Record energy prices: is this our new normal?
What's happening in the UK power markets? How can businesses manage the impact of higher prices and increased volatility?
On 9 September 2021 we thought electricity prices had reached an all-time high, but by Wednesday 15 September they had surged even higher. On this momentous date they reached the day-ahead wholesale price of £2,500 per MWh – to overtake the previous day's record-breaking peak of £1,750. The price of wholesale gas has increased by 250% since the beginning of the year and by 70% since August.
Balancing costs also increased substantially to reflect the scarcity of flexible plant and low wind, pushing prices to beyond £4000/Mwh on occasion, a level rarely ever seen. Typically, balancing prices are around 40 times lower.
Of course, this all adds up to higher bills for many businesses, with a few manufacturers already taking drastic action by pausing or limiting production. It has never been more important to double down on energy efficiency and weigh up the opportunities of generating and storing renewable power on site to reduce costs and increase energy security.
For those organisations that have flexibility, back-up power sources, or are able to load-shift, the situation is more positive. These businesses have an opportunity to sell their excess electricity at premium rates and create a solid income from flexing their energy.
Centrica Business Solutions has helped customers to optimise energy and maximise income from flexibility in recent weeks.
Why recent energy prices surged
What is causing the UK's bullish power market? Is this a rare oddity, or a sign of things to come? How can National Grid keep the system balanced and what are the opportunities for business?
Higher energy demand from global economies that are bouncing back after COVID restrictions, together with increasing environmental concerns, are pushing up gas and carbon costs. But on top of these bullish factors, the first two weeks of September brought a 'perfect storm' of other extreme market pressures to the UK.
Unseasonably low wind, combined with planned power plant outages for pre-winter maintenance (totalling 17GW of capacity) made supply extremely tight. This was exacerbated by interconnector constraints, including an outage, due to fire, of a major power import pipeline from France. National Grid has said that this alone will cause a 1,000 MW capacity shortfall until 27 March 2022.
What's next for power prices?
While it's impossible to predict the future of the energy market, which is inherently volatile, most forecasters expect increasing volatility. One of the key drivers is the rapid replacement of fossil fuel generation with intermittent renewables, together with increasing power demands due to the electrification of both heat and transport.
In the immediate future, many of the plants currently undergoing planned maintenance will return to availability. And as we enter winter, breezy conditions should return to provide a significant increase in wind generation. The new North Sea Link will also open this year, providing a two-way 1.4 GW renewable power supply between Norway and the UK.
Nevertheless, similar low wind issues in interconnected countries could mean that some of these vital pipelines experience further supply shortages due to a lack of back up capacity. In addition, colder weather and darker days and nights will increase UK peak energy demand by at least 15GW as we go into winter.
Going forward, strong competition from rebounding global economies for gas (which remains the biggest single source of UK power generation) could maintain upward pressure on prices. This situation is aggravated because some European gas storage facilities are already depleted after a cold winter in the northern hemisphere.
Looking further ahead, the UK's coal power stations are to be phased out by 2024, gas power station capacity is reducing, while nuclear provision has declined sharply and faces an uncertain future.
As part of its commitment to generate emission-free electricity by 2050, the government aims to deliver 40GW of offshore wind by 2030. But replacing stable, predictable fossil fuel power stations (that provide system inertia) with intermittent renewables requires a fully flexible energy system that can balance supply and demand at all times.
What actions can businesses take?
With increased energy volatility and higher prices, businesses should put in place a resilience plan and take urgent steps to improve energy efficiency.
Implementing Solar (PV) can help to de-risk against the rising cost of energy. It enables businesses to unlock value from their existing assets including their roof, parking and ground space to generate their own on-site energy supply – driving resilience instead of relying on more expensive energy from the grid. In addition, Solar PV can actually create an additional revenue stream when fed back to the grid.
Alternatively, Combined Heat and Power is a flexible and secure source of on-site generation, which can improve your resilience and can cut your energy costs by up 40%.
Installing distributed energy technologies at your sites, such as renewable on-site generation and energy storage, will increase energy security, while providing a win-win opportunity to improve both environmental and financial performance.
The big optimisation opportunity
As September's record-breaking balancing payment prices indicate, there are opportunities for organisations to earn significant financial rewards from energy optimisation through a wider range of demand side response (DSR) activities.
There is an attractive window of opportunity to monetise battery energy storage and aggregate flexibility from a range of assets to maximise returns and minimise risk. In this way, businesses can accelerate progress towards a net zero energy system that supports a major expansion of renewable energy resources, such as solar and wind power.
Centrica Business Solutions' market-leading Artificial Intelligence (AI) technology capabilities and DSR and wholesale trading expertise underpin our suite of energy optimisation solutions. We can adapt to changing business needs and market dynamics to maximise value and minimise the risk and complexity associated with flexible energy market revenue.
How we can help
Improve energy & operational efficiency, reduce costs & get the most out of your resources with data-led decision making that optimises your energy supply. We'll protect your sites from energy supply disruption to keep your business on 24/7 and safeguard you against commercial, regulatory and market risks.
By combining our expertise with the power of distributed energy, we can help you to become more efficient, resilient and sustainable – on your pathway to a low-carbon future.