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How Did a U.K. Power Plant Get 25 Times the Market Price?

  • Calon planned to shut Severn unit during high price period
  • U.K. grid sought increased reserves for first time since 2012

On the afternoon of Nov. 4, a U.K. power station began to shut down one of its gas-fired units and the network manager was told it wouldn’t be available. Within an hour, the operator ramped it up again after the grid called for increased reserves and the power station got paid a handsome premium for doing so.

The facility at the Severn power plant in Wales, operated by Macquarie Group Ltd., was running near full throttle at 396 megawatts. It didn’t report any operational problems, a requirement of European regulations, that would have prevented it supplying the market. Nonetheless, it began to decrease output from 3 p.m.

When the network manager requested additional generation capacity for two hours from 4:30 p.m., Severn responded. The reward for providing extra power was a payout 25 times the market price for that time in the day, according to calculations by Bloomberg based on exchange and grid data.

The episode raises questions about how U.K. power plants operate as National Grid Plc, the company responsible for ensuring supply meets demand, grapples with a thinner buffer of surplus generating capacity. That margin will be about 5 percent this winter, down from as much as 16 percent four years ago, according to data from the London-based company.

“This is a market, and it might be argued that price spikes are a necessary condition for its long-term viability, and therefore that it’s not unreasonable for individual generators to exploit scarcities,” said John Rhys, a senior research fellow at the Oxford Energy Institute. “If we really are in a period of very tight capacity, then I’m afraid that’s what having a market means and it’s going to happen.”

The Office of Gas and Electricity Markets, the market regulator, may take a different view. It has rules in place to stop generators from “exploiting” periods when the grid is constrained to obtain an “excessive profit,” according to a document on its website. Chris Lock, a spokesman for the regulator in London, declined to comment on whether Severn, owned by Calon Energy Ltd., breached regulations.

The capacity decline was caused by the closing of coal-fired plants in the past four years under European Union legislation. Energy Secretary Amber Rudd is concerned it will lead to consumers being hit by higher bills. The government plans to close all coal plants by 2025, unless they fit technology that make them pollute less, she said Wednesday.

“We had a power station able to supply at a time of need,” Andrew Mackintosh, a Calon Energy spokesman, said by e-mail. “The market has been created to operate this way, in situations such as this, and we did not act outside the rules when responding to National Grid’s request.”

Steve McCool, a spokesman for Macquarie in London, declined to comment.

Lawmakers Concerned

Lawmakers in the Energy and Climate Change Committee are so concerned about the outlook for the coming winter that they summoned three National Grid executives to a one-time hearing on Nov. 24 to discuss what happened in the market on Nov. 4.

The capacity shortage on that day caused the grid to issue a so-called Notification of Inadequate System Margin for the first time since February 2012. There is potential for market maneuvers such as Severn’s to become more prevalent: National Grid’s Chief Executive Officer Steve Holliday said Nov. 10 the company may issue as many as seven requests this winter.

Severn began ramping down in the regular wholesale market at 3 p.m. and had planned to halt completely at 3:50 p.m. By 4:50 p.m. the five-year-old unit was paid 2,500 pounds ($3,800) per megawatt-hour in the balancing market. That compares with 97.80 pounds per megawatt-hour for the three-hour period through 7 p.m.

“Issuing a NISM is intended to stimulate a market response,” National Grid said in a statement. “It is not unusual to see prices rise in these circumstances.”

The Severn unit was called on in the balancing market the previous day too, when it got paid a maximum of 401 pounds per megawatt-hour. Prices for earlier in the week showed that the U.K. power system was getting increasingly tight compared with a normal November day.

Enforcement Powers

Before National Grid turns to plants kept in reserve, it has to use up every available megawatt there is. A generator is not allowed to hold back a plant to try to earn more in the balancing market, according to the rules. The agency actively monitors the market and have powers to take enforcement action if needed, Lock said.

“We take any allegation of misconduct very seriously and we welcome parties that come forward with information on this,” he said by e-mail.

The rules may need to be changed so that grid can find cheaper ways to increase supply, according Dave Jones, who analyzed power and carbon markets at EON SE for 13 years and now does the same for environmental lobby group Sandbag in London.

For gas plants, “the periods where you can make excellent margins are few and far between,” Paul Verrill, a director at Yarm, England-based energy trading consultant Enappsys Ltd., who used to manage power stations during a career in the industry spanning more than 20 years. “It is a market and hence a generator can chose its pricing strategy,” he said.

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