Policy & regulation

Report urges ministers not to spend billions more responding to “overblown” fears

The supplemental balancing reserve (SBR) cost a total of £180 million over the three years it was in operation but was “never once used”, a new report by the Energy and Climate Intelligence Unit has found. 

The think tank raised concerns that “fearmongering” about the “overblown” risk of blackouts led ministers to purchase an expensive insurance policy that was not needed. It has urged them not to spend “billions” more to bolster the UK’s capacity margin.

“The clear message from this report is that paying to boost spare capacity in Britain’s electricity system can be very expensive, and potentially unnecessary,” said Energy and Climate Intelligence Unit (ECIU) energy analyst Jonathan Marshall.

“The drop in the number of calls by the grid for extra power last winter also suggests that, in an era of smarter technology, balancing supply and demand is becoming easier and cheaper.

“This begs the question of whether calls to increase our capacity margins in the UK, for example by a new ‘dash for gas’, are sensible, given that doing so comes with a price tag in the billions of pounds.”

The SBR was introduced in 2013 as a stop gap measure to provide backup capacity until the introduction of the capacity market. Under the mechanism, mothballed power stations which may otherwise have closed entirely were paid to remain on standby outside of the wholesale energy market to ensure there were no blackouts.   

The report found that National Grid spent £23.5 million (£15.57/kW) on the SBR in the first year of its operation, £23.1 million (£12.95/kW) in the second year, and £122 million (£34.21/kW) in the third.

Not only was the mechanism “ultimately unused” but warnings to the wholesale market over potential capacity shortfalls also become “less frequent” during the period.

A notice of inadequate system margin (NISM) – now electricity margin notice (EMN) – was issued by National Grid on just three occasions over the last four years. Not a single EMN was issued during the recent winter. The report said a decade ago they were common, but “now, they are not”.

This was despite a “gradual decline” in the UK’s capacity margin in recent years, which fell from 16 per cent in 2011 to just 6.6 per cent in 2016. “The absence of problems relating to a declining capacity margin shows that a narrowing gap between supply and demand is not an issue,” the report said.

Source: National Grid and Lazarus (taken from ECIU report)

The ECIU called into question the recommendation of a recent report by the House of Lords Economic Affairs Committee to raise the capacity margin to 10 per cent. It estimated that the extra capacity would cost £2.1 billion to build if provided by new gas-fired plants and a whopping £12 billion if provided by new nuclear power stations.

“Moving ahead, as more capacity retires due to old age, measures that increase grid flexibility will ensure that a thinner margin can be realised without affecting security of supply,” the report added. The introduction of the capacity market for the coming winter should be “the final nail in the coffin for blackout fears in the UK”.

MP and ECIU advisory board member James Heappey commented: “This report shows that the special temporary measure adopted in 2013 to cover us through the last three winters was completely unnecessary. Bill payers have spent £180 million on standby power stations that were not needed.

“On the surface, we did not need the SBR. And while it is valid to argue it was a prudent investment during a period of disruptive energy system change, we should also ask whether ministers of the time were spooked by claims of an imminent loss of power.”

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