The reserve power opportunity

The UK power market – like power markets elsewhere – seeks to constantly address the ‘energy trilemma’ of security, sustainability, and affordability. Broadly speaking, these can be summarised as: keeping the lights on (security), reducing the carbon impact (sustainability) and limiting any detrimental impact of power prices on economic growth (affordability).

When it comes to security, the UK power market has historically operated with a total generating capacity well above the level of peak demand. This has ensured a robust electricity supply system, able to produce sufficient power to meet peak demand, even when some power generating equipment is unable to produce due to temporary technical problems or other outages. 

As a result, power has been a complete non-issue in the mind of the consumer. But over the last few years, there has been an increasing focus on the sustainability side of the equation. In particular, this has created three significant developments in the UK power market:

The closure of large coal- and oil-fired power stations. Between 2012 and 2014, 15 UK power stations closed or partially closed. This was in part due to a European Union Directive that required fossil fuel power stations to drastically reduce emissions. In the UK, a number of coal and gas power stations opted not to make the investment necessary to meet the new standards and so were forced to shut down. 

The decommissioning of nuclear power stations. Many of the nuclear power stations built in the 1970s and 1980s will reach the end of their useful lives over the next 15 years. This will reduce the power in the grid by around 14GW, which represents 25 percent of peak winter demand. Meanwhile, political and financial issues have slowed the development of new nuclear sites, suggesting this shortfall will not be offset by new nuclear generation.

Renewable energy fluctuations. The UK continues to invest in renewable energy sources, as it seeks to meet its European Union carbon reduction obligations by 2020. However, most renewable energy installations produce power intermittently, creating unpredictable variations in the power supply.

In summary, the focus on sustainability has had a negative impact on security. The closure of fossil fuel power stations has reduced installed capacity, whilst the growing use of wind and solar power has increased the proportion of power that is intermittent and cannot be relied upon to meet peak demand. A cold and still winter evening – with no solar and no wind generation – now poses significant challenges for the UK power system. 

Furthermore, the continued growth of the renewable energy sector poses serious questions for developers of large coal and gas power stations. They now have to accept that their output will be variable and unpredictable, because of a big and growing slice of the UK’s energy supply comes from wind and solar. 

Committing to the huge cost of building a fossil fuel power station, with limited confidence in the future demand for your output, could be a frightening concept. As a result, spare capacity is now coming under pressure and the ability of the supply network to meet peak winter demand is much less assured. 

The energy regulator Ofgem now forecasts that spare capacity could fall to 0 percent next winter. If this occurs, it becomes more likely that businesses and homes will experience brownouts (reduced power) or blackouts (no power) during the coming winter. Under such a scenario, power becomes a major consumer issue. 

Coinciding with this shortage of capacity has been an increase in the fluctuations of system frequency. System frequency is a continuously changing variable that is determined and controlled by the second-by-second (real time) balance between system demand and total generation. It is critical that the frequency of power in UK is constant at 50Hz. During periods of excess demand, frequency typically reduces towards 49Hz until additional supply is added to the system or demand is reduced. Conversely, during periods of excess supply, frequency typically rises towards 51Hz until additional demand is added to the system or supply is reduced. 

Classical generators are big heavy machines that rotate on a large shaft. These devices store mechanical kinetic energy through high levels of inertia. If a large source of power to the grid is suddenly cut off, the entire system slows rapidly, and as it does all generators release stored energy via inertia. Hence the bigger and heavier the generator, the higher the system inertia and the more resistant the system to fluctuations in frequency. Historically, coal-fired generation had very high levels of inertia and hence provided the ability to maintain a stable frequency. But the closure of coal-fired generation has exacerbated the frequency problems. 

National Grid has a licence obligation to control frequency within the limits specified in the ‘Electricity Supply Regulations’, i.e. plus or minus 1 percent of nominal system frequency (50Hz) save in abnormal or exceptional circumstances. National Grid must therefore ensure that sufficient generation and/or demand is held in automatic readiness to manage all credible circumstances that might result in frequency variations.

To mitigate both the capacity and frequency risks, the UK government and National Grid have put in place a number of measures designed to reward companies that can provide additional power during periods of peak demand. These include:

Capacity Market (CM) payments. Introduced through the Electricity Market Reform, the Capacity Market aims to incentivise investment in power generating infrastructure by awarding payments per megawatt/hour to companies that can make capacity available. In this way, the government hopes to ensure that the UK’s needs for installed generating capacity are met. Capacity Market Payments are determined through a competitive auction process, with successful bidders awarded payment contracts of up to 15 years. 

Triad payments. Received from large commercial users of electricity, in return for provision of power during the three highest periods of demand during the winter. Dealing with peaks in demand for electricity, particularly during the winter months, is one of the many challenges facing National Grid as system operator. The ‘smoothing’ effect of the Triad system on electricity demand helps to keep the network running more efficiently without building expensive infrastructure.

Frequency Response (FR) payments. Received from National Grid for being available to provide power at short notice. The market is split into three categories which provide power on different timescales – Enhanced (within 1 second), Primary (within 10 seconds) and Secondary (within 30 seconds).

There are a number of ways to address these capacity and frequency requirements. At a high level, the equipment needs to be flexible enough to be installed where needed, large enough to make a meaningful power output when called upon and responsive enough to meet frequency response requirements. Getting the right balance is not straightforward. Batteries have fast response but not large capacity, whilst gas-fired generation plants have large capacity but not fast response. 

One of the most flexible ways of addressing these needs is through investments in reserve power projects. These are typically installations of eight to 10 small containerised 2MW diesel-fired generating units. When aggregated into 16-20MW projects, these generators are quick to build, provide material capacity with short response times, low fixed costs and the ability to significantly reduce the need for additional infrastructure build by being located close to existing substation and transmission assets. 

The key revenue streams available for these projects are the Capacity Market, Triad, and Frequency Response payments detailed above, plus the income from selling the actual power output through a power purchase agreement to a retailer or large user. 

Given the generator targets output during times of peak demand, these will normally coincide with periods of higher power prices. Whilst difficult to forecast, it is expected that most if not all of the output will be sold at prices well above the marginal cost of production. 

In most cases, the generating equipment has dual-fuel capability for both diesel and gas. This allows the generator to benefit from quick start-up (from diesel, full power within 22 seconds) and lower emissions (by switching to gas once the generator is at full power). 

The provision of this generation capacity is an ‘enabler’ for intermittent generation – at a national level it is hard to justify building more wind, solar and other intermittent generation without having certainty around the availability of supply during the winter evening periods of peak demand. Reserve power generation provides that certainty and also lays down a pathway to lower carbon intensity. 

The days of taking energy security for granted are behind us, but with smart and timely reserve power investments, the risks of blackouts and brownouts impacting our power usage could be contained.