Space, time and electricity (part 3)
DEEP DIVE: Burning gas to replace curtailed wind is madness. Nodal pricing does not restore sanity.
Paying wind farms to shut down and paying even more to turn up gas-fired power stations makes no sense even in the best of times. Amid the tightest global gas market and worst UK energy poverty crisis in living memory, it is sheer lunacy. And yet that is precisely what the UK is doing with increasing frequency due a failure to match a ramp-up in wind with adequate transmission capacity.
‘Fixing’ this by pushing new risks onto generators via ‘nodal’ electricity pricing and centralisation of dispatch decisions runs a high risk of unintended consequences. Locational marginal pricing (LMP) doesn’t really attack the crux of the problem, is politically awkward and fails to decouple electricity prices from gas. So, is it doomed to fail?
This is part three in a mini-series exploring plans to introduce locational marginal pricing (LMP) in the UK electricity market. Part one is free to read here. Part two is available to premium members here. Subscribe today for full access.
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Last year, UK energy consumers paid £507 million to replace zero marginal cost wind with much more expensive electricity from gas-fired power stations. This cost arises from the unhappy workaround known as wind curtailment, a problem that is only going to get worse as the UK builds more wind farms in far-flung locations. Curtailment costs rose from £299 million in 2020, due mainly to the spike in wholesale natural gas prices in the second half of 2021. In November 2021 alone, the cost of wind curtailment was a staggering £200 million.
The vast majority of this cash is being funnelled to combined cycle gas turbine (CCGT) power stations. That’s because curtailed wind farms forego subsidy payments, so the net cost to consumers of the ‘shut down wind’ element of curtailment (known as the ‘bid’ price) is much less than the ‘fire up gas’ element (the ‘offer’ price). And the further wholesale gas prices rise, the greater the financial and carbon cost of curtailment – eroding the wealth and health of hard-pressed British consumers.
In 2021, the net ‘bid’ cost to consumers (from shutting down predominantly Scottish wind) came in at £78 million. But the ‘offer’ cost (of cranking up mostly CCGTs) was £429 million. So, when a British wind farm is curtailed, around 85% of the cost arises from burning more gas. Just 15% goes to the wind generator that is located on the ‘wrong’ side of the transmission bottleneck.
In fact, sky-high gas prices mean curtailment costs are significantly higher on days with low wind curtailment compared to high curtailment days during periods of low gas pricing. Analysis of National Grid BM data by Drax, comparing a pre-Covid day in February 2020 with a gas-starved day in November 2021, illustrates this well: curtailed volumes were significantly lower in November but constraint payments were drastically higher.
Compare these two charts (where ‘bid costs’ equate to wind curtailment payments, and ‘offer costs’ equate to CCGT fire-up payments):