La Nina Could Drive Up U.K. Energy Prices

  • Cooler temperatures and lower wind speeds seen across Europe
  • National Grid may have to buy more expensive backup power

Electricity prices in Britain may rise this winter as the El Nino weather system ebbs away, driving up energy demand while quelling breezes that wind farms depend on to generate renewable power.

The La Nina weather patterns that generally follows El Nino may cool temperatures and curtail wind speeds from the U.K. to Germany, according to U.K. government meteorologists. That in turn would boost winter heating needs at the moment when weaker air currents reduce output from wind farms. The result would force utilities to rely on more expensive backup supplies.

“If La Nina succeeds in pushing the European weather regime into high pressure patterns, it generally means colder temperatures,” said Hazel Thornton, a weather analyst at the Met Office, in a telephone interview. “It’s also the case that we get the unfortunate relationship of lower wind speeds during that period, so that could mean we get lower wind power.”

The challenges to Britain’s power grid could be particularly acute. With coal-fired capacity reduced to just seven plants, the buffer of surplus generation may fall below zero at times next winter, prompting National Grid Plc to draw on its reserves. As much as 7-gigawatts of closures were announced for 2016, equivalent to 11 percent of U.K. peak demand.

The U.K. runs the risk of “severe” price spikes next winter after a wave of plant closures, James Brand, an analyst at Deutsche Bank AG, said by phone. Additional capacity has been withheld for a reserve of back-up supply, leaving fewer plants available at the market price.

“A cold and windless period is most likely to result in high power prices, particularly if accompanied by multiple unplanned outages,” Brand said. National Grid will be able to ensure the “lights stay on” by calling on its Strategic Balancing Reserve. That’s an expensive option only used when power prices reach 3,000 pounds per megawatt hour -- 100 times the normal price.

National Grid Chief Executive Officer John Pettigrew told analysts on May 19 that the winter will be “tight but manageable.” To prevent blackouts, the operator of England’s electricity grid will pay 122.4 million pounds ($185 million) to keep 3.58 gigawatts on standby in 2016-17, up from 2.56 gigawatts the previous year. It also will award contracts to businesses and factories agreeing to curb demand at short notice.

While high prices may be bad news for consumers, it could be a relief for many utilities, such as Centrica Plc and SSE Plc, which have been squeezed by falling energy prices in the last few years.

Weather Systems

La Nina is the opposite of the warming characterized by El Nino, which came to an end this week after helping to generate the hottest temperatures in 130 years and parching farmland across the world. The weather system responds like an elastic band released after being stretched during El Nino, said Adam Scaife, a Met Office forecaster who makes weather predictions from data spanning decades.

“If you pull hard in one direction and let go, the thing has a tendency not just to return to neutral but to overshoot,” he said. “That’s La Nina.”

National Grid has a team of analysts who update forecasts “several times a day” and are producing models that are “very accurate,” the Met Office said in an e-mail statement. The U.S. Climate Prediction Center says there’s a 75 percent chance La Nina will develop by year’s end, but its formation also could come earlier: sometime from July to September.

The first quarter of 2017 could show another reversal as storms come off the Atlantic across Europe. That would boost temperatures above average and increase wind speeds, said Thornton from the Met Office. Higher wind speeds reduce the value of subsidies under the U.K.’s renewable obligation.

This could be bad news for utilities, pushing down power prices, said Elchin Mammadov, an analyst at Bloomberg Intelligence.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE