The cost of keeping the lights on at peak times

Ofgem announced recently that we have just enough electricity generating margin to keep us going over the next few years [1]. However the risk of interruptions to peak power supply is obviously being taken very seriously, judging by the effort going in to manage it. There are initiatives to:

• pay power generators to have capacity available
• pay companies to reduce power demand when requested
• fund energy efficiency improvements that will reduce demand at peak times

Under the new capacity market, the first two of these compete directly with each other. It will be interesting to see which is cheaper. However, these are like sticking plaster whereas the last option offers more long term relief.

UK Electricity demand daily pattern in 2009, from Energy and Carbon Emissions, the way we live today

Paying power generators for capacity.
Currently we only pay generators when they deliver power. Ideally the cheapest power sources supply all of the time and more expensive sources are used occasionally when needed to cover peak demand. However, keeping a power station maintained that is only used occasionally is expensive. In a perfect market, the price paid for peak power would always be just enough to ensure that capacity is available. However, peak power prices are volatile and decisions about generating capacity need to be made years in advance.

The new capacity market gives generators a source of revenue which is predictable 4-5 years ahead, so that they can make appropriate investment. Suppliers bid for how much they will charge to have capacity available over each delivery year, one or 4 years in advance. The lowest bidders win and they get some secure revenue regardless of how much they actually generate. When the grid people predict a potential shortfall (a 'stress event') they put out a warning and when the event happens the capacity providers must deliver or face a big fine. The warning gives them at least 4 hours to get ready.

The capacity market is supposed to be an incentive not just for maintaining otherwise uneconomic plant but also to build new plant, potentially using energy storage. However, existing power stations can also bid to supply capacity and this gives them some windfall profits. It has been estimated that EDF could earn £800 million over the next 5 years from supplying nuclear capacity [3]. Since the nuclear power plants run most of the time anyway, this is a very poor way to target extra funds.

Paying to reduce power demand when requested
Reducing demand has the same effect as increasing supply. This is not a new concept and there are already some companies with agreements to reduce load on request for an hour or so [4]. It doesn't necessarily cost much to do this, for example if you already have backup generators that you expect to use in case of a power cut you can switch them on at any time. The only extra cost is the fuel. Of course the backup generators aren't likely to be low carbon but they should only be used occasionally so this is not important.

In order to contract with the National Grid for this - up to now it was called Short Term Operating Reserve - you need to be able to turn off at least 3 MW of supply - 10s or 100s of times more than most companies use. Hence there is now a niche for a new type of company that rolls up small amounts of demand reduction into tradable units. KiWiPower is one of these. They contract with small and medium size companies that can provide demand response - like turning off the air conditioning for a while, reducing lighting, shutting down some IT servers where jobs can be delayed, or switching to backup generators. The metering equipment that KiWiPower installs can also be useful for company management, to monitor how much electricity is used where. A recent trial in London hotels showed that you can turn off the chiller parts of the air conditioning for an hour without anyone noticing.

Since reducing demand is equivalent to increasing supply KiWiPower will compete directly with the power companies in the capacity market.

Funding energy efficiency improvement that will reduce peak demand
Peak time is early evening in the winter. The extra demand includes electricity for lighting, cooking, watching TV and so on and it is hard to shift this demand to another time. If you want your dinner at 7 you probably start cooking at 6pm and you won't want to wait until 8pm. However, demand can be reduced by making these appliances more efficient. Lighting is one area where we can we do this very well by replacing our old lights with CFLs and LEDs, though not all of us have got around to it yet. Also there is continuing demand for power for fridges and freezers, air conditioning in offices, computer equipment and so on. These are often on all the time and bringing them up to date with the most efficient products reduces the peak demand too.

To see how well this can work there is a scheme about to be launched called the Electricity Demand Reduction Pilot [6]. This was supposed to be launched in June so it is a little late but never mind. The auction is scheduled for October so there is time yet. For the purposes of the pilot, peak time is 3pm-7pm Nov-Feb and if you have equipment running at that time which you could upgrade to be more efficient you can bid for a subsidy to help you pay for it. You can only do this if the payback time without subsidy would be at least 2 years, and you can't use it for equipment that you would normally replace every 2 years or more often. However, say you have your eye on some new, more efficient chiller cabinets for which the bill savings would payback in 3 years - that would qualify. If your bid gets through the auction you get some cash as soon as it is installed and the rest at the end of the program when you report how much you reduced demand.

You can preregister your interest now.

First year allowances for energy saving products
By the way, do you also know that you can get tax relief on energy saving equipment? The enhanced capital allowance scheme allow you to write off 100% of the cost of the equipment in the first year [7]. Unfortunately that only helps if you have taxable profits. Ultimately your bills are the same but rather than taking many years to pay back you start making savings immediately, or at least when you would have paid the tax. The list of qualifying measures is long and varied from energy efficient hand dryers or pipe insulation to heat pumps.

When any new policy comes along there are always teething problems and with three new policies that means three sets of problems. The first issue we have seen: the windfall profits for existing power stations is highly unfortunate, though we don't know for sure yet how much it will cost. Let's keep our fingers crossed for the others.


[1] Electricity Capacity Assessment 2014 (Ofgem)
[2] Maintaining UK Energy Security (DECC)
[3] EDF in line for £800m windfall from subsidy scheme to keep lights on (Guardian)
[4] Short term operating reserve (National Grid)
[5] Demand Response trial nets big windfall for London hotels (Green Hotelier) Jan 2014
[6] Electricity Demand Reduction Pilot (DECC)
[7] First year allowances for energy saving products (HMRC)