UK Power: Under Pressure

3 November 2003 – Further to the news that UK power generators have warned of future blackouts, electricity sector chiefs would like the government to reinstate capacity payments as a means of ensuring future security of supply. However, with a relatively new energy minister, this is more about pressuring tactics than market realities, writes Datamonitor Energy Consultant, Alex Solomon.

Ian Russell, chief executive of ScottishPower, has warned that a power supply crisis is a distinct possibility within the next few years. The combination of scheduled closures of older nuclear and coal-fired plants, together with the UK’s current low renewable capacity means that blackouts could occur. Mr Russell and other industry executives have stated that they are not prepared to invest in new plants while wholesale prices remain low.

ScottishPower and Powergen, two of the UK’s largest electricity suppliers, favour a return to capacity payments, abolished with the introduction of NETA in 2001. Under the old pool system, capacity payments were made to generators in return for keeping less efficient plants operating.

Currently the market has no equivalent mechanism and the reserve margin has fallen from the deemed safe level of 20 per cent to as low as 2 per cent on one occasion in the past year. National Grid Transco (NGT) has suggested that the margin could fall to as low as 7 per cent this winter.

The capacity payments system, which was open to manipulation, did at least provided sufficient advance warning to generators to bring mothballed capacity back online. At present 4.6 GW of generation capacity in the UK is mothballed, with NGT estimating that 55 per cent of this can be operational at short notice.
According to Datamonitor, it would take an exceptional combination of factors to bring about blackouts in the UK this winter. Although the longer-term situation will require careful planning, NGT is currently examining a range of options to ensure security of supply this winter. These include allowing plants to operate at above their maximum generating levels and offering large power consumers ‘turn down’ contracts to reduce consumption at times of peak demand.

Datamonitor believes Mr Russell’s comments are an attempt to pressurize the government and Ofgem, both thought to be opposed to capacity payments, into market intervention. Both should resist the industry’s latest attempts at coercion.