ESO takes cautious action ahead of Winter to ensure security of electricity supply

• ESO’s Winter Outlook Base Case shows de-rated margins of 3.7GW or 6.3%, this is similar to recent winters
• Russia’s invasion of Ukraine means that overall, this is likely to be a challenging winter for energy supply throughout Europe. As a result, ESO has developed additional tools to manage risk
• New tools developed for this winter include: Winter contingency contracts and the innovative Demand Flexibility Service which businesses and the public can get behind and be paid to move their electricity use out of peak hours
• As part of its analysis this winter the ESO has also developed additional illustrative scenarios

Situation

Since last winter the world has fundamentally changed with the invasion of Ukraine by Russia. With this backdrop the ESO presents the Winter Outlook. Building on the Early View of Winter, this document presents a more detailed view focusing on the upcoming winter in Great Britain. This Winter Outlook and corresponding Data Workbook covers the period from 31 October 2022 to 31 March 2023. The data freeze date for this outlook was 22 September 2022.

New times require new tools

Since Russia’s invasion of Ukraine and the knock-on effects in the European and global energy markets the ESO has added several mitigating tools to its operational toolbox to help manage the energy supply this winter. Those tools include:

• Providing an early view of the Winter Outlook in midsummer, so market participants, stakeholders and others had a view of the emerging energy impacts on winter.
• Securing 3 contracts with coal generators to keep 5 coal units open and on standby this winter to generate up to approximately 2 GW of additional power (enough to supply about 600,000 homes and flats).
• Creating a new Demand Flexibility Service where energy users will be incentivized to reduce consumption/turn off power at key times to reduce overall demand across the system. It is projected that this tool could reduce demand by up to 2 GW.

Building on the early view

Building on the Early View of Winter, this electricity Winter Outlook presents a more detailed view focusing on the upcoming winter in Great Britain. This Winter Outlook covers the period from 31 October 2022 to 31 March 2023. The data freeze date for this outlook was 22 September 2022.

This Winter Outlook is developed in the context of unprecedented turmoil and volatility in energy markets in Europe and beyond and, as we stated earlier in the year, shortfalls of gas in continental Europe could have a range of knock-on impacts in Britain. Therefore, in this Winter Outlook in addition to our Base Case, the ESO has also set out a scenario to illustrate the implications should some of those potential risks to security of energy supplies materialise.

Base case

The ESO’s central view remains, as set out in the Base Case, that there will be adequate margins (3.7GW / 6.3%) through the winter to ensure GB remains within the reliability standard[1], although the ESO expects there to be days where we will need to utilise many of the tools in our operational toolkit, including use of system notices[2].

Given the scale of uncertainty and risks associated with the current geopolitical situation as we head into this winter, as noted the ESO has put in place a number of risk mitigation initiatives – these include contracting to retain approximately 2GW of coal fired generation that would otherwise have closed and introducing an innovative Demand Flexibility Service to incentivise customers to reduce consumption at periods where margins are tight.

Notwithstanding the mitigation measures noted above, it is highly likely that the wholesale price of energy (both gas and electricity) will remain very high throughout the winter outlook period[3].

Alternate scenario 

While the Base Case assumes that capacity across all providers (generation, storage, interconnection etc.) is available in line with commitments secured under the Capacity Market, the ESO have also modelled a scenario whereby the energy crisis in Europe results in electricity not being available to import into GB from continental Europe. This could be due to a combination of factors, including a shortage of gas in Europe (which in turn limits power generation in Europe) and/or generation unavailability (e.g., due to a high level of outages across another country’s generation fleet.

In this hypothetical alternative scenario (no electricity imports from continental Europe[4]), the ESO would deploy its mitigation strategies – dispatching the retained coal units and the Demand Flexibility Service. By securing approximately/up to 4GW[5] through these actions, the ESO would expect to maintain adequate margins and mitigate impacts on customers.

The Demand Flexibility Service is new and innovative, and the ESO have worked with suppliers, aggregators, industry, Ofgem and BEIS on the design to ensure it is ready for the winter and capable of delivering the required level of participation and response (2GW+). It will launch on 1 November, and the ESO is encouraging suppliers and aggregators to work with their customers to ensure the highest levels of engagement and participation. The ESO sees particular potential from commercial organisations who can shift their load from peak hours and have had positive feedback from British companies on this.

Without the deployment of the additional coal generation units or the new Demand Flexibility Service, the ESO would expect to see a reduction in margins. In this scenario on days when it was cold (therefore likely high demand), with low levels of wind (reduced available generation), there may be the potential to need to interrupt supply to some customers for limited periods of time in a managed and controlled manner. However, the ESO expects the mitigations outlined above to be effective.

In the unlikely event that escalation of the situation in Europe means that insufficient gas supply were to be available in Great Britain this would further erode electricity supply margins6 potentially leading to supply interruptions to customers for short periods. All possible mitigating strategies, including our new measures, would be deployed to minimise the disruption.

Fintan Slye, Executive Director of the ESO, said:

Under our Base Case, as set out in the Winter Outlook, we are cautiously confident that there will be adequate margins through the winter period. As an expert and responsible operator of Great Britain’s electricity system it is incumbent on us to also factor in external factors and risks beyond our control like the unprecedented turmoil and volatility in energy markets in Europe and beyond.

Our illustrative scenarios outline how we would respond to any challenges around interconnector availability and potential impacts to gas supplies for power generation. We’ve engaged with and continue to work with the National Grid Gas System Operator, System Operator counterparts in Europe, government, the energy regulator and the energy industry. We’ve also taken prudent action in agreeing winter contingency contracts for coal and developing our innovative Demand Flexibility Service to compliment the robust set of tools we already use to balance the electricity system every day.

The Winter Outlook 2022/23 can be read in full on the Research and Publications section of the NG ESO website.

[1] The reliability standard is less than 3 hours Loss of Load Expectation (LOLE).  Modelling shows the Base case LOLE to be 0.2 hrs, well within the standard.

[2] These would include Electricity Margin Notices (EMNs), Capacity Market Notices (CMNs) etc.

[3] This will also lead to higher balancing costs as the costs of each required action are linked to the wholesale price of electricity as bid into the Balancing Mechanism or offered for trades on interconnectors.

[4] The scenario assumes no electricity imports available from France, Netherlands and Belgium; 1.4GW imports from Norway; 0.4GW exports to Northern Ireland & Ireland.

[5] We expect the additional coal units to provide 2GW and therefore the Demand Flexibility Service would need to provide 2GW.