfew, the plunge in temperature actually proved that the current market driven system for energy supply works, just about.

Nevertheless, the closure of storage capacity last year along with declining North Sea supplies has left Britain increasingly reliant on imports and renewables to keep the lights and heating on. Under normal conditions this “just about managing” approach would be fine but this week has been a chilly reminder that energy security isn’t scaremongering – it really matters for the economy as a whole. At the peak of the storm on Thursday when temperatures fell to among the coldest ever recorded in the UK for March, daily gas demand hit an eight-year high of around 410m cubic metres. In the dozen distribution areas of the UK managed by the four network operators, demand was forecast at around 337m cubic metres, which is 121m cubic metres above seasonal levels, according to S&P Global Platts Analytics.

The sharp draw on gas prompted the National Grid to issue a rare deficit warning – its first in eight years. The announcement understandably stoked panic that Britain was in real danger of running out of supplies. The warning allowed National Grid to ask some industrial customers to reduce consumption to ensure that domestic supplies could be maintained.

Meanwhile, homes have continued to receive energy supplies. The problem is that bills may now increase, along with more calls for price caps and handouts to subsidise the cost of reliable energy. Such retrograde measures should be resisted as they could plunge Britain into an energy abyss, starved of both investment and access to global markets.

Wholesale within-day prices at the National Balancing Point – the UK’S virtual gas hub – reached as much as 325p per thermal unit on Thursday, over six times higher than the average daily price in January. With same-day supplies from the North Sea already maximised, British distributors were forced to compete on the open market with mainland Europe, where demand has also been surging. Although it was a close-run thing, Britain’s diverse energy supply mix held up to its first big test since the closure of a major gas storage facility last year. With coalfired power plants operating at full choke and gas supplies maxing out, wind provided a helpful 13 gigawatts of electricity at a critical time to help avert disaster.

Of course, some will argue that the Government’s historical complacency on energy issues and Centrica’s decision to close Rough, the country’s largest natural gas storage site, last year have both recklessly contributed to the current tight market conditions. However, maintaining the 32-year-old Rough facility was uneconomic and building new capacity would have required taxpayer subsidy.

What’s clear is that the UK cannot afford to ignore potential new sources of domestic gas supply until better battery storage technology can be developed. If the economy is to continue to grow strongly it will require cheap, reliable and secure supplies of fuel. Importing more liquefied natural gas is one potential solution but spot cargoes on giant tankers can also take weeks to arrive, by which time any crisis will have abated. A return of coal-fired power plants is an alternative but that would require pulling back on climate change commitments.

Then there is the potential for onshore shale gas production in the UK. Although fracking in Britain will never happen on the same scale as the US, the development of a commercially viable shale gas industry could be enough to offset a demand squeeze caused by a cold snap. Although it was a close run thing, the current system in the UK has just about survived its biggest test. Energy has a price and that price is best determined by the laws of supply and demand.

‘We cannot afford to ignore potential new sources of domestic gas supply’

Andy Critchlow is head of Energy News, EMEA at S&P Global Platts