LONDON, Dec 20 (Reuters) - Britain’s energy regulator will allow National Grid, the country’s transmission operator, to pay businesses that agree to reduce their electricity consumption on winter evenings from 2014 to help avoid strains on the network.
National Grid’s request to create a Demand Side Balancing Reserve (DSBR) was approved by the Office of Gas and Electricity Markets (Ofgem) on Thursday.
National Grid will pay business customers that commit to reduce their power consumption on specified winter evenings between 1600 and 2000 GMT in response to a call from grid controllers.
Late afternoon and early evening in winter is when the demand on Britain’s power generators and transmission system reach their highest levels of the year.
Cold, dark winter evenings massively increase heating and lighting demand.
Most offices and factories are still operating, but many domestic customers are returning home from work and school, and street lighting is on.
To top it off, when high-pressure weather systems cover the country, sometimes for days at a time, cold still air reduces output from the country’s wind farms.
With many of the country’s ageing coal-fired power plants due to close over the next two years as a result of environmental regulations, the country’s reserves of spare generating capacity will shrink to their lowest level in years.
So National Grid is preparing to meet any shortfall by paying businesses to curb their evening power use and pay some power producers otherwise planning to mothball or decommission their plants to hold them in reserve.
The announcement, which was not a surprise, has already drawn predictable howls of protest from business lobbyists.
“It’s not the job of Ofgem to decide how much energy businesses use,” Graeme Leach, chief economist at the Institute of Directors, is quoted saying in the City AM newspaper. “Successive governments have failed to secure our energy future, leaving us in this dire situation,” he complained.
“This is another example of a statist solution to a state-created problem. Business leaders don’t know whether to laugh or cry,” he added.
A different analyst complained that the country faced a “full blown energy crisis” and there is a “real risk of blackouts and price spikes for hard-pressed consumers and industry.”
In fact, the chance of blackouts remains remote. The Demand Side Balancing Reserve is a market-oriented solution that will make best use of the country’s generating and transmission capacity.
Business leaders should welcome it as an efficiency measure that saves money rather than condemn it as an imposition.
Electricity customers have become accustomed to the convenience of sufficient electricity always being available at the flick of a switch.
But if every customer tried to use every appliance at the same time, the combined load on the generation and transmission system would be enormous. Huge numbers of power plants and high-voltage networks would need to be built to deliver all that electricity, at staggering expense. Most of the time, many of them would be sitting idle, or wastefully burning fuel on standby just in case more power is needed.
Instead, the power industry relies upon “uncorrelated loads,” the fact not every customer will use every appliance at the same time, but that in aggregate these uncorrelated loads nonetheless behave in reasonably predictable ways.
Because loads are not perfectly correlated, the industry only needs to be able to provide a fraction of the total potential demand at any given time.
Most of the time, that works fine. But there are times when loads become much more correlated than normal, stretching the system’s capacity to its limits.
One familiar example is the “TV pick up” when popular television programmes finish or hit a commercial break and millions of customers all get up and switch on electric kettle at the same time.
Since the average electric kettle uses several kilowatts, and is one of the most energy-intensive appliances in the home, the combined demand of millions of kettles all switching on at the same time is enormous.
The other big problem is the winter seasonal peak, when heating and lighting loads from millions of homes, offices and factories all become highly correlated in early evening.
Invariably, load usually peaks between 1700 and 1730 GMT on winter evenings during between November and February, a phenomenon that National Grid terms the Triad, after the three-highest half-hourly demand periods in the year.
Dates, times and the volume of electricity demanded for all the Triads since 1990 are available on National Grid’s website. In winter 2012/13, the Triads occurred on December 12, January 16 and November 29, all between 1700 and 1730 GMT.
Generators and transmission operators must have enough capacity available to serve correlated peak load, even though for much of the rest of the year it will not be fully utilised. The capacity management problem is actually even worse than this implies.
Like other grids in advanced economies, Britain’s is managed to achieve an extraordinarily high level of reliability at all times (which is why it is exceptionally rare for there to be blackouts other than as a result of weather damage to the network).
The grid is operated to cope with any conceivable contingency (and some that are barely imaginable). Controllers maintain all sorts of reserves to meet expected and unexpected changes in demand. They also maintain enough to cope with unplanned outages in the generation and transmission system.
There are sufficient reserves to cope with the sudden loss of the biggest power station or transmission line on the network, or even the biggest two (the N-1 or N-2 criterion).
If that emergency occurs, the grid immediately begins to prepare for the next biggest emergency that could happen, calling up more generation and transmission capacity, or curtailing demand, to restore the network to a reliable state able to deal with the next crisis.
In the United States, for example, if the N-1 contingency occurs, grid controllers must immediately start to bring on enough extra generation, or reduce demand, to be ready to deal with the next N-1 condition within a maximum of 30 minutes.
Published capacity margins take this into account. If stated capacity fell to zero, the lights would not start to go out, but the grid could no longer guarantee exceptionally high reliability in the face of an emergency.
Rather than sacrifice reliability, the grid can declare various states of emergency and call for flat-out generation or demand reductions, first voluntary and then compulsory, beginning with big industrial users such as cold storage warehouses, and ending with the most vital services like schools, hospitals and homes.
In other words, the chance of power being axed to ordinary offices and homes remains remote even if stated capacity margins during the Triads fell to zero.
Faced with highly correlated peak loads, planners have two choices. First, they can plan to have enough generation and transmission on hand passively to meet peak load, plus extra reserves to cover prediction errors, N-2 etc. But that is enormously expensive.
Alternatively, they can try to reduce the amount of correlation by encouraging consumers to shift some electricity consumption away from the peak, avoiding the need to build so much extra capacity.
National Grid already has agreements in place with many large industrial energy consumers to curtail their electricity use during periods of peak demand. The Demand Side Balancing Reserve extends this arrangement to medium-sized and smaller business customers.
Load-shifting is already common in other sectors (for example the peak/off-peak pricing of capacity on the rail network or for airfares).
No one expects to pay the same price for a train or plane ticket at all times and all seasons. The marginal cost of carrying extra passengers during rush hour or on popular routes around public holidays is far higher than at other times, and ticket prices vary accordingly to reflect cost differences and ration available capacity.
Power users need to get used to the idea of variable pricing. Switching the kettle or cooking dinner at 1730 GMT in December puts far more strain on the network than doing it at 1930 BST in April. It costs far more to provide that power and needs to be priced accordingly.
National Grid’s proposals reflect this reality. Rather than charge households more for winter evening power, the transmission operator is giving businesses a rebate to encourage them to shift some non-essential usage out of the peak period.
The concept of unlimited electricity being available on demand at a flat price is becoming a thing of the past (a rather statist solution, to coin a phrase).
In future, as smart meters are rolled out, more customers will have to get used to the idea that the cost and the price of electricity varies depending on when they use it.
Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.
Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.