Wednesday, 29 October 2014

Worried about security of energy supplies this winter?

Written by Helen Wallace-Fisher 
Energy Procurement Manager at CBRE

This week the National Grid announced that the supply/demand margin for electricity over the winter period could drop to 4%, compared to 5% last winter and the lowest since the winter of 2007 when spare capacity dropped to 3%.  This is due to a number of planned closures and unplanned breakdowns, combined with the impact of delays to the commissioning of new plants.

That said, National Grid has emphasised that there is no risk of winter blackouts, as it has a range of existing contracts in place whereby it can call on companies to reduce their demand from the grid in times of system stress.  It is also in the process of agreeing additional reserve contracts with three power plants that would increase the margin to more than 6%.

The low electricity margins coincide with ongoing tensions between Russia and Ukraine.  Although the UK does not receive any gas directly from Russia, if it cuts supplies to Ukraine then gas flows to the rest of Europe could be affected, which would have a knock on effect to supplies to the UK.  If necessary the UK would import more Liquefied Natural Gas (LNG) from elsewhere, though this would increase gas prices and potentially drive electricity prices higher still.

As yet the energy markets appear unconcerned by National Grid’s announcement, which has not had any meaningful impact on wholesale prices for the remainder of the winter.  However, any companies with unhedged volumes for the period should consider whether they want to carry the risk of potentially very volatile prices or lock out any remaining volumes now.

The issue highlights the potential benefit for those companies with the ability to shed load, or to switch on back up generation and thus reduce the volume taken from the grid.  This can be done for two reasons: to reduce exposure to periods of high pricing; or to go further and offer such services to National Grid in return for availability payments.

CBRE is seeing a significant growth in interest in these areas and urges companies to consider how to optimise their portfolios to either reduce costs or introduce a new income stream. 

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