United Kingdom

United Kingdom

Worst fears realised in Britain -- Imbalance prices shock

The UK's new system for buying and selling electricity had a potentially devastating effect on the value of wind energy in its first week of operation. A wind farm would have made a loss selling electricity it was contracted to provide, conclude researchers who analysed energy prices and wind farm outputs from the first week of the new electricity trading arrangements (NETA).

Introduced on March 27, NETA requires generators to forecast the amount of energy they will supply 3.5 hours ahead of delivery. The system then punishes generators for any "imbalance." If they supply less than their predicted amount of energy they pay market price for the shortfall. If they supply more energy than forecast, they can only charge a lower price for the excess -- and in some cases have to pay for supplying more electricity to the grid. For an intermittent source of energy such as wind power the imbalance charges reduce its overall value.

"While there had been some concern about the adverse effects of NETA in the lead up to its introduction, the harsh reality of the first week of operation has taken everyone by surprise," says Goran Strbac, a researcher for the Tyndall Centre for Climate Change Research who is based at the University of Manchester Institute of Science and Technology (UMIST). "The most profitable way of operating a wind farm so far has been to turn it off," he adds.

According to a report by Strbac and Graeme Bathurst, also of UMIST, a 10 MW wind farm could have made a loss of £1532 in the first week of NETA. The main causes were price spikes in the market price of electricity. Prices paid by generators for shortfalls in their predicted output ranged from £0.0083/kWh up to a massive £34.1476/kWh. "The magnitude and volatility of these imbalance prices has exceeded the initial expectation by more than tenfold," the report explains.

Price spikes alarm

The price spikes alarmed energy regulator OFGEM which, just nine days after the beginning of trading under NETA, agreed to urgent adjustments to the method for calculating imbalance charges. Strbac says, however, that renewables have not been considered specifically. "Due to the intrinsic difficulty of forecasting available winds and other sources of renewable energy, these suppliers are likely to suffer under NETA."

Critics of NETA have long argued that the system of imbalance charges does not reflect the real world. Fluctuations from numerous other sources of power completely swamp any fluctuations in wind output, unless wind represents a large part of the total supply. This is not the case in the UK where wind under NETA ends up being penalised out of all proportion to its real impact on the system. NETA replaces the old electricity pool in England and Wales as the means of buying and selling wholesale electricity. The previous system based on a power pool did not penalise generators for failing to deliver as forecast.

At the request of Energy Minister Peter Hain, OFGEM is embarking on a review of the initial impact of NETA on small generators -- including renewables. The review is to cover the period April and May and its scope will include assessing the impact of imbalance prices on small generators, analysing the variability and volatility of prices in the market, and comparing the effects of NETA with the previous pool arrangements. OFGEM aims to publish an initial report in August 2001.

The actual effect on real wind farms has not been as dire as the hypothetical example in Strbac and Bathurst's report. Most wind plant are on fixed price contracts and not spilling their output into the NETA trading system. "And there are ways of mitigating exposure to imbalance risk such as accurate forecasting and consolidation in a large portfolio (of generating plant)," explains Andrew MacDonald from Concert Energy, a subsidiary of Innogy, that offers consolidation for small and renewable generators.

But MacDonald agrees that the effects of NETA so far have been "of a magnitude that even the most pessimistic of forecasters would not have imagined." What is more, he believes they are unlikely to get better. The modifications to the imbalance charges called for by OFGEM are superficial and unlikely to improve the situation, he says. The only glimmer of light for small generators is the government's review of the impacts of NETA. "But in the short term it is looking quite bleak."

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