Leveraging energy flexibility to address soaring UK energy prices

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With the prices of natural gas in the UK and across Europe increasing in the past six months and expected to reach record-high levels through the first quarter of 2022, insight into the role energy flexibility can play in the anticipated growth in energy demand and prices is needed.

What is causing energy prices to increase and how can flexible energy help to avoid such increases to happen again?

Dan Starman, head of assets and infrastructure at UK research firm Cornwall Insight, said: “Many of the price increases now are driven by underlying market fundamentals such as high gas and carbon prices, as well as demand recovery from COVID-19. To counter these factors, we would need long-term flexibility, such as long-range seasonal gas storage. This can act to suppress prices if summer seasonal prices are at a discount to winter and provided excess gas is available to inject into storage.”

In addition to the high gas and carbon prices, the failure to fill up gas reserves by the majority of European economies including the UK following heavy usage last winter can be blamed for the spike in gas prices, according to media reports. Due to supply chain disruptions caused by the pandemic, utilities have failed to secure enough capacity to meet the growing energy demand that has been witnessed in the past six months as economies re-opened with CODIV-19 restrictions being lifted. In an interview with Bloomberg, Francesco Starace, the CEO of Italian utility Enel, said the increase in natural gas prices is a result of Russia providing less than normal to the European market.

With the majority of natural gas used in the UK imported from Norway, Qatar, and the US, would a backlog from Russia result in such increases in energy prices? One could argue.

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When asked by the BBC about whether the UK is facing shortages in natural gas, UK Energy Secretary Kwasi Kwarteng said it was alarmist and misguided to start talking about gas shortages. He said: “There is no question of the lights going out, of people being unable to heat their homes. There will be no three-day working week or a throwback to the 1970s.”

COP26 president Alok Sharma, added that “We do not see risks of supplies right now and prices are being protected.” He said Ofgem’s price cap would help avoid a further increase in consumer gas prices. The COP26 president made the announcement following reports that the UK government is considering providing utilities with loans to survive the market challenges as well as removing taxes for natural gas imports.

However, some four small utility companies in the UK have been reported to have ceased operations in the past month due to a lack of funds to purchase natural gas at high wholesale prices.

Energy management firm Kaluza and demand-side management solutions company Flexitricity states that demand response is much-needed for the UK energy system to alleviate constraints that have recently caused prices to reach as high as £4,000 ($5,400) per MWh in the Balancing Mechanism.

Where is the UK sourcing flexible energy and how?

Starman explains: “Much of the flexibility we have is very short in duration – operating on within-day cycles, for example, batteries and to some extent pumped storage. More flexibility here could have reduced some of the significant spreads between peak and off-peak prices we have seen over recent weeks, although it would have done little to suppress longer-term prices. Longer-term flexibility, and any shortfall in generation margin, are typically provided by assets that are fossil fuel-fired (gas being the main source in Great Britain). Replacing these marginal generators will present a significant technical challenge.

“Long-duration storage, such as pumped storage or hydrogen, is not well supported through existing mechanisms either because of their first-of-a-kind nature and increased risk or long-lead times and high construction costs. Changing mechanisms such as the Contracts for Difference (CfD) or Capacity Market to reflect better these projects requirements should be considered. Finally, it is worth noting BEIS has a long duration storage competition in progress. We have already seen fertiliser factors shut off demand in response to high prices, and we may see more of this if prices continue to remain high. The future energy system will likely require more flexibility from all demand users.“

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What role will energy flexibility play in helping the UK achieve its net-zero goals?

“Net-zero is most cost-effectively achieved with renewable power sources, and as such, there is a high level of flexibility required to manage the intermittency of these power sources,” said Starman. “Therefore there will be increased future reliance on all kinds of storage (especially lithium-ion battery storage and pumped storage) interconnection, demand Side Response, and Carbon Capture Usage and Storage on thermal power stations.”

To conclude, the role of energy flexibility will continue to increase in stabilising energy markets and simplifying utility grid resilience efforts as the move to low-carbon energy-based grid networks intensifies.