Why wholesale energy price hikes make flexibility so vital

What's happening in the UK energy market?

There's a perfect storm leading to a massive hike of close to 200% in UK gas prices and an overall tripling in the cost of wholesale energy since July last year. This has led to a dramatic reduction in our energy suppliers. To put this into context, so far in 2021, we've seen 7 suppliers go bust affecting over a million householders and there's more to come. We started the year with around 70 suppliers and industry experts estimate we will have as few as 10 by December.  

Why is this happening?

The UK and the EU are struggling with a shortage of gas and a lack of wind at the moment, but for the UK this is worse because we rely on gas and wind for around 60% of our energy compared to 30% for the EU.  

It's just not been very windy of late, and as for gas, a large portion of our supply is courtesy of European pipelines.    

Production issues and an increased demand across Europe due to hard winters and environmental concerns have resulted in a significant gas shortage. There are global gas markets, but they are running low due to high demand in Asia. UK coal plant capacity is down from 23 gigawatts in 2011to 5 today and nuclear supply has been hit by problems resulting in reduced output. Add to this the UK energy price cap preventing energy suppliers from passing on price hikes and you can see why the sector is reeling.

It doesn't end there; in addition to shouldering the rising cost of energy, UK suppliers also face an annual deadline to hand over millions in renewable energy subsidies collected from bills to pay renewable energy developers. Only last week, wind farms were paid more than £1.8 million to shut down - at a time when consumers face huge rises in energy bills because of spiralling wholesale energy costs.  

Then we come to unexpected incidents such as the fire on15 September affecting the UK's biggest cross-border interconnector, the IFA1, resulting in an immediate loss of 1GW from the market, possibly throughout the winter. Another recent blaze at Sellindge, near Ashford, will prolong a halving of the trunk’s capacity.  

This perfect storm saw prices of electricity on the day-ahead market on the N2EX exchange soar to £2,500 per MWh for delivery at one point, with an average daily price of £424.61. Keep in mind the average for august was £106.83, and across 2020 it was only £35.26 per MWh.  

What can be done?  

The energy cap has already increased this year and is due to increase again next April but that won't solve our problems and we have a very tough 6 months ahead. The government face difficult decisions in balancing the lack of supply with consumer demand and domestic energy costs, and there's no quick win on the horizon, as well as the journey to net-zero to contend with.  

Where we can take meaningful action to help us survive these supply-side problems and contribute to our next zero journeys is to focus on the demand side.  

How can the demand side help?  

National Grid (NG) is the Electricity System Operator(ESO) and runs the UK's network to ensure that supply and demand are balanced and power flows across the network safely and reliably. This becomes increasingly challenging as more renewable energy comes online because it is, by nature, inflexible; unlike the electricity, we generate, and gas, it isn't always predictable and can't easily be turned up or down. The requirement for increased flexibility in the system due to increasing inflexibility on the supply side is a challenge, but it also presents exciting opportunities to innovate on the demand side.  

NG's introduction of grid balancing services such as demand side response (DSR), short term operating reserve (STOR), and dynamic containment and firm frequency response (FFR) have already started the demand side revolution. These initiatives are all about using energy in a smart way that benefits the consumer and delivers flexibility and capacity to the ESO.    

Where are we now?  

The supply side currently dominates our market. The inflexible nature of renewables, massive cost and environmental issues associated with adding to, or renovating our existing crumbling energy generation infrastructure, not to mention the issues around global energy supply, are all very real concerns for us right now. Increased focus and investment on the demand side will help us to build a more sustainable and flexible UK energy system that can better accommodate renewables and reduce the chances of the global gas market holding us hostage in the future. Not only that, demand side flexibility will play an increasingly important part in our transition to 2050 net zero emissions targets.