By Paul Homewood
h/t Dave Ward
Every week, electricity traders in the UK can ask the national grid managers for an hour. The conference call, which anyone can follow, provides an insight into what the men and women on the front lines of the electricity market are worried about. Hearing them say it’s getting scarier for the week – and suggests keeping the lights on this winter will be a lot harder than European governments are admitting.
The price is disturbing enough. UK households were told on Friday that their electricity and gas bills will increase by 80% from October 1. The so-called energy price cap is set at £3,549 ($4,189). ) per year, up from £1,971 in the past six months and £1,277 last winter.
But the industry teleconference shows that the problem is broader than just increasing costs. The words “urgent” and “shortage” are used more and more, with participants focusing on when, rather than if, a crisis will occur. Imagine being able to eavesdrop on conversations between Wall Street executives and the Federal Reserve during the global financial crisis in 2008.
Here’s a question from last week’s trading session: “Are you a viable option to play the war game if/when cross-border trading collapses due to the security of supply pressures this winter? ” And another: “Can we have a meeting to talk about emergency arrangements?” Another said that the forecast for the electricity supply-demand balance shows “how bad winter can be for anyone who can do the math”. The same caller was blunt about the network’s own predictions: “I don’t think you believe what you wrote, and no one else does.”
A particularly revealing intervention. “Based on where winter ’22 products are being traded, where’s your position on securing power in the winter?” asked a participant. Context? In the futures market, UK energy for December 2022 is rapidly approaching £1,000 per megawatt hour, a 50% increase from current prices. Implications? Power shortage.
Compare the tone to the British government’s insistence that there is nothing to worry about. “Households, businesses and industry can be confident they will get the electricity and gas they need during the winter,” Downing Street said earlier this week. “That’s because we have one of the most diverse and reliable energy systems in the world.”
The official weekly call is called “ESO . Operational Transparency Forum,” and allows market participants to query the regulators of the so-called National Electricity Control Center, the hub that transfers electricity across the UK from generators to merchants to consumers. . Forums often deal with confusing power trading issues. But in recent weeks, attention has turned to crisis management. Another example from earlier this month: “If a system stress event is taking place in both gas and electricity, how do the power system operator and the gas control center communicate with each other? Which stressful event is prioritized? “It is particularly disturbing that very few disaster scenarios appear to have been planned.
The main concern is what will happen if European countries adopt a beggar-neighbor policy by stopping the flow of electricity across borders, as Norway has said it is considering. “Please, the market needs to fully understand how to use connectors in times of very high prices and potential generation shortages,” one market participant said last week.
Another topic is how much consumption could fall if households and businesses cannot withstand rising electricity and gas prices. “The extent of the drop in demand, the extent of the demand destruction, do you have forecasts for the coming winter from commercial industrial consumers as a price response?” is a recent example. Another repeated the request: “What disposal needs, if any, are included in your demand forecast for this winter for residential and industrial?” Grid managers cannot provide any numbers to callers.
To be sure, the call should focus on potential troubles ahead – it exists to anticipate and solve problems. But having heard it many times over the past few months, I have three takeaways. First, the electrical emergency is worse than many industry executives admit, and far more dangerous than the government admits. Second, high prices are a big deal, but supply security is also at risk. Third, time is running out to prepare before the temperature starts to drop.
The Finnish grid manager, in a rare example of the kind of much-needed transparency, told citizens earlier this week to prepare for the shortage this winter. European governments have a duty to make clear to their constituents the magnitude of the coming crisis. Minimizing the size of the problem or worse, pretending there’s no problem, won’t keep the power going this winter.
While we can blame Russia for the current gas supply problems, the real cause of this lurking disaster is the government’s forced shutdown of most of their coal generating capacity. over the past decade:
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