Avoiding blackouts…at any cost?

The report, GB electricity capacity margin, says that the capacity margin of the UK electricity system could continue to fall over the next five years as old generating plants close, presenting an increasing risk of power cuts.

To combat this, among other measures, it recommends asking industrial users to adjust their production schedules to avoid heavy energy usage at times of peak electricity demand.

This is something that the government is already looking at as part of the Electricity Market Reform (EMR) process currently making its way through Parliament. It is proposed that a series of auctions for reserve capacity will be held where bidders – either owners of idle generating plant or major consumers – will vie to be paid for freeing up capacity on the grid at critical times.

Capacity payments to industrial users already occur in the US, and last year 28GW – 6% of peak demand - was made available through so-called demand side response (DSR) providers.

UK capacity auctions are set to run on four-yearly cycles, with the first auction set to take place at the end of next year to provide capacity in 2018. However, these auctions are restricted to generating capacity, with the DSR portion being held back to be auctioned just a year in advance of delivery – a concession made by the government to recognise the fact that it would be extremely difficult for industrial users to calculate their energy needs four years in advance.

As a result, ahead of the main capacity mechanism scheme beginning at the end of 2018 there will be two one-year DSR delivery periods starting at the end of 2016 and end of 2017, with the auctions for these periods taking place at the end of 2015 and end of 2016 respectively.

In between now and the first DSR period at the end of 2016, National Grid has proposed to run its own capacity payment scheme, called Demand Side Balancing Reserve (DSBR). This scheme, if approved by energy regulator Ofgem, will run between 4pm and 8pm every night during two winter periods: November 2014 to February 2015, and November 2015 to February 2016.

With processing accounting for 73% of UK industrial energy usage, it seems likely that process plant owners will be a core target market for both the DBSR and subsequent DSR and capacity mechanism schemes.

Billpayers being forced to subsidise industrial giants like BASF, Unilever and Coca-Cola is hardly likely to go down well

Indeed, Roberts told me yesterday that he thought that process industries where volumes of production could be adjusted “relatively easily” would also be better suited to being DSR providers than sectors such as automotive manufacturing where cutting electricity demand would effectively mean shutting the plant down.

Unfortunately, this is not the view taken by some of the major process industry bodies. The Chemical Industries Association in response to National Grid’s summer consultation on its DSBR scheme said “many of our companies are unable to provide these services as they run large continuous processes and do not have the ability to switch off or down at short notice”.

Likewise the Confederation of Paper Industries was doubtful that major processes could be adjusted, but felt there might be some interest among its members with onsite generation such as Combined Heat and Power (CHP)in National Grid’s proposals that under the DSBR these plants could start feeding electricity into the Grid.

“While core papermaking is a continuous process with very limited opportunity for short term interruption, some mills will have sub-processes (such as batch production of pulp or product conversion) that could have operational cycles adjusted,” said the CPI response.

“Likewise operation of CHP could be maximised to support balancing projects if sufficiently incentivised. However it should be stressed that paper mills are designed to produce paper and not as power stations. ”

With National Grid proposing capacity payment fees ranging between £1,000 per MWh and £15,000 per MWh, being a DSR provider could clearly be very lucrative, potentially leading to the ludicrous situation of paper mills becoming power plants.

At a time when energy costs are already at the top of the political agenda, billpayers being forced to subsidise industrial giants like BASF, Unilever and Coca-Cola is hardly likely to go down well with the general public.

And if the payments were to go the other way, then the issue of blackouts will become even more pressing: in the US the electricity capacity supplied through DSR rose every year until last year, when it fell to 28GW from 32GW in 2011.

Flat demand combined with low natural gas prices (thanks to the US’ shale gas boom) meant wholesale electricity process fell, and in turn the payments offered to DSR providers fell. Consequently there was a lower take-up.

I’m not saying that the UK is going to experience its own shale boom that drives down gas prices any time soon, but if political pressures forced the cutting of capacity payment prices offered to DSR providers (as we have seen with renewable energy incentives), then take-up could be non-existent.

Billpayers subsidising industrial firms or the very real prospect of blackouts? Which would you choose?