National Grid has launched an investigation into very high prices in one of the most important energy markets it uses to keep Britain’s lights on.
National Grid ESO, the part of the FTSE 100 company in charge of Britain’s electricity system, said on Friday that in recent weeks “there have been some very high-cost days” in the so-called balancing market used by the company to correct mismatches in supply and demand. The prices were not always easily explained.
The group has to ensure supply and demand match on a minute-by-minute basis. Most energy capacity is procured in advance, but National Grid uses the balancing market to correct any mismatches close to real time.
Given that the costs of balancing Britain’s electricity system ultimately feed through to consumer electricity bills, National Grid said “it is important to fully understand the factors driving the market”.
Last year, the most expensive day in the balancing market was £10 million, but costs have soared this year. Total costs on Wednesday, for example, reached £65m.
National Grid ESO said that “there are many issues that can, and will, have contributed to the high costs”.
“Our review will seek to ensure that, at a time when households’ budgets are under strain, consumers can continue to have confidence in the market.”
But some analysts have pointed to profiteering on behalf of power generators, particularly when the margin between supply and demand has looked very tight, such as during periods of low wind or if there are outages at nuclear or gas-fired plants.
Analysts said some power generators have not been entering the markets where capacity can be secured by National Grid earlier. Instead, they said, generators are holding off and entering the balancing mechanism, where they believe they can achieve higher prices.
Phil Hewitt, director at energy consultancy EnAppSys, said that was the case on Wednesday. Although the margin between supply and demand on that day had not been “not particularly tight”, generators representing a total of 4 gigawatts of capacity removed themselves from the market, where National Grid ensures there is sufficient supply for the peak evening hour, so they could enter the balancing market.
This meant that National Grid was spending “extreme amounts of money” on Wednesday to ensure it could fill the generation gap for the evening, Hewitt said.
“I am not surprised that National Grid is reviewing the operation of the balancing mechanism,” he added.