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There’s not much that connects West Burton, a sleepy rural hamlet in Britain’s east Midlands, with the US state of California.
But this month the owners of a power station near the Nottinghamshire village became the beneficiaries of an energy imbalance of a kind that enriched power companies, caused blackouts and infuriated countless consumers across the Golden State last summer.
A power squeeze in the east of England briefly allowed West Burton B, a gas-fired station owned by EDF of France, to sell its output for the vertiginous price of £4,000 per megawatt hour (MWh). Normal UK wholesale prices are closer to £40 to £50/MWh.
Nottinghamshire was not alone in experiencing this unwelcome blend of low output and high prices. Over the past three weeks, wholesale purchasers of electricity across Britain have frequently paid £1,000/MWh at peak times, according to Nord Pool, a day-ahead electricity market that matches up buyers and sellers.
True, the UK has not experienced blackouts like the Californians did last year. The lights stayed on, and consumers were not inconvenienced. But more connects the two places than just their experience of rising prices.
The US state now generates roughly a third of its electricity from renewables. For Britain, the figure is about 40 per cent. What those figures conceal is the variability of output. In Britain’s case, data from National Grid ESO and Elexon show that on some days wind and solar alone produce as much as 65 per cent of its electricity. But there is a flipside, which is what happens on days when there is less wind and sun to speak of.
According to the same data, wind and solar produced 20 per cent or less of Britain’s power on 87 days in 2020, including one stretch of eight consecutive days in August and another seven-day period in November. All it then takes is a power station, interconnector or wind farm to drop off the system, and all hell breaks loose in the market.
Critically, although renewable operators are responsible for these ups and downs (which can also involve them overproducing and having to be paid to switch off), they do not bear the economic consequences. These are lumped on the system as a whole.
Managing variability is a real issue in the medium term. That is because this may get worse before it gets better. Consider one of the features of renewables: unlike fossil fuels, solar and wind have no marginal fuel costs to recover. That, together with the subsidy they receive, permits them to sell electricity profitably at levels which are ruinous for fossil fuel stations.
In days of plentiful sun and wind, prices can even go negative. One day last May, for instance, they fell to negative £9.92/MWh.
What this means is that the grid is likely to become ever more dominated by intermittent capacity. There is little merit in building new fossil fuel capacity when margins are so slender. (Average operating margins at the UK’s three large thermal generating utilities were just 6 per cent in 2019.)
The one thing stopping much of the UK’s existing gas capacity closing is the existence of another bung — the so-called capacity market — that pays stations to keep their doors open so they can sell power at eye-watering prices on days when renewables cannot produce. Meanwhile, in another blow to baseload, Britain’s ageing nuclear fleet will start shutting next year without like-for-like replacement.
In the long run, advancing technology should allow grids to operate with elevated levels of renewables. But in the meantime, there is a need to ensure the UK has the baseload power it needs to keep the lights on without wasteful volatility. In his 2017 cost of energy review, the economist Dieter Helm suggested an elegant solution: make all operators meet the system costs for which they are responsible.
Instead of giving renewable owners a free option to sell whatever they could produce, they would bid to deliver specific quantities of power at certain times of day, with penalties if they over or under delivered. That would put them on the same economic footing as other operators.
Such disciplines might deprive West Burton B of the odd jackpot, and the serried ranks of wind farms and solar parks of some juicy rents. But they would ensure that the lights kept burning, while also giving the British people a better sense of the real cost of the energy transition on which they have embarked.
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