The rise in renewable generation
The GB energy market is expected to become increasingly dominated by renewable and low carbon technologies. Since 2010, the proportion of generation from coal (Fig. 2) and oil has declined dramatically, whilst generation from wind and solar has increased (Fig. 1). Last year, the system ran without coal for just over 18 days and this year the last coal generator came off the system at midnight on 9th April, with no coal being burnt for electricity since (except for a period of maintenance at the end of day 67) (Fig. 3).
Figure 1. Electricity generation mix by quarter and fuel source (GB). Source: BEIS Energy trends section 5: Electricity (ET 5.1).
Figure 2. Average monthly coal output (GW) from the year 2015 to 2020. Source: Gridwatch
Figure 3. Daily share of Britain’s power generated by burning coal. Source: Drax Electric Insights.
The rise in renewable penetration brings challenges for both new and existing renewable asset owners. Cornwall Insight reports settlement prices for solar and wind were 15 per cent below average baseload values during March and April this year. This is known as renewables price cannibalisation; a phenomenon where large amounts of non-dispatchable generation depresses prices as generation output cannot be scheduled to times of greater demand. Therefore, although Contracts for Difference (CfD) generators are largely protected against price cannibalisation, generators with CfDs awarded from Allocation Rounds 2 and 3 do not receive subsidy payments if day-ahead auction prices turn negative for six consecutive hours or more. For those securing CfDs in Allocation Round 4 no support payments will be given when prices turn negative for any length of time. By 2030, up to 40 GW of solar and 30 GW offshore wind is projected to be built and this is likely to exacerbate the effect of price cannibalisation.
Impact of future wholesale market negative pricing and volatility on renewable generation
Although, negative pricing in the BM is not a new phenomenon, as more intermittent renewables are added to the system coupled with changes to the imbalance price calculation to PAR1 this is an increasing trend for not only the BM but also in wholesale markets too.
In May 2020 alone, UK half-hourly prices for day-ahead supply went negative on three occasions for over 12 hours. Overall, in 2020 so far, prices have been negative for over 100 hours compared to previous years where negative pricing was not experienced in the Day ahead market (with the exception of December 2019). This growth in negative pricing (Fig. 4) presents a significant risk to asset owners with assets supported under CfDs.
In addition to the increased periods of negative pricing, fundamental changes in daily price shapes are expected over the next decade. At present prices are generally low overnight, rising in the morning and peaking in the later afternoon (Fig. 4).
Figure 4. Day ahead wholesale market prices for 2018, 2019 and the first half of 2020. Data from Epex spot.
In the future this will change as wholesale prices will move away from being set by the marginal cost of low efficiency gas generators and minimum daily prices will diverge from gas marginal cost due to wind output. Large volumes of non-dispatchable generation with a similar position in the merit order and a reduction in thermal capacity will lead to increased volatility. This volatility will be exacerbated by high levels of embedded renewable penetration, which will mean that the swings in residual demand over the day grow causing the system marginal cost to traverse the steepest part of the supply stack more frequently. Additionally, a forecasted rise in commodity costs (not withstanding COVID-19 immediate impacts) will result in higher wholesale prices when prices are set by gas.
Figure 5. Day ahead wholesale prices in 2016, 2017, 2018, 2019. Data from Epex spot.
This growth in volatility presents a risk to asset owners who choose to trade a proportion of their capacity directly in wholesale markets (without CfD support). It will also, in the future, be a risk to all asset owners, as asset lives are typically longer than the life of CfD contracts, meaning that all assets will face merchant exposure towards the end of their lives.
Upside’s view — what can assets owners do?
Whether assets are supported by CfDs or not, there is clearly a revenue risk for assets due to increased prevalence of negative pricing and wholesale market price volatility.
Upside Energy helps asset owners reduce this exposure by providing the real-time control and dispatch ability that not only enables assets to be reliably turned-down at the right time, but ensures it is back generating afterwards.