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The chaos caused by the National Grid failures on 9 August was a stark reminder to everyone in the UK of how reliant we are on the consistent supply of electricity. The continuing advancement of technology, the growing electrification of transport and heating, and the integration of electronics into even the most basic processes have made us precariously dependent on an uninterrupted and uncapped provision of electricity. But with the march towards renewables and electrification gathering ever greater momentum, will the recent blackout really be the one-off that the National Grid claims?
The UK electricity market today
The National Grid owns the electricity transmission networks in England and Wales, as well as being the system operator for the Scottish networks, supplying millions of homes and businesses. The network covers 7,212km of overhead line, 2,280km of underground cable and 347 substations. The overall electricity network is regulated by Ofgem, whose remit also includes those organisations which work with the National Grid as transmission network operators (TNOs) and distribution network operators (DNOs) and the companies which build, repair and maintain the network infrastructure.
The 14 accredited UK DNOs operate under Ofgem's eight year framework spanning from 1 April 2015 to 31 March 2023. The total expenditure allowances over the framework was originally budgeted at £27.8bn, however actual expenditure is forecast to be £26.6bn (9.6% lower), and the DNOs are behind on even the lower revised scheduled works according to the latest Ofgem report.
National Grid and Ofgem have now released their preliminary findings around the disruptive events on 9 August. The report states the key factors of the blackout were
1. Renewables & localised supply
The UK is due to close all remaining coal plants by 2025, and the majority of the 15 nuclear reactors in the UK are due to retire by 2030, therefore, the UK government is focused on increasing renewable energy provision and decentralising energy, including to local producer-consumers. Both renewable and local energy generation are known to be more volatile than thermal generators and will demand improved transmission and distribution capabilities across a broader national footprint, and will also require the grid to prepare to better manage small businesses and households both drawing electricity from and selling energy back to the national grid at times when a surplus is generated.
The high levels of renewable supply at the time of the lightning strike meant that the proportion of electricity generated by wind power was around 30%, reducing the levels of thermal plant generation and thereby reducing the available resources to manage the outages. The move away from historic sources of energy such as coal has reduced inertia (the stored rotating energy in the system) on the grid, which is relied upon to regulate frequency.
As we continue to reduce energy generation from fossil fuels, so the inertia in the system also reduces, therefore the National Grid is becoming increasingly reliant on synthetic inertia. This comes in the form of paid agreements between the National Grid and companies (suppliers) to either:
Historically, DESS providers have relied on payments due to them under National Grid framework contracts to justify their initial capital outlay to install storage capacity or provide frequency response (depending on their contract). However, because the income under these contracts has fallen so substantially, today BESS developers in particular no longer look to those National Grid contracts to justify the initial investment, but rather look to electricity spot prices and associated trading revenues (i.e. where electricity can be selectively bought and sold at optimal times during the day) to achieve the required rate of return. There is a very significant consequence of this change and the associated revenue uncertainty that is materialising in the National Grid T-4 contracts (contracts where suppliers have four years to develop and make storage capacity available to the National Grid). The first round of these contracts were tendered in 2016, so the contracted capacity under those contracts should become available to the National Grid during 2020. However, in reality, not much of the contracted capacity has actually been built or is currently under development, with some suppliers potentially preferring to pay a penalty for failing to provide contracted capacity rather than incur the cost of installing such capacity (assuming there is more than an SPV standing behind the contractual commitments). This suggests that storage capacity and frequency response, i.e. the potential future availability of synthetic inertia from DESS and BESS providers - is likely to remain under considerable pressure over the next few years with the capacity that the National Grid is anticipating to come on line not being available.
This lack of activity is reflected in a comment by Kelvin Ruck, MD of G2 Energy, the largest installer of battery storage in the UK, who says "although through our national coverage we have seen a large increase in the number of potential BESS projects being priced up over the past few years since the first T-4 contracts were awarded, it is only in the last few months we have seen a significant increase in the number of BESS projects where shovels are actually striking the ground".
Supporting Ruck's view, a paper by Frontier Economics of the National Grid's 2018 Capacity Market auction process found that the clearing price per kW of supply over the four years to 2021/22 had fallen from £22.50 in 2016 to only £8.40 in 2018. As a result, only 762 MW of new build supply was commissioned, forcing the National Grid to instead move towards relying on interconnector supply (i.e. importing energy from other countries). Batteries, combined cycle gas turbines and small generators were the divisions which struggled to compete at the low auction prices. The report also highlighted the lack of visibility provided by the National Grid for investors about the volume and price of National Grid balancing requirements in the future. Even for those investors which have remained in the National Grid processes, if they are too optimistic about their prospects in 2021, those small flexible projects will be at severe risk.
This raises a key question as to whether the current tendering and contracting process is really attracting the investment and achieving the capacity installation that it was designed to encourage, with the potential result that we may experience more failures in the grid balancing system in the future.
The recent blackout has also highlighted the need for DNOs to take further steps to prepare for any latency in the system. Blame has already been apportioned to the DNOs for a lack of prioritisation of major public infrastructure institutions such as hospitals and train lines which should have been unaffected by increasing outages for private home owners. The implication of these early recommendations perhaps emphasises the expectation that this network failure is likely to be repeated and that private customers can expect to be the "front line" of casualties in the case of future failures.
The blackout has also put a spotlight on concerns on maintenance and investment in the network which in addition to having been reduced by 9.6% from the initial 2015 budgeted spend, is also currently behind in terms of maintenance spend incurred to date according to the latest Ofgem report. This may have played a part in the number of recent collapses of electrical engineering contractors such as SPIE, Carillion and Voltcom who were part of the limited pool of contractors available to the National Grid and DNOs, who suffered from a combination of (amongst other things) low margin work, long working capital cycles and project unpredictability causing staffing uncertainties (and therefore inefficiencies), which stretched their balance sheets to the point of failure. These failures have now reduced the availability of maintenance crews with the requisite skills and safety systems in place to deliver the maintenance and upgrade services required by the National Grid and DNOs, which in turn means there likely to be a real physical capacity constraint restricting the speed at which this underinvestment can be caught up in the short term.
Reflecting on recent events and the fundamental changes in the future of both generation and demand across the UK's electricity network, does the 2015 Ofgem framework therefore really continue to be fit for the requirements of our network and has it really delivered the investment and additional capacity it was designed to?
Also, is the current maintenance framework really providing efficient service to the grid and DNOs, or is it stretching SME balance sheets to the point of breaking and thereby reducing the pool of contractors available to provide future grid maintenance and upgrades?
One thing that seems likely as we move to a more decentralised generation and storage network across the grid is that greater demand will be placed on its ability to respond nimbly, which will become increasingly harder if investments are not being made, and the SMEs with the requisite skills and accreditations to work on these networks are no longer operating.