September tightness 'a wake-up call' for UK power market: Vest Energy

London — September power price spikes were a wake-up call ahead of higher-demand winter, Aaron Lally of trading startup Vest told S&P Global Platts Oct. 12.

National Grid issued a capacity notice warning of tight margins Sept. 15 as low wind conditions across northwest Europe drove prices up.

A GB intraday half hourly price of GBP650/MWh for Settlement Period 37/38 was, remarkably, below its Germany counterpart at Eur813/MWh (GBP749/MWh), as wind generation plummeted sharply across northwest Europe.

"It's pretty scary that the system tightened in September when demand is nowhere near winter levels. Yet we saw real stress on the system in the UK and across the continent," Lally said.

It had been a theme in recent years that interconnection growth would benefit consumers, but Lally said this was not always the case.

"Broadly speaking there are two weather patterns across Europe in winter: low pressure bringing wet and windy conditions; and high pressure blocked patterns resulting in low hydro, low wind and colder temperatures," he said.

The last four winters have seen low-pressure patterns dominate with good hydro stocks and high wind generation suppressing power prices. Under these conditions interconnection worked effectively, ensuring better integration of low-priced supply.

With low wind generation mid-September, however, NW European markets were seen fighting over the incremental megawatt on interconnectors, pushing prices higher, Lally said.

This was the case in 2013, when high pressure settled for weeks over Europe and prices rose strongly.

"So the question is – if the stack stays the same across Europe, how does the power price look this winter?" he asked.

Maintenance query

While French nuclear availability was moving back up to more normal levels after a sub-par run, there were concerns as to whether appropriate maintenance more generally had been carried out over the summer lockdowns when personnel restrictions were in place.

"In 2016/17, when a lot of French reactors were pulled off the system because of cracks, the UK spot price went ballistic," Lally said.

"My worry is we've been lulled into a false sense of security by four above-seasonal normal temperature winters with high renewable generation. We don't know what the weather will be like this winter but there is a chance of lower renewable generation and cooler weather, how does the power system look under those conditions?"

UK storage

Vest's team is headed by ex-Kiwi Power trader Lally. The company aims to attract hundreds of megawatts of UK grid-scale batteries (anything in front of the meter) and renewables before expanding into Germany, France, Italy and Spain within two years.

"We optimize and trade storage and renewable assets in a merchant world. Unsubsidized renewables and storage need business cases. The UK is ahead of the continent by a couple of years, with the first batteries now coming out of their long-term EFR contracts with National Grid," he said.

The company is positioning itself between pure technology and pure trader companies.

Technology companies focused on automation do not always have appropriate market access, Lally said, while utility traders are behind on automation but have strong asset bases.

"We'll use algorithms for 90%-95% of our actions, and step in during stress events like the 'Beast from the East' [extreme cold weather front] in March 2018, where we think experience is critical," he said.

BM opportunities

Experience is also important when faced with transmission system operator National Grid's rate of adaptation.

"As a trader you are working with a TSO that is technology savvy but takes time to implement processes. UK storage is being called more often in the balancing mechanism now, but it is still a long way off where it should be," he said.

This is a familiar thesis for Lally, who has told Platts before that batteries can deliver similar services to gas and hydro assets but at much cheaper cost to the consumer.

"If the grid used energy storage better and paid it the market rate (for example by dispatching it in price merit order in the Balancing Mechanism instead of gas or hydro) then there would be a lot more energy storage already built," he said.