Consumers could see increased bills next year as non-commodity costs (NCCs) rise in reaction to tight supply margins. Despite demand maintaining a long-term downward trend, the power supply system could be struggling at times next winter and this is expected to lead to greater use of balancing tools, raising NCCs.
National Grid reiterated it expects an increased use of Supplement Balancing Reserve (SBR), Demand Side Balancing Reserve (DSBR) and other demand side balancing tools during winter 2016/17 in order to cut demand at peak and boost supplies when required.
This is a result of supply margins being forecast to be significantly tighter for this coming winter. Margins of minus 3GW had been initially forecast throughout November 2016, December 2016 and January 2017. While this has been offset by offering additional reserve contracts to coal plant, margins remain tight. The UK’s coal capacity has since dropped with the closure of the Rugeley plant, further heightening concerns over available supply for 2016/17.
Isn’t demand lower?
While demand is currently on a downward trend, the mild conditions seen last winter are not guaranteed to be repeated. Increased reserve capacity has been acquired for the SBR, DSBR and STOR balancing schemes. National Grid has also defended its decision to award Black Start Contracts to Drax and Fiddlers Ferry coal plant. A black start is the means by which power is restarted following a national outage, without the need for start-up power from the grid. Such contracts are required to ensure suitable plant are available to restart the rest of the grid following a blackout. The awarding of such contracts underlines the seriousness of the situation developing for the upcoming winter.
The concerns over supply margins for next year have been enhanced after National Grid issued its Winter Review for 2015/16, a season during which it issued its first system alert for insufficient supply margins in four years. Winter 2015/16 was one of the UK’s mildest since the 1960s, with temperatures consistently above seasonal normal for most of November, December and late January. This led to lower domestic heating demand, which helped to offset increased gas for power generation.
Impact of coal plant closures
However, reduced baseload capacity following coal plant closures was worsened by a series of energy plant breakdowns in early November which left the system struggling to meet forecast peak demand. An additional 500MW was requested to meet evening peak demand, with 40MW of DSBR also requested which saw large energy users paid to turn down consumption at peak times. National Grid stressed there was no disruption to service or risk of blackouts and the incident proved to be isolated. However, some market participants saw the move as a sign of things to come, with increased system intervention from National Grid ultimately adding to non-commodity costs for consumers.
As margins tighten for the forthcoming winter, price volatility is expected to increase with supply disruptions potentially leading to price spikes in the market.
As a result, it is more important than ever for consumers to stay on top of the latest developments in the energy markets. Our Market Intelligence service can help – click the button below to find out more about our service.