Despite positive winter outlooks from grid operators, and a reduced likelihood of blackouts compared to last year, affordability is still a priority issue for households across the UK. Dr Alastair Martin, founder and CSO of Flexitricity, highlights the pricing practices and economic dynamics impacting energy costs over the winter season. Along with new markets and regulations, he explains how flexibility measures can positively impact winter prices and security for the future.
The messages from Ofgem’s, National Grid’s and National Gas’s winter forecasts are clear: this winter should be easier. But easier than what?
To recap: last winter there was a worldwide energy price crisis, far more electricity than usual flowed out of Britain to make up for French nuclear woes, there were some cold snaps, and Russia – a major source of gas for Western Europe – continued to pursue the major war it started in Ukraine. This winter we face a further conflict that threatens energy prices. According to some analysts, households could pay £100 more a year for their energy as the Gaza conflict contributes to rising wholesale gas prices which, in turn, typically feed electricity rates.
Zooming in on people’s day-to-day costs, around 80% of the approximately four million British customers on pre-payment meters (PPMs) ran out of credit last year. An unknown number of non-PPM customers chose to spend the winter in cold houses to ensure they could afford other essentials, like food.
To put it bluntly, although Europe was largely spared the misery and economic impact of grid-induced blackouts, there was a significant level of what the industry calls “self-disconnection.” This rather clinical euphemism masks the widespread social harm caused by energy affordability worries.
Every winter – in fact, all the time – electricity and gas operations and infrastructure businesses are primed to interrupt customers’ energy supplies in the event of a crisis. This preparation is part of their licence obligations and there are rules, cascades and rotas determining how they can manage energy supplies during emergency events.
Cautious, experienced analysts at National Grid and National Gas never promise zero blackouts (only politicians do that) and their track-record is probably as good as we could ask for. We therefore have every reason to trust their reassurances that forecasts are almost back to normal for this winter. While that may be comforting in terms of energy security it doesn’t address affordability.
Ofgem’s introduction of the Inflexible Offers Licence Condition (IOLC) at the end of August is welcome news in this context as it aims to stop excessive price rises in the Balancing Mechanism (BM).
Every generator watches the market to try to figure out how much their electricity might be worth, but last winter a small number made operational tweaks on top of their pricing decisions that largely placed the Electricity System Operator, and hence the customer, at their mercy. The effect of this was both specific and general.
For instance, on 12 December 2022, the most expensive day of the year, 87% of the £27m spent that day on the Balancing Mechanism went to just two gas-fired power stations. These costs are contagious. If National Grid has no option but to pay above ten times the retail price cap for electricity, other generators can end up pricing themselves at the same level. It’s a defensive measure: under the rules of the BM, that’s what it could cost them if there’s a routine fault on their own stations. If one station goes for a high price, many others will follow.
The problem of prices being dragged upwards is an Ofgem construct, but the newly introduced IOLC should take some of the price sting out of occasional tight moments and hopefully lead to lower prices for consumers.
Much was made last winter of how well wind farms did out of the UK’s energy market. The reality is rather more complicated, as we basically have a bilateral market with multiple trading horizons. The underlying point, however, is that every penny paid to a generator (whether gas, nuclear, solar or wind) comes from the customers’ pocket. What matters is the totality of this effect, and the fundamental forces that drive it. These include gas prices and storage constraints, problematic market rules, and French nuclear restrictions – triggering UK electricity exports that can add 9% to our winter peak demand.
Although many of these factors are now being addressed and things seem a little less fraught this year, that’s hardly a strategic view of energy security. To achieve that we must look at ourselves: at making the best use of our resources and minimising waste. The industry must do more in terms of energy efficiency. Flexitricity’s contribution is in using flexibility to make electricity greener, more secure, and cheaper.
A large part of that is using the Balancing Mechanism and balancing services as triggers to deliver energy dynamically, right at the moment of need. For this to work, National Grid ESO must use the best-priced resource available for each need, and it hasn’t always been good at finding those resources in the BM stack. Most of the market is waiting eagerly for the launch of ESO’s Open Balancing Platform, a new control room system due for launch in December – though the old toolkit has kept Flexitricity’s control room busy, and provided increased revenue for our customers over recent weeks.
Significantly, National Grid is also in the market with two innovative services.
The first of these, the Demand Flexibility Service (DFS), is back for a second winter. The DFS won’t replace the 1.9GW of peak reduction that the Triad system previously delivered, but it is a show of commitment to flexible domestic consumption. Primarily electric vehicle chargers and heat pumps, which are still central to energy policy, despite recent headlines.
The second is the Local Constraints Market (LCM), a brilliant idea suffering from a resolvable flaw in its execution. The LCM is ESO’s offer to pay people in Scotland for shifting their consumption to windy periods. That puts Scottish wind energy to work when some of it would otherwise be discarded and reduces the gas burn across GB in less windy periods.
The flaw is that the LCM is currently constructed as a two-tier market: an electricity supplier bringing home energy users into LCM makes more money than a flexibility aggregator doing the same. This is a problem for market integrity, but more importantly, it’s a problem because up to now only aggregators have participated. That’s because flexibility aggregators are good at aggregating flexibility, and electricity suppliers are good at supplying electricity.
At Flexitricity, we’re optimistic about resolving imperfections in the balancing mechanism, in wider balancing services and in other markets where flexible energy users can earn revenue. Our customers are earning now, even as these markets currently stand. This winter will still have its moments, and Flexitricity will respond with its 1GW aggregated virtual power station. But we can see what’s coming after that, and we’re right at the front of most of it. Winter 2023/24 will show progress, but winter 2024/25 could be truly transformational.
