INTERVIEW: Further UK power capacity warnings likely this winter - Hartree Partners

London — There were significant variables in the UK power market heading into winter that made further capacity notices likely, Adam Lewis of merchant commodity trade Hartree Partners told S&P Global Platts Oct. 13.

While some drivers had eased in recent weeks, notably the state of French nuclear generation, the likelihood of further warnings from National Grid remained high, Lewis said.

"It looks like the Calon Energy gas plants won't be around this winter, and there is risk around UK nuclear. Any delays to returns once we get into November, coupled with low wind across the continent, would certainly trigger a number of similar events to September 15," he said.

The GB intraday half-hourly market traded up to GBP650/MWh for 18:00 that day as very low wind generation tightened capacity margins across northwest Europe. Earlier in the day National Grid had issued a rare Capacity Market Notice, warning four hours in advance there might be less generation on the system than needed to meet demand.

"We've had a number of tight hours over the last few weeks and, looking at forward spark spreads, it looks like the winter is continuing to price in similar events," Lewis said.

Calon questions

The drivers of tightness included Calon Energy's fall into administration, taking two 850 MW gas plants at Severn Power and Sutton Bridge out of the market at short notice; French and UK nuclear availability; and, more recently, a change in UK-France price spreads.

The market had been pricing close to full UK exports to France for much of the winter, making the UK bullish, exacerbated by the imminent operation of another UK-France interconnector (IFA2).

More recently French prices had dropped, however, reducing UK export potential and easing tightness ahead.

"That does not take away from where we are – and we're watching the Calon assets to see if they return," he said.

There had been surprise in the market when the assets went into administration in August, Lewis said.

"Severn Power is a pretty good power station, it is high up the UK gas stack," he said. "I don't know how the process will play out but that unit should return to the market, the question is when."

As of Oct. 7, Calon administrator KPMG was unable to provide guidance on how a sales process was going, a company spokeswoman told Platts.

"The Capacity Market contracts held by Calon are a big part of that process," Lewis said.

The contracts would have been cancelled due to the company going into administration, with a limited time window to re-instate them before the sites in question are banned from holding CM contracts for a period of time.

"A banned status could have quite a significant impact on the commercial value of the sites," he said.

Shifting demand patterns

Getting a better understanding of the shape of demand this winter was key, Lewis said.

Looking at the coronavirus-hit summer may not be a good indicator of the virus' effect this winter on, for instance, lighting load, he said.

"Typically people get home around 5-5.30pm and the lighting load kicks in then, even if darkness fell at 4-4.30pm. Now, with everyone at home, does that load kick in earlier? Is that offset by reduced office lighting? Probably not that much," he said.

Overall, Hartree thought UK demand destruction due to the coronavirus had been running at between 0%-2% since August.

"That's why we thought National Grid's decision to extend the contract with Sizewell into September was questionable, and indeed it backfired with the capacity warning mid-September," Lewis said.

Triad unknown

Further, with Triad incentives no longer a factor this winter, the behavior of some embedded generation was a new unknown.

The UK has a sizeable amount of fast response diesel and gas peaking units owned by new entrant operators like UKPR and Conrad Energy.

Previously these operators were getting payments from the system operator for generating when a triad (one of the three highest demand peaks between November and February) was in progress. Now those network benefits have disappeared.

"There's going to be a change in behavior but quantifying it is challenging," Lewis said. "We're looking at the diesel engine fleet in particular. If your marginal cost is over GBP100/MWh there are very few half hours where you'd be running just on price."

The result could be higher demand during triad periods due to a lack of triad avoidance by generators.

"Embedded generation is low down in the network so their megawatts just look like demand reduction," he said. "We'll see an increase in demand, but it is hard to measure because you've got Covid layered on top of that."

Reacting quickly was the key for a trader like Hartree. "Once we start to see the data coming through we can take some views and optimize our generation assets along with our customers' exposure," he said.