A rise in electricity costs this week has raised fears that officials operating Great Britain’s power market could be held to “ransom” by owners of gas power plants during cold, windless days in order to keep the lights on. Here, we look why costs have increased sharply, the trading rules for plants and the implications for Labour’s clean power ambitions.
What has happened?
Britain’s energy grid has becoming increasingly dominated by wind power, which reached new records for clean power generation last year. But the grid operator was forced to pay more than £20m to safeguard Britain’s electricity supplies on Wednesday when high demand for electricity combined with low wind speeds, increasing the reliance on gas power plants.
Industry experts believe that costs could reach similar levels on Friday as freezing, windless weather drives prices in the UK’s wholesale electricity market higher.
Market data has revealed that £17.8m, or almost 90% of Wednesday’s costs to balance supply and demand, were handed to just two gas power plants after they said they would not run unless they were paid rates up to 100 times higher than normal market prices.
The Connah’s Quay gas plant in north Wales raked in revenues of £10.3m from the grid operator’s balancing payments on Wednesday, while the Rye House gas-fired power station, just north of London, received almost £7.5m.
There were concerns raised over Britain’s gas supplies, too. On Friday, the owner of the UK’s biggest gas storage site, Centrica, warned that its inventories were “concerningly low” after an early start to winter, and colder than average temperatures, caused its stocks to halve leaving less than a week’s worth of gas available. The government insisted that the UK’s gas supplies will meet winter demand.
How did these costs climb so high and who pays for it?
The newly nationalised national energy System Operator (Neso) fine tunes the balance between electricity supplies and demand by making payments to generators through a so-called “balancing mechanism”. This market can lead to prices which are far higher than usual market rates, and is ultimately paid for through household energy bills.
When electricity supply is short, Neso – which is responsible for the gas and electricity systems across England, Scotland and Wales – encourages energy companies to bid prices at which they would be prepared to power up their plants.
The system operator warned on Tuesday that it would need extra plants to fire up in the early evening on Wednesday to generate enough electricity to power homes and businesses within the safety limits set to prevent blackouts.
But both the Connah’s Quay and the Rye House plants notified the grid operator that they would switch off their turbines at lunchtime, and be unavailable to run during the forecast power supply crunch, unless they were paid steadily rising hourly prices through the afternoon.
The Rye House power plant demanded payments of £5,000 per megawatt-hour to keep generating power. This is over 40 times the government’s official estimate for the levelised cost of running a gas power plant. The Connah’s Quay power plant commanded payments of £2,300/MWh.
Were any trading rules broken?
Fears that Britain’s gas power plants were using slumps in renewable energy to command “excessive” prices from the grid operator have long been held and were reignited during the energy crisis, prompting the industry regulator, Ofgem, to set new trading rules for generators in 2023.
Under the rules, power plant owners cannot threaten to cut their generation to zero on the same day they offer to continue running for very high prices. But there is nothing to prevent owners from using this strategy if it gives the grid operator notification of the shutdown a day ahead of time.
“This is a ludicrous rule,” one industry source said. “It seems perfectly possible that generators could anticipate a supply crunch the day before and make it worse by notifying the operator that they plan to shut down.”
Market data does not show whether the power plant notifications were made on the same day, or the day before in line with market rules.
“It may not breach these regulations directly but it certainly goes against the spirit of the rules, which is to protect bill payers from excessive costs,” the source said.
Ofgem did not say if any rules were broken to extract the eye-watering payments earlier this week.
“There is a feeling that this system is rigged,” a former commodities trader told the Guardian.
Another industry source said: “We have suspicions that some traders in the market have been allowed to hold the power system to ransom by using a loophole in the market regulation.”
The owner of the Rye House plant, VPI Power, a subsidiary of Vitol, said the company “takes its market obligations very seriously” and had never left the grid operator short on power “intentionally or otherwise”.
VPI and Uniper, the owner of Connah’s Quay, declined to comment on when their notifications were made.
“Rye House runs rarely and is usually required for days like Wednesday when the system is very tight. We continue to invest significantly to ensure it is available and reliable in those moments,” the spokesperson said.
A spokesperson for the energy regulator said Ofgem continually reviews trading activity “all the time” and would “not hesitate to act if we find evidence that market rules have been broken”.
“Since the start of 2023, we have recovered more than £78m in fines and redress from generators that failed to follow the rules,” the spokesperson said.
Is this the price of Labour’s clean power plans?
The surge in market costs has also raised concerns among sceptics of the government’s clean power plans, claiming that the UK’s growing reliance on renewable energy could leave consumers more exposed to the cost of running gas plants when wind and solar is not available.
Labour has pledged that the UK’s electricity system will run on 95% low-carbon power sources, with gas plants held in reserve as backup when needed, by 2030. It is not clear how the UK’s gas plants will remain economic if they are seldom used throughout the year.
Pranav Menon, a researcher at Aurora Energy Research, called for “perspective” on the costs associated with backing up renewable energy.
He said that the recent surge in market costs was a sign that the growth in wind and solar is outpacing the rollout of batteries and other technologies which can store renewable power and release it when needed. In the coming years these will increase the flexibility of Britain’s electricity system, he said.
“While a system with greater intermittent renewable capacity is more complex to manage and increases balancing costs during periods of tightness, it also delivers benefits such as lower wholesale prices,” he added.
The grid operator could also make more use of its existing schemes which pay energy consumers to use less electricity during periods of high demand, rather than paying generators to produce more, according to Greg Jackson, the chief executive of Octopus Energy.
“Millions of pounds were added to bills in just a few hours to pay a handful of gas power plants for a modest amount of electricity. It’d have been far cheaper to pay customers who chose to use a bit less instead,” Jackson said.
