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UK blackout raises pressure on National Grid amid nationalization debate


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UK blackout raises pressure on National Grid amid nationalization debate

National Grid PLC is under renewed political scrutiny after a widespread blackout brought parts of the U.K. to a standstill, raising pressure on the grid operator as it braces for potentially significant cuts to its regulated returns and faces the threat of being taken back into public ownership.

The U.K. government commissioned an investigation into National Grid's handling of a major power failure Aug. 9, when near-simultaneous outages at a gas-fired power plant and an offshore wind farm triggered power cuts, affecting homes and transport networks across parts of England and Wales.

Although analysts said the incident was a rare event and the company likely followed appropriate procedures, the outage raises questions about how prepared National Grid is for managing a changing electricity system that is increasingly dominated by renewables. The spotlight also comes at an awkward time for the company, which has been defending itself against accusations that private network operators are prioritizing shareholder returns over infrastructure investments.

Britain's opposition Labour party announced plans to renationalize energy networks if it comes to power, causing a headache for companies such as National Grid. Meanwhile, energy regulator Office of Gas and Electricity Markets wants to slash regulated returns for power and gas networks, although National Grid is fighting hard to water down the proposal.

"It's not a brilliant time for something to have happened," said Thomas Edwards, senior consultant at Cornwall Insight. Although Edwards said National Grid seems to have handled the incident admirably and has "not been idle" preparing for such events, for example by testing enhanced frequency response, the outage is expected to add fuel to the criticism of the wider transmission and distribution sector.

"This is only likely to heighten the political scrutiny around U.K. energy networks," analysts at Jefferies said in a note, adding that the development was "unhelpful" for National Grid.

In the aftermath of the blackout, Labour renewed its call for taking networks back into public ownership. The party has slumped in opinion polls in recent months, making it less likely to win the parliamentary majority needed to push through a nationalization.

"National Grid which in May posted £1.8 billion in profits and increased dividend payouts to shareholders must urgently provide a full account of what went wrong, and why," tweeted Rebecca Long-Bailey, Labour's shadow secretary of state for energy. "Integrating large amounts of renewable energy will require planned and coordinated investments in our networks which is why Labour has committed to taking the grid back into public hands."

'It could have been much worse'

The Office of Gas and Electricity Markets asked the company for a detailed report on what went wrong and raised the possibility of "enforcement action." The energy regulator can fine utilities up to 10% of their total revenues, although this would require opening a formal investigation first. The fine would only apply to National Grid ESO, a regulated part of the group that is responsible for managing supply and demand but is legally separate from National Grid Transmission, which owns and operates the physical network infrastructure.

The blackout was triggered by outages at the 727-MW Little Barford combined-cycle gas plant owned by German utility RWE AG and the 1,218-MW Hornsea One offshore wind project owned by Danish utility Ørsted A/S. The wind farm is still under construction but has been exporting power since mid-February.

The last time the country saw a power cut on the same scale, caused by two separate outages at a coal-fired plant and a nuclear station, was in May 2008.

National Grid emphasized that the latest event was "rare and unusual" and said its systems had automatically cut power to some demand centers around the country to avoid a larger grid collapse since other generators were unable to increase power production quickly enough to stabilize the network.

A spokesperson for Ørsted said the company is investigating what caused the outage at Hornsea One. A spokesperson for RWE did not respond to a request for comment.

Edwards said market disclosures by the companies indicate that RWE's gas plant tripped first, followed by Hornsea. Close to 1,500 MW of capacity was disconnected when the two plants went offline, causing frequency on the grid to drop below the threshold stipulated by National Grid's regulatory license for several minutes.

Although that technically represents a breach of its license conditions, Edwards said he thought it unlikely that the company would be hit with a significant fine.

"I don't think it's a fault of National Grid ... I think they'll be able to say, 'Our systems worked, we weren't negligent,'" he said, adding that it was to the credit of the system operator that a wider breakdown could be avoided. "It could have been much worse."