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The crisis, which quietly played out within the control room of the British electricity system, shows the growing vulnerability of energy transportation networks — power grids and gas and oil pipelines — across much of the industrialized world after years of low investment and not-in-my-backyard opposition.
On most days, the bottlenecks mean distorted costs. Sometimes, it results in sky-high prices where energy is in short supply when it is needed. At other occasions, prices can tumble to zero, or go negative, when producers cannot sell their power into a congested transmission system. Increasingly, it puts the whole system at risk. Talk to most industry executives and you quickly get the sense that we are sleepwalking into more blackouts. Discuss the problems with the engineers who manage the system day-in, day-out, and that danger appears even closer. The £9,724.54 price, settled between noon and 1:00 p.m. on July 20 via the so-called NEMO interconnector that links the UK with Belgium, was the highest Britain has ever paid to import electricity, nearly five times higher than the previous record. The absurdity of that level is apparent when comparing it with the year-to-date average for UK spot electricity: £178 per megawatt hour.
“It was an absolute shock,” says Phil Hewitt, who has been monitoring electricity prices for over two decades and is now executive director of EnAppSys Ltd, a consultancy. “It was the price to keep the lights on. The security of supply was at stake.”
The actual amount of electricity bought at the record price was tiny: enough to supply just eight houses for a year. More power was bought at slightly lower prices. The payments, nonetheless, highlight desperation: buying across the channel was, for 60 minutes or so, the only option to balance the system. If Belgium had not helped, the grid would had been forced to “undertake demand control and disconnect homes from electricity,” says a grid spokesperson.
In a normal situation, without the traffic jams on the grid, the UK should have been able to send power to the southeast of England from elsewhere in the country — even from all the way in Scotland, where offshore wind farms are producing more than ever. The problem is that the UK, and the rest of industrialized nations, aren’t investing enough in their grids, leaving the system exposed.
The world is investing about $300 billion per year in power grids, an amount that has barely changed since 2015, according to the International Energy Agency. It isn’t enough, as the global economy electrifies and deals with a shifting generation map, with intermittent renewable energy like solar and wind replacing polluting — but dependable — coal- and gas-fired stations.
Now, grid bottlenecks create perverse situations. In Spain, for example, there are times when solar electricity producers in the south have to switch off their plants while, in the north, gas-fired power stations are turning on to meet demand. In some corners of the US, electricity prices often drop below zero, with power plants forced to sell their energy due to grid constraints. Meanwhile, in other corners of the US, consumers are facing calls to reduce power demand on peak days and face record prices.
Aging infrastructure, often 30 or 40 years old, needs to be replaced. But refurbishment and expansion come up against local opposition to more pylons and overhead cables. In the UK, authorities are bypassing popular resistance by moving some parts of the grid offshore, using undersea cables. “Fish don’t vote,” goes the industry’s joke. It is, however, an expensive undertaking.
High metal prices are making building new grids even more costly. Cables are made of copper or aluminum which, at today’s prices, account for nearly a third of what will be spent on a new grid, up 10 percentage points from investments made between 2010 and 2020.Across the US and Europe, utilities and grid managers need to invest billions of dollars into digitalization of the network to allow demand-side load management that would reduce consumption at peak times, often via hourly prices. Managing peak demand is going to be even more important when millions of households shift to electric vehicles, creating a new source of electricity consumption.
Last year, the UK paid just under £1,600 per megawatt hour on one day to import electricity and avert a short squeeze. On July 18, it paid just over £2,000, which became the record. Two days later, the price went to nearly £10,000. The pattern is clear. At some point, even sky-high prices won’t be enough. Then, a blackout would belatedly lay bare the consequences of our under-investing ways.
More From This Writer and Others at Bloomberg Opinion:
Europe’s Heat Wave Is Bad for Energy Prices, But the Drought Is Worse: Javier Blas
Struggling to Stay Cool? So Is the Generator Powering Your Aircon: David Fickling
Putin’s New Weapon of Mass Disruption: Kazakh Oil: Julian Lee
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. A former reporter for Bloomberg News and commodities editor at the Financial Times, he is coauthor of “The World for Sale: Money, Power and the Traders Who Barter the Earth’s Resources.”
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