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UK balancing costs rocket in September on tight generation margins

Highlights

Operating reserve costs up fivefold

October constraints set to rocket

YTD costs up 13.6% on year

UK power system balancing costs ballooned in September on the back of tight generation margins, causing the cost of operating reserve to rise fivefold month on month, National Grid Electricity System Operator data showed Oct. 18.

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Monthly costs of GBP234.30 million ($321.68 million) were up 29% on August and 61% year on year, reflecting soaring gas-fired power costs twinned with a period of low wind output.

"Balancing Mechanism prices rose sharply on the back of higher wholesale prices and tight margins, leading to increases in the costs of securing reserve," National Grid ESO said in a report.

The data showed the cost of operating reserve exploding in September to GBP146.80/MWh from GBP28.80/MWh in August, a strong indication of much tighter generator margins.

The UK has very limited coal flexibility to call on when the wind drops, making the system reliant on gas-fired units, for which spot NBP gas prices rose from 126 pence per therm Sept. 1 to 200 p/therm on Sept. 30, according to S&P Global Platts assessments.

Looking ahead, the ESO said it had increased its operating reserve forecast for October to reflect these conditions.

While operating reserve costs were rising, however, these would be relatively minor against the massive anticipated hike in constraint costs to GBP101.60 million for October, from GBP37.60 million for September, the data showed.

September constraints were 32% lower month on month because of higher levels of inertia and lower Rate of Change of Frequency costs, the ESO said.

Other components of the costs came in negative as neighboring transmission system operators requested trades to assist in their own balancing, it said.

UK balancing costs in the first nine months of the year totaled GBP1.44 billion, up 13.6% from GBP1.27 billion in the same period of 2020.