The Energy Challenge

Keeping the Lights On

HomeOur IndustryThe Energy Challenge Keeping the Lights On

In the UK, up to one third of power generation capacity is due to retire by 2020 due to age or failure to meet new environmental targets. New, low carbon power generation must be built to replace this in good time and backed up, where necessary, with flexible gas to ensure the lights stay on.

By 2020, the UK could need to invest up to £100 billion in our electricity system alone. This investment is necessary for the country’s energy security to facilitate day-to-day activities and support economic growth in the UK, reduce carbon emissions and meet our legally-binding environmental targets.

The challenge is to achieve this investment to meet our decarbonisation targets whilst ensuring that power, heat and transport are affordable for households and businesses.

 

How is power generated in the UK?

Electricity UK

 

Power Generation Capacity

What do we mean by ‘Capacity Margin’?

The capacity margin is the surplus of potential available power generation over and above peak demand, and takes into account the fact that plant is sometimes unavailable due to outages.

Source: National Grid

What is Peak Demand and why does it matter?

In winter, demand peaks between 5pm and 8pm when people are returning from work and want to heat up their homes and cook their dinners at a time when businesses are also still open. Electricity demand surges during these peak hours, which puts a big strain on the grid because more energy capacity is needed to meet the demand.

A 24-hour profile of weekday household demand

24hr Profile

Based on a sample of 250 households’ average daily profile across a whole year

Source: Further Analysis of the Household Electricity Survey - Early Findings: Demand side management

Electricity grid operators call on power generators in order of marginal cost, for example wind farms have a low running cost so would be called ahead of higher cost generators such as coal or gas-fired power stations.

To meet extra demand during peak hours, even the highest cost generation can be called up.  As a result, the wholesale price of electricity during peak hours is higher than in off-peak hours.

Switching demand from peak to off-peak hours can alleviate pressure on our electricity system and help to mitigate climate change as fewer power stations need to be turned on to meet the demand, which reduces carbon emissions from generation.

 

The UK generation market is undergoing significant structural change

Bringing Renewables Online

Solar

To hook up new generation such as wind farms, the grid that transports electricity to homes must be updated.  This has meant increased charges, set by the regulator, for energy suppliers to use these networks.

The growth in micro generation such as solar means that more homes and businesses can generate their own electricity and provide power for local networks, which has reduced some demand on the main grid. However, this has not been enough to prevent a decline in the power capacity margin.

Nuclear

The UK’s 16 nuclear reactors currently account for around one-fifth of total electricity generation, however all but one of these is due to be closed by 2028.

Government projections are that an additional 60 GW of power capacity will be needed by 2025.  Whilst 35 GW of this is predicted to come from renewables, much of the remainder is expected to be provided by nuclear energy with the first of the new reactors expected to come online in 2018.

Source: EIA

 

What measures are in place to ensure the lights stay on?

Capacity Market

To ensure security of supply, the UK government has introduced a ‘Capacity Market’ which aims to ensure that investment in reliable sources of electricity generation is economically viable by paying generators to be available when needed.

Government sets a target for the amount of capacity needed which is then purchased in annual auctions (‘Capacity Auctions’) 4 years and 1 year ahead of each year in which power is required.

The first auction took place in December 2014, with the government buying 49.26GW of capacity to be delivered in the year 2018/19 at a price of £19.40kW and a total cost of £0.99bn (in 2014 prices).

A further auction for 2018/19 will be held one year ahead in 2017 for an additional 2.5GW for delivery in 2018/19, and an auction for 2019/20 will take place later this year.

Balancing the Grid

National Grid is responsible for balancing supply and demand on the UK’s energy grid, and it does this 24 hours a day.

To address concerns about supply risks in the nearer term, Ofgem (supported by Government) has authorised National Grid to purchase additional reserves of capacity for winter 2014/15 and winter 2017/18 inclusive.

National Grid’s ‘Supplemental Balancing Reserve (SBR)’ and ‘Demand Side Balancing Reserve (DSBR)’ will be competitively tendered, with winning bidders committing to increase power generation (or reduce demand) when called upon by National Grid in exchange for a payment.

Sufficient thermal (non-renewable) generation is still needed on the system for times when intermittent generation such as wind is insufficient – for example for periods when there is little or no wind and high demand.

Smart Technology

Smart meter

Smart meters allow customers to keep continual track of energy use in their home and to take advantage of ‘time-of-use’ tariffs, reducing their costs and lowering peak emissions.

Early indications from smart metering trials suggest consumers with smart meters and time-of-use tariffs reduced their peak electricity demand by an average of 9%*.

Managing demand for electricity is important, as at times of peak demand when electricity demand surges grid operators have to ‘switch on’ extra sources of electricity generation. These extra sources of power generation are called on in order of marginal cost, starting with the lowest, meaning that at peak times even the most expensive generators - and the least environmentally friendly such as fossil fuel plants - will be running.

If, by shifting power-intensive tasks such as running a washing machine or charging an electric vehicle to off-peak periods, we can create fewer of these ‘peaks’ in demand we will make electricity supply more efficient and also reduce carbon emissions. In turn, more efficient use of our electricity system can lead to lower costs overall for generation and transmission, making energy cheaper for customers, which will make it possible to charge cheaper rates for off-peak energy.

‘Free Power Saturdays’

In North America, Direct Energy uses smart meters to provide ‘Free Power Saturdays’, which offer reduced costs to customers for using energy at times of lower demand. Centrica is also collaborating with manufacturers to create other smart products that will further improve management of the energy grid - 150 Direct Energy customers are piloting the next generation smart water heater, which makes it possible for electricity providers to heat and store hot water to even out demand on the grid.

In the UK, British Gas has successfully trialled the smart meter enabled ‘Free Saturdays or Sundays’ energy tariffs, with an initial launch planned in the second half of 2015.

*Source: Based on early findings from the Customer-Led Network Revolution project in which British Gas is a delivery partner.

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