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UK power prices surge and higher energy efficiency target expected

Power prices have spiked in the United Kingdom and it is not yet winter as margins narrow, with a binding EU energy efficiency target set to be proposed.

The Big Picture

The United Kingdom witnessed its first price spike in recent weeks, even before the winter season got underway. A combination of higher-than-expected air cooling demand, summer maintenance on power stations and several unplanned outages pushed expected peak demand above available generation. This came as the UK government finally gave the go-ahead for the French and Chinese financed nuclear power station at Hinkley Point in Somerset.

In order to reduce energy use, which would reduce peak demand and ease capacity margins, EU regulators look set to propose a binding target to cut energy use by 30 percent by 2030, using a mixture of better building efficiency, mandatory electric vehicle chargers and smart meters.

Opportunity

With forecasters predicting lower than normal wind speeds across the United Kingdom and northwest Europe, it could be that winter 2016/17 is shaping up to be the tightest—and most expensive—winter in the UK power market’s two-decade history. All eyes will now be focused on December’s capacity market auctions, through which contracts will be awarded to power plants to make themselves available for next winter and four years ahead.

The European Commission originally proposed a 30 percent reduction in energy efficiency, but this was rejected by member states and watered down to 27 percent, along with the renewable energy target. The Commission is keen to use the target as a step towards implementing the Paris Agreement on climate change, especially as the United States and China have beaten the European Union to ratifying the deal.

Key Action

As well as capacity from large-scale generators, the government is looking to procure 300MW of demand side response in its upcoming “transitional arrangements” auction. This is an opportunity for those with demand side capabilities to earn revenue in return for reducing demand at times of winter peak demand. But, National Grid has cancelled its demand side balancing reserve tender for the coming winter, as a lack of willing participants undermined its viability this year. National Grid will work with providers capable of offering reserve across the peak in order to understand if “alternative delivery routes” can be developed for this winter.

Energy efficiency should be at the top of consumers’ agendas in terms of reducing energy demand and therefore costs.

Author
Louise Bell Louise Bell
Managing Editor
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