Tag: flexibility and stability and power system security

The role of biomass in securing reliable power generation

5 December 2022

Power generation, Sustainable bioenergy

Key takeaways

  • Since 2021, there has been a sharp rise in the price of electricity, driven by a steep increase in wholesale gas prices in Europe in particular.
  • A number of factors, including the impact of COVID-19 and the effects of the war in Ukraine have contributed to driving gas prices to record highs.
  • The volatility of gas prices means the UK needs to find replacements for the role of gas in helping to balance the electricity grid.
  • Biomass and pumped storage hydro have the capacity to provide reliable, renewable energy to UK homes and businesses, while contributing to keeping the grid stable.

Great Britain, and many other parts of the world, are in a phase of energy uncertainty. Since 2021, soaring power prices have caused energy bills to escalate as much as five-fold and led to a string of collapses of UK energy suppliers.

As of October 2022, the annual energy bill for a UK household with “typical” energy consumption has been capped at £2,500 a year –  96% higher than the winter 2021/22 price cap – the upper limits the rates suppliers can charge for their default tariffs.

The costs of energy to end consumers would be even higher were it not for this energy price guarantee introduced by the UK government on 1 October and currently due to be in place until 31 March 2023. In Germany, the government has committed €200 billion towards a ‘defensive shield’ against surging energy prices, while France has capped energy price increases at 4% for 2022 and 15% from January 2023.

The primary factor in this change is the rise in natural gas prices.

Periods of turbulence driven by commodity prices emphasises the need for a diverse, secure supply of power generation available to the UK grid. As the energy system works through the necessary transition away from fossil fuels to renewable sources, the need for a reliable, low-carbon, affordable power becomes even greater.

What’s driving up gas prices? 

As the world went into lockdown in 2020 the demand for energy, including gas, dropped – and so did supply. When countries began to emerge from lockdown in 2021 and economies started to reboot, supply struggled to keep up with renewed demand, triggering a rise in the price of wholesale gas, and other fuels. The cold winter in 2020-2021 and unusually hot summers in 2021 and 2022 also dented European gas storage levels, further contributing to rising gas prices.

 An already uncertain energy market was further destabilised by Russia’s invasion of Ukraine. This was particularly true in Europe, (most notably Germany) where Russian gas at the time accounted for around 40% of total gas consumption. Gas prices began increase rapidly as a result of factors including fears that Russia would restrict the supply of gas to Europe in response to sanctions against the country, or that an embargo on Russian gas would be introduced.

Constrained gas supplies also increased global demand for alternative sources like liquified natural gas (LNG) imports, which account for about 22% of the UK’s gas. This increase in demand has pushed up the price of these alternatives, forcing countries to compete to attract supplies.

There are several reasons why higher gas prices have such a significant impact on UK energy prices. Firstly, a considerable proportion of UK electricity comes from gas. In the second quarter of 2022, gas represented 42% of the UK energy mix, making it the country’s single largest source of electricity.

The UK also relies heavily on gas to heat its homes. And with those homes being some of the oldest and least energy-efficient in Europe, it takes more gas to heat them up and keep them warm.

Click to view/download

The role of biomass and pumped storage hydro in ensuring security of supply 

In addition to the pressures placed on gas and electricity supplies since 2021, the UK’s journey to net zero depends on increasing reliance on intermittent sources of power, such as wind and solar. As such, there is a renewed need to ensure a diverse range of power generation sources to secure electricity supply globally.

As gas becomes less economical, biomass offers a renewable reliable, dispatchable source of power that can balance the grid and supply baseload power regardless of weather conditions.

The Turbine Hall at Cruachan Power Station

Our four 645 MW biomass-fuelled generating turbines at Drax Power Station make it the largest single renewable source of power in the UK. The plant can produce enough electricity to power the equivalent of five million homes come rain or shine.

Drax’s Cruachan pumped storage hydro power station in the Scottish Highlands also offers National Grid the capacity to store 440 MW of renewable power. By absorbing excess electricity from zero carbon sources, like wind and solar, Cruachan can store and deploy power when the grid needs it most.

The ability of pumped storage hydro and biomass plants to store energy and quickly adjust output as required will become ever more important as the UK’s use of renewables grows and there are fewer spinning turbines connected to the grid.  As renewable, non-intermittent sources of electricity, biomass and pumped storage hydro are central to a safe, economic, and stable electricity grid – and to the UK’s low-carbon energy future.

Half year results for the six months ended 30 June 2022

26 July 2022

Investors

RNS Number: 6883T
Drax Group plc
(“Drax” or the “Group”; Symbol:DRX)

Six months ended 30 JuneH1 2022H1 2021
Key financial performance measures
Adjusted EBITDA (£ million)(1)(2)225186
Continuing operations225165
Discontinued operations – gas generation-21
Net debt (£ million)(3)1,1011,029
Adjusted basic EPS (pence)(1)20.014.6
Interim dividend (pence per share)8.47.5
Total financial performance measures from continuing operations
Operating profit (£ million)20784
Profit before tax (£ million)20052

Drax CEO, Will Gardiner [click to view/download]

Will Gardiner, CEO of Drax Group, said:

“As the UK’s largest generator of renewable power by output, Drax plays a critical role in supporting the country’s security of supply. We are accelerating our investment in renewable generation, having recently submitted planning applications for the development of BECCS at Drax Power Station and for the expansion of Cruachan Pumped Storage Power Station.

“As a leading producer of sustainable wood pellets we continue to invest in expanding our pellet production in order to supply the rising global demand for renewable power generated from biomass. We have commissioned new biomass pellet production plants in the US South and expect to take a final investment decision on up to 500,000 tonnes of additional capacity before the end of the year.

“As carbon removals become an increasingly urgent part of the global route to Net Zero, we are also making very encouraging progress towards delivering BECCS in North America and progressing with site selection, government engagement and technology development.

“In the UK and US we have plans to invest £3 billion in renewables that would create thousands of green jobs in communities that need them, underlining our position as a growing, international business at the heart of the green energy transition.”

Financial highlights

  • Adjusted EBITDA £225 million up 21% (H1 2021: £186 million)
  • Strong liquidity and balance sheet – £539 million of cash and committed facilities at 30 June 2022
    • Expect to be significantly below 2 times Net Debt to Adjusted EBITDA by the end of 2022
  • Sustainable and growing dividend – expected full year dividend up 11.7% to 21.0 p/share (2021: 18.8 p/share)
    • Interim dividend of 8.4 p/share (H1 2021: 7.5 p/share) – 40% of full year expectation

Engineers at Cruachan Power Station

Progress with strategy in H1 2022

  • To be a global leader in sustainable biomass – targeting 8Mt of capacity and 4Mt of sales to 3rd parties by 2030
    • Addition of 0.4Mt of operational pellet production capacity
    • New Tokyo sales office opened July 2022
  • To be a global leader in negative emissions
    • BECCS – UK – targeting 8Mt of negative emissions by 2030
    • Planning application submitted and government consultation on GGR business models published with power BECCS business model consultation expected “during the summer”
    • BECCS – North America – targeting 4Mt of negative emissions by 2030
    • Ongoing engagement with policy makers, screening of regions and locations for BECCS
  • To be a leader in UK dispatchable, renewable power
    • >99% reduction in scope 1 and 2 emissions from generation since 2012
    • UK’s largest generator of renewable power by output – 11% of total
    • Optimisation of biomass generation and logistics to support security of supply at times of higher demand
    • Planning application submitted for 600MW expansion of Cruachan and connection agreement secured

Outlook for 2022

  • Expectations for full year Adjusted EBITDA unchanged from 6 July 2022 update which reflected optimisation of biomass generation and logistics to support UK security of supply this winter when demand is high, a strong pumped storage performance and agreement of a winter contingency contract for coal

Future positive – people, nature, climate

  • People
    • Diversity and inclusion programme – inclusive management, promoting social mobility via graduates, apprenticeships and work experience programmes
    • Continued commitment to STEM outreach programme

An apprentice working in the turbine hall at Drax Power Station, North Yorkshire

  • Nature and climate
    • Science-based sustainability policy fully compliant with current UK and EU law on sustainable sourcing and aligned with UN guidelines for carbon accounting
    • Biomass produced using sawmill and forest residuals, and low-grade roundwood, which often have few alternative markets and would otherwise be landfilled, burned or left to rot, releasing CO2 and other GHGs
    • Increase in sawmill residues used by Drax to produce pellets – 67% of total fibre (FY 2021: 62%)
    • 100% of woody biomass produced by Drax verified against SBP, SFI, FSC®(4) or PEFC Chain of Custody certification with third-party supplier compliance primarily via SBP certification

Operational review

Pellet Production – increased production, flexible operations to support UK generation, addition of 0.4Mt of capacity 

  • Adjusted EBITDA up 13% to £45 million (H1 2021: £40 million)
    • Pellet production up 54% to 2.0Mt (H1 2021: 1.3Mt) (including Pinnacle since 13 April 2021)
  • Addition of c.0.4Mt of new production capacity
    • Commissioning of Demopolis and Leola, expect to reach full production capacity in H2 2022
  • Total $/t cost of $146/t(5) – 2% increase on 2021 ($143/t(5))
    • Increase in utility costs in Q2-22 (>20% increase)
    • Fuel surcharge – barge and rail to port (> 10% increase)
    • Commissioning costs at Demopolis and Leola plants
    • Net reduction in other costs, inclusive of optimisation of supply chain to meet reprofiling of Generation
    • No material change in fibre costs
  • Areas of focus for further savings – wider range of sustainable biomass fibre, continued focus on operational efficiency and improvement, capacity expansion, innovation and technology
  • Continue to target final investment decision on up to 0.5Mt of new capacity in H2 2022

Generation – increased recognition of value of long-term security of supply from biomass and pumped storage

  • Adjusted EBITDA from continuing operations £205 million up 24% (H1 2021: £165 million)
    • Optimisation of biomass generation and logistics to support security of supply at times of higher demand
    • Summer – lower power demand, lower power generation and sale of reprofiled biomass
    • Winter – maximise biomass deliveries to support increased generation at times of higher demand
    • Four small, planned biomass outages completed in H1, supporting higher planned generation in H2-22
    • Strong portfolio system support performance (balancing mechanism, ancillary services and optimisation)
    • Higher cost of sales – logistics optimisation, biomass and system costs
  • Six-month extension of coal at request of UK government – winter contingency contract for security of supply
    • Closure of coal units in March 2023 following expiration of agreement with ESO at end of March 2023
    • Fixed fee and compensation for associated costs, including coal
    • Remain committed to coal closure and development of BECCS, with no change to expected timetable
  • As at 21 July 2022, Drax had 25.4TWh of power hedged between 2022 and 2024 on its ROC and hydro generation assets at an average price of £95.9/MWh, with a further 2.3TWh equivalent of gas sales (transacted for the purpose of accessing additional liquidity for forward sales from ROC units and highly correlated to forward power prices) plus additional sales under the CfD mechanism
Contracted power sales 21 July 2022202220232024
ROC (TWh(6))11.78.84.5
Average achieved £ per MWh87.298.3109.5
Hydro (TWh)0.30.1-
-Average achieved £ per MWh133.1242.0-
Gas hedges (TWh equivalent)(0.1)0.51.9
-Pence per therm361.0145.8135.0
Lower expected level of ROC generation in 2023 due to major planned outages on two units

Customers – renewable power under long-term contracts to high-quality I&C customers and decarbonisation products

  • Adjusted EBITDA of £24 million (H1 2021: £5 million loss) – continued improvement following impact of Covid-19
    • principally in the SME business
    • Includes benefit of excess contracted power sold back into merchant market
  • Continued development of Industrial & Commercial (I&C) portfolio
    • 9TWh of power sales – 21% increase compared to H1 2021 (5.7TWh)
    • Focusing on key sectors to increase sales to high-quality counterparties supporting generation route to market
    • Energy services to expand the Group’s system support capability and customer sustainability objectives
  • SME – increasingly stringent credit control in SME business to reflect higher power price environment

Other financial information

  • Total operating profit from continuing operations of £207 million (H1 2021: £84 million), including £130 million mark-to-market gain on derivative contracts and £27 million of exceptional costs
  • Total profit after tax from continuing operations of £148 million includes an £8 million non-cash charge from revaluing deferred tax balances following confirmation of UK corporation tax rate increases from 2023 (H1 2021: £6 million loss including a £48 million non-cash charge from revaluing deferred tax balances)
  • Capital investment of £60 million (H1 2021: £71 million) – primarily maintenance
    • Full year expectation of £290–£310 million, includes £120 million for Open Cycle Gas Turbine projects, £20 million BECCS FEED and site preparation, and £10 million associated with new pellet capacity, subject to final investment decision (FID)
  • Depreciation and amortisation of £121 million (H1: £89 million) reflects inclusion of Pinnacle for a full six months, plant upgrades and accelerated depreciation of certain pellet plant equipment in line with planned capital upgrades
  • Group cost of debt below 3.6%
  • Cash Generated from Operations £185 million (H1 2021: £138 million)
  • Net Debt of £1,101 million (31 December 2021: £1,044 million), including cash and cash equivalents of £288 million (31 December H1 2021: £317 million)
    • Continue to expect Net Debt to Adjusted EBITDA significantly below 2 times by end of 2022, reflecting optimisation of generation and logistics to deliver higher levels of power generation and cash flows in H2 2022

View complete half year report

View Investor Presentation

Webcast Live Event

Half year results for the six months ended 30 June 2021

29 July 2021

Investors
Engineers walking in front of sustainable biomass wood pellet storage dome at Drax Power Station, June 2021

RNS Number: 8333G
Drax Group plc
(“Drax” or the “Group”; Symbol:DRX)

Six months ended 30 JuneH1 2021H1 2020
Key financial performance measures
Adjusted EBITDA (£ million)(1)(2)186179
Continuing operations165160
Discontinued operations – gas generation2119
Net debt (£ million)(3)1,029792
Adjusted basic EPS (pence)(1)14.610.8
Interim dividend (pence per share)7.56.8
Total financial performance measures from continuing operations
Operating profit / (loss) (£ million)84(57)
Profit / (loss) before tax (£ million)52(85)

Will Gardiner, CEO of Drax Group, said:

“We have had a great first half of the year, transforming Drax into the world’s leading sustainable biomass generation and supply company as well as the UK’s largest generator of renewable power.

“The business has performed well, and we have exciting growth opportunities to support the global transition to a low-carbon economy.

Drax Group CEO Will Gardiner in the control room at Drax Power Station

Drax Group CEO Will Gardiner in the control room at Drax Power Station

“Drax has reduced its generation emissions by over 90%, and we are very proud to be one of the lowest carbon intensity power generators in Europe – a huge transformation for a business which less than a decade ago operated the largest coal power station in Western Europe.

“In the past six months we have significantly advanced our plans for Bioenergy with Carbon Capture and Storage (BECCS) in the UK and globally. By 2030 Drax could be delivering millions of tonnes of negative emissions and leading the world in providing a critical technology needed to tackle the climate crisis.

“We are pleased to be announcing a 10% increase in our dividend, and we remain committed to creating long-term value for all our stakeholders.” 

Financial highlights

Pinnacle named ship

  • Adjusted EBITDA from continuing and discontinued operations up £7 million to £186 million (H1 2020: £179 million)
  • Acquisition of Pinnacle Renewable Energy Inc. (Pinnacle) for cash consideration of C$385 million (£222 million) (enterprise value of C$796 million) and sale of gas generation assets for £186 million
  • Strong liquidity and balance sheet
    • £666 million of cash and committed facilities at 30 June 2021
    • Refinancing of Canadian facilities (July 2021) with lower cost ESG facility following Pinnacle acquisition
  •  Sustainable and growing dividend – expected full year dividend up 10% to 18.8 pence per share (2020: 17.1p/share)
    • Interim dividend of 7.5 pence per share (H1 2020: 6.8p/share) – 40% of full year expectation

Strategic highlights

Kentaro Hosomi, Chief Regional Officer EMEA, Mitsubishi Heavy Industries (MHI) at Drax Power Station, North Yorkshire

Kentaro Hosomi, Chief Regional Officer EMEA, Mitsubishi Heavy Industries (MHI) at Drax Power Station, North Yorkshire

  • Developing complementary biomass strategies for supply, negative emissions and renewable power
  • Creation of the world’s leading sustainable biomass generation and supply company
    • Supply – 17 operational plants and developments across three major fibre baskets with production capacity of 4.9Mt pa and $4.3 billion of long-term contracted sales to high-quality customers in Asia and Europe
    • Generation – 2.6GW of biomass generation – UK’s largest source of renewable power by output
  • >90% reduction in generation emissions since 2012
    • Sale of gas generation assets January 2021 and end of commercial coal March 2021
  • Development of BECCS
    • Planning application submitted for Drax Power Station and technology partner (MHI) selected
    • Participation in East Coast Cluster – phase 1 regional clusters and projects to be selected from late 2021
    • Partnerships with Bechtel and Phoenix BioPower evaluating international BECCS and biomass technologies
  • System support – option to develop Cruachan from 400MW to over 1GW – commenced planning approval process

 Outlook

  • Adjusted EBITDA, inclusive of Pinnacle from 13 April 2021, full year expectations unchanged

Operational review

Pellet Production – acquisition of Pinnacle, capacity expansion and biomass cost reduction

close-up of truck raising and lowering

  • Sustainable sourcing
    • Biomass produced using forestry residuals and material otherwise uneconomic to commercial forestry
    • Science-based sustainability policy fully compliant with current UK, EU law on sustainable sourcing aligned with UN guidelines for carbon accounting
    • All woody biomass verified and audited against FSC®(4), PEFC or SBP requirements
  • Adjusted EBITDA (including Pinnacle since 13 April 2021) up 60% to £40 million (H1 2020: £25 million)
    • Pellet production up 70% to 1.3Mt (H1 2020: 0.8Mt)
    • Cost of production down 8% to $141/t(5) (H1 2020: $154/t(5))
  • Near-term developments in US Southeast (2021-22)
    • Commissioning of LaSalle expansion, Demopolis and first satellite plant in H2
  • Other opportunities for growth and cost reduction
    • Increased production capacity, supply of biomass to third parties and expansion of fuel envelope to include lower cost biomass

Generation – flexible and renewable generation

  • 12% of UK’s renewable electricity, strong operational performance and system support services
  • Adjusted EBITDA down 14% to £185 million (H1 2020: £214 million)
    • Biomass – Lower achieved power prices and higher GBP cost of biomass reflecting historical power and FX hedging
    • Strong system support (balancing mechanism, Ancillary Services and optimisation) of £70 million (H1 2020: £66 million) – additional coal operations and continued good hydro and pumped storage performance, in addition to coal operations
    • Coal – utilisation of residual coal stock in Q1 2021 and capture of higher power prices
  • Pumped storage / hydro – good operational and system support performance
    • £34 million of Adjusted EBITDA (Cruachan, Lanark, Galloway schemes and Daldowie) (H1 2020: £35 million)
  • Ongoing cost reductions to support operating model for biomass at Drax Power Station from 2027
    • End of commercial coal operations in March, formal closure September 2022 – reduction in fixed cost base
    • Major planned outage for biomass CfD unit – August to November 2021 – including third turbine upgrade delivering improved thermal efficiency and lower maintenance cost, supporting lower cost biomass operations
    • Trials to expand range of lower cost biomass fuels – up to 35% load achieved in test runs on one unit
  • Strong contracted power position – 29.3TWh sold forward at £52.1/MWh 2021-2023. Opportunities to capture higher power prices in future periods, subject to liquidity
As at 25 July 2021202120222023
Fixed price power sales (TWh) 15.99.14.3
-      CfD(6)3.80.6-
-      ROC10.88.44.0
-      Other1.30.10.3
At an average achieved price (£ per MWh)51.752.452.7

Customers – renewable electricity and services under long-term contracts to high-quality I&C customer base

 

  • Adjusted EBITDA loss of £5 million inclusive of £10-15 million impact of Covid-19 (H1 2020 £37 million loss inclusive of £44 million impact of Covid-19)
  • Continuing development of Industrial & Commercial (I&C) portfolio
    • Focusing on key sectors to increase sales to high-quality counterparties supporting generation route to market
    • Energy services expand the Group’s system support capability and customer sustainability objectives
  • Closure of Oxford and Cardiff offices as part of SME strategic review and the rebranding of the Haven Power I&C business to Drax
  • Continue to evaluate options for SME portfolio to maximise value and alignment with strategy

Other financial information

  • Total operating profit from continuing operations of £84 million including £20 million mark-to-market gain on derivative contracts and acquisition related costs of £10 million and restructuring costs of £2 million
  • Total loss after tax from continuing operations of £6 million including a £48 million charge from revaluing deferred tax balances following announcement of future UK tax rate changes
  • Total loss after tax from continuing operations of £6 million including a £48 million charge from revaluing deferred tax balances following confirmation of UK corporation tax rate increases from 2023
  • Capital investment of £71 million (H1 2020: £78 million) – continued investment in biomass strategy
    • Full year expectation of £210–230 million, includes pellet plant developments – LaSalle expansion, satellite plants and commissioning of Demopolis
  • Group cost of debt now below 3.5% reflecting refinancing of Canadian facilities in July 2021
  • Net debt of £1,029 million (31 December 2020: £776 million), including cash and cash equivalents of £406 million (31 December 2020: £290 million)
    • 5x net debt to Adjusted EBITDA, with £666 million of total cash and committed facilities (31 December 2020: £682 million)
    • Continue to expect around 2.0x net debt to Adjusted EBITDA by end of 2022
View complete half year report View investor presentation Listen to webcast

The cost of staying in control

Iain Staffell, Imperial College London

31 August 2020

Opinion
What: Industrial landscape with cables, pylons and train at sunset Where: Somerset, UK When: January 2016

The cost of keeping Britain’s power system stable has soared, and now adds 20% onto the cost of generating electricity.

The actions that National Grid takes to manage the power system have typically amounted to 5% of generation costs over the last decade, but this share has quadrupled over the last two years.  In the first half of 2020, the cost of these actions averaged £100 million per month.

Supplying electricity to our homes and workplaces needs more than just power stations generating electricity.

Supply and demand must be kept perfectly in balance, and flows of electricity around the country must be actively managed to keep all the interconnected components stable and prevent blackouts.  National Grid’s costs for taking these actions have been on the rise, as we reported over the previous two summers; but recently they have skyrocketed.

At the start of the decade, balancing added about £1/MWh to the cost of electricity, but last quarter it surpassed £5/MWh for the first time (see below).

Balancing prices have risen in step with the share of variable renewables.  The dashed line below shows that for every extra percent of electricity supplied by wind and solar adds 10 pence per MWh to the balancing price.  Last quarter really bucks this trend though, and balancing prices have risen 35% above the level expected from this trend.  The UK Energy Research Centre predicted that wind and solar would add up to £5/MWh to the cost of electricity due to their intermittency, and Britain has now reached this point, albeit a few years earlier than expected.

This is partly because keeping the power system stable is requiring more interventions than ever before.  With low demand and high renewable generation, National Grid is having to order more wind farms to reduce their output, at a cost of around £20 million per month.  They even had to take out a £50+ million contract to reduce the output from the Sizewell B nuclear reactor at times of system stress.

Two charts illustrating the costs of balancing Great Britain's power system

[Left] The quarterly-average cost of balancing the power system, expressed as a percentage of the cost of generation. [Right] Balancing price shown against share of variable renewables, with dots showing the average over each quarter

A second reason for the price rise is that National Grid’s costs of balancing are passed on to generators and consumers, who pay per MWh.  As demand has fallen by a sixth since the beginning of the coronavirus pandemic, the increased costs are being shared out among a smaller base.  Ofgem has stepped in to cap the balancing service charges at a maximum of £10/MWh until late October.  Their COVID support scheme will defer up to £100 million of charges until the following year.

For a quarter of a century, the electricity demand in GB ranged from 19 to 58 GW*.  Historically, demand minus the intermittent output of wind and solar farms never fell below 14 GW.  However, in each month from April to June this year, this ‘net demand’ fell below 7 GW.

Just as a McLaren sports car is happier going at 70 than 20 mph, the national grid is now being forced to operate well outside its comfort zone.

This highlights the importance of the work that National Grid must do towards their ambition to be ready for a zero-carbon system by 2025.  The fact we are hitting these limits now, rather than in a few years’ time is a direct result of COVID.  Running the system right at its limits is having a short-term financial impact, and is teaching us lessons for the long-term about how to run a leaner and highly-renewable power system.

Chart: Minimum net demand (demand minus wind and solar output) in each quarter since 1990

Minimum net demand (demand minus wind and solar output) in each quarter since 1990

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Front cover of Drax Electric Insights Q2 2020 report

Electric Insights Q2 2020 report [click to view/download]

What is the national grid?

21 August 2020

Power generation
Electricity grid

What is the grid?

The national grid, or simply the grid, is the network of powerlines, pylons, gas lines and interconnectors that makes up Great Britain’s electricity and gas systems — and the engineers, technology and rules responsible for their seamless operation. It ensures electricity generated anywhere, by any source, can be transmitted to meet the demand for power wherever it’s needed across the country. It heats homes and businesses. It helps us to cook our food.

The national electricity grid consists of a high voltage transmission system, which connects electricity from power stations to substations and smaller local networks – called Distribution Network Operators, or DNOs – which transport electricity into homes and businesses.

Key national grid facts

How does it work?

Transporting electricity around the grid is more complicated than just connecting cables to power generators. In order to move power around the country, things like voltage and frequency of electricity must be balanced and kept uniform at all times. Without this, unstable electricity could damage equipment and ultimately lead to blackouts.

The National Grid Electricity System operator (ESO) is a separate entity from the National Grid company, and is responsible for maintaining the correct voltage, frequency and reserve power levels to ensure electricity is transmitted safely and efficiently at all times.

It does this by working with power generators and energy storage facilities to provide what are known as ‘ancillary services’ – a set of processes that keep the power system in operation, stable and balanced.

The national grid is the network of power stations, powerlines and electricity infrastructure that allows electricity to be generated, transported and used across the country.

Who controls it?

In Great Britain the National Grid company owns and operates the transmission systems which ensure electricity is delivered safely and reliably across the country.

The local distribution system is made up of 14 regional DNO companies, which deliver electricity at a lower voltage from substations to homes and businesses.

Great Britain’s grid incudes England, Scotland, Wales and several surrounding islands. Northern Ireland is part of an island-wide electricity system with the Republic of Ireland.

National grid fast facts

  • Great Britain’s grid is made up of more than 7,000 kilometres of cables, 90,000 pylons, 346 substations, and 1,500 kilometres of underground cables
  • Construction of the grid began on 14 July 1928 and was completed on 5 September 1933
  • It was originally designed to operate as 7 separate, connected grids, before a group of rebellion engineers attempted to run it as one on 29 October 1938. It has run as one grid ever since
  • A decade ago, Britain had 80 individual points of generation to manage. Today there are nearly one million
  • All electricity in Great Britain operates at a frequency of 50Hz. A deviation of just 1% above or below could cause damage

How is the grid changing?

As the sources that generate Great Britain’s electricity change to include more renewables, the grid has also changed.

The grid was built to work with large power stations that operate huge spinning turbines. With decarbonisation it’s evolved to include a greater variety of intermittent weather dependent sources such as wind, solar and decentralised power sources that serve individual buildings or communities.

This makes managing the grid’s stability more complicated, and requires the use of more ancillary services, usually delivered by flexible generators such as thermal power stations.

Go deeper

What are ancillary services?

Power generation
Ancillary services

What are ancillary services?

Ancillary services are a set of processes that enable the transportation of electricity around the grid while keeping the power system operating in a stable, efficient and safe way.

Why do we need ancillary services? 

When electricity makes its way through the country, it needs to be managed so that the power generation and electricity useage levels are equal.

The regulating of elements such as frequency and voltage has to be carefully managed, so that the massive amounts of electricity moving – or transmitted – are able to be used safely in homes,  businesses, schools and hospitals around the country.

Ancillary services enable the power system to operate in a stable, efficient and safe way.

 What do ancillary services offer?

Ancillary services include a wide variety of electrical efficiency and safety nets, all focussed on ensuring the power system delivers enough output to meet demand yet remains stable:

Frequency: The UK’s power system runs at a frequency of 50 hertz – to stay balanced, it has to remain at that frequency. Turbines and generators adjust the speed at which they spin automatically to increase or decrease power in line with demand and ensure that the system is kept stable.

Voltage: Different parts of the UK’s transmission system use voltages of either 400, 275 or 132 kilovolts. To ensure that voltage remains within 5% of those figures at all times, to be safe for domestic electricity use, power stations can produce or re-absorb excess energy as reactive power, keeping the overall system reliable.

Inertia: Turbine use is important in keeping the system operating in its current state, even with disruptions and sudden changes. The electricity system uses the weight of heavy spinning turbines to create stability, acting as dampeners and smoothing out unexpected changes in frequency across the network.

Reserve: An important part of ancillary servicing is making sure that there are no surprises – so holding back powerto release if something unexpected happens means that the network can function confidently, knowing that there are generators and other power providers such as pumped hydro storage waiting ready to back it up.

Key facts about ancillary services

Who manages ancillary services?

In the UK the grid’s stability is managed by National Grid Electricity System Operator (ESO) – a  separate company of National Grid Electricity Transmission (ET). The ESO works with ancillary service providers to either sign long-term contracts or make short term requests for a service.

These partners are often power stations, such as Drax Power Station, which have large spinning turbines capable of controlling voltage, frequency, providing inertia and serving as a source of reserve power. 

What is the future of ancillary services, as we move to a more renewable system?

As the UK’s electricity system continues to change, so to do its requirements for different ancillary services. The switch from a few very large power stations to a greater variety of different electricity sources, some of which may be dependent on the weather, as well as changes in how the country uses electricity, means there is a greater need for ancillary services to keep the grid stable.

These services have historically been delivered by thermal power stations, but new innovations are enabling wind turbines to provide inertial response and overcome changes in frequency, and batteries to store reserve power that can then be supplied to the power system to ensure balance.

Ancillary Services

Ancillary services fast facts  

  • Batteries can in some cases be cheaper ancillary alternatives to conventional sources of energy. The Hornsdale Power Reserve, which runs on a Tesla battery in South Australia, lowered the price of frequency ancillary services by 90% after just four months of use.
  • Ancillary services usually work from habit; knowing when to slow electricity production, or increase supply based around the general public’s standard working hours, dinner time and the early morning rush.
  • But during the COVID-19 lockdown, electricity consumption on weekdays fell by 13% and so National Grid ESO had to intervene with ancillary services to keep the lights on.
  • Every year, the ESO’s ancillary services move 300 terawatt hours (TWh) of electricity, which is equal to 4 trillion kettles boiling at once.

With recent innovations around renewable energies, there are a wider variety of ways for ancillary services to generate power.

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Button: What is decarbonisation?

Maintaining electricity grid stability during rapid decarbonisation

13 November 2019

Power generation
Cruachan pylons

Great Britain’s electricity system is in the middle of a revolution. Where power supply was once dominated by some big thermal coal, gas and nuclear power stations, it now comes from an array of sources. Thousands of new individual points have been added to the mix, ranging from large interconnectors, that bring in power from neighbouring countries, through to wind farms, solar panels, small gas and diesel engines.

The energy mix has been changing radically, with low carbon sources expected to provide 58% of Great Britain’s power by 2020, up from 22% in 2010 and 53% in 2018. However, the security standards at which the electricity grid needs to be operated remain the same; these are predominantly voltage and frequency, and nominally 230 V and 50Hz for a domestic consumer.

The operation of the Transmission system, including maintaining these standards is overseen by the National Grid Electricity System Operator (ESO), using a set of vital tools it needs to have available, known as ancillary services. Some of this capability was inherent in large generators, which could provide the ancillary services required to keep a stable transmission system. Maintaining system stability, with thousands of generation points — a large part of which are not directly controllable — is increasingly challenging.

Click graphic to view/download

Ancillary services enable electricity to reach the end customer when and where it is required, in a safe manner, within acceptable quality standards. In addition to managing voltage and frequency levels, these standards also include maintaining adequate reserves to accommodate demand forecast uncertainties, generator breakdown and system faults. 1.

As the electricity mix changes, so must the process by which these services are secured. A diverse set of existing and genuinely new solutions will be needed to keep the lights on in the net zero carbon future.

Three steps to creating the right environment for a stable, resilient future grid:

1. Make the value of ancillary services transparent

In order for companies to help the ESO, be they generators or other service providers, it must be open and transparent about what’s needed to maintain grid stability and build resilience for the future.

“The ESO is the only buyer in the ancillary services market and is well-positioned to understand how the system is evolving. It should be proactively flagging how its needs may evolve in the future, so that the market can develop solutions to meet them”, says Marcelo Torres, Drax’s Regulation Manager – Markets.

Certain ancillary services still don’t have their own competitive markets and are provided as a “by-product” of the generation of electricity. An example is reactive power, for which there are no developed functioning regional markets yet. Generally, all power stations connected to the transmission network with a generation capacity of over 50MW are required to have the capability to provide this service, at a default price that may not reflect its real value to the system.

Another example is inertia, provided today largely through the heavy spinning turbines of thermal and pumped-storage hydro stations, which serve as stored energy that can slow down or smooth out sudden changes in network frequency.

If ancillary services were valued explicitly, market participants would have an insight into how much they are actually worth to the ESO and the grid’s stability, which would in turn incentivise new, competitive products to reach the market.

Torres points to technologies such as synchronous compensators, which are machines capable of providing ancillary services, including inertia and reactive power, without generating potentially unneeded electricity.

Services which can be provided by different power technologies

Click graphic to view/download

“These solutions will enable more renewables to connect safely to the network at a lower cost to consumers. For these solutions to come forward, ascribing the right value to ancillary services will be key. Without clear price signals, there is a risk of underinvestment in those technologies that provide the services needed, potentially resulting in price shocks for consumers”.

“The ESO is moving in the right direction with its recent Network Development Pathfinder projects. It has accelerated this work, launching its first ever tender for inertia and should roll out similar initiatives GB-wide. Such procurements should align with existing investment signals such as those provided by the Capacity Market. This should allow for the right type of capacity to be built where it is most needed, delivering a secure and resilient grid”.

2. Create market confidence

“Constructing the machinery and infrastructure that will enable the ESO to operate a carbon-free system will require major financial investment, as well as years to plan and build,” says Torres.

“This can only be achieved if Ofgem designs the ESO’s incentives in a way that rewards it for taking bold, strategic initiatives that have the potential to deliver good value for money to consumers in the long-term.”

Evidence of this working is shown in the success of offshore wind, which now provide around a sixth of Great Britain’s electricity, at record low prices. This is partly due to the government providing offshore wind developers with revenue stabilisation mechanisms, known as ‘Contracts for Difference’ (CfDs).

This is not a new concept for government and regulators around the world looking to enable investment in energy infrastructure. Financing renewables to achieve decarbonisation is enabled through CfDs or market-led hedging tools, like Power Purchase Agreements. Investment to ensure there is sufficient capacity to meet peak demand is secured through long-term contracts, competitively awarded through the Capacity Market. Similarly, investment in interconnection is supported through Ofgem’s ‘Cap & Floor’ regime.

“Subsidy isn’t required for investment in ancillary services. What’s needed,” says Torres, “is a clear and stable market framework designed around the system’s needs, which provides a mix of short and long-term signals. More certainty over the market landscape and the expected returns will lower the risk of these investments and get the solutions needed at a lower overall cost to consumers.”

“Long-term procurement is not the right answer everywhere. Where there is already a mature and liquid market, such as the case for frequency response, buying services closer to real time makes sense for two reasons. First, it allows prices to reflect more accurately the market conditions and therefore the real value of a service at the time when it is needed. Second, it allows a wider range of resources to participate in the market, increasing competition. Striking the right balance between short and long-term procurement is key to create a sustainable ancillary services market.”

Currently, the ESO requests that electricity-generation firms commit to supplying a certain amount of power for the purpose of frequency response, a month ahead of time. For resources such as wind farms or solar, which are dependent on the weather, this makes it extremely difficult for them to enter this market. Even for conventional large thermal generators it can be a problem, as many of them do not know how or if they will be running beyond a few days.

“The ESO is currently conducting some trials procuring frequency response one week in advance. While this is an improvement, it is still too long a lead time for intermittent sources or demand-side response, which ideally need day-ahead or almost real time auctions to unlock their full potential,” says Torres.

“The ancillary services market has been through a prolonged period of change since the ESO published its System Needs and Product Strategy in 2017. Without knowing how the market landscape will look like by the end of these reforms, it’s difficult for providers to develop the right solutions.”

A shift in thinking, which considers what the electricity network might require in the future, and how to provide the market with financial incentives to make it a reality, is needed. A resilient, stable future system is to the advantage of consumers.

3. Diversify

There will be no silver bullet that can solve all the challenges the energy transition poses. Maintaining system reliability in a high renewables world will require large amounts of dispatchable power, with different response time and duration. From small batteries and demand-side response that will manage instantaneously frequency fluctuations, through to large pumped storage hydro plants that will provide backup power during the days when the wind won’t blow and the sun won’t shine. A framework structured around the system’s different needs should aim at harnessing flexibility across a range of technologies and sizes.

 

Truly diversifying will also involve unlocking the flexibility potential on the distribution grid. To achieve this, the way that access to the distribution network is managed and paid for will need to evolve. Today, with big parts of the distribution network being congested, small flexible assets are asked to wait in the queue for several years or face disproportionate amount of network reinforcement costs to get connected.

Machine hall, Cruachan Power Station

The ongoing review of the network access and forward-looking charging arrangements needs to address these barriers soon, if we are serious about making use of flexibility to foster the energy transition, while keeping consumer bills as low as possible.

Since 2018, GB’s Distribution Network Operators (DNOs) have been tendering and procuring for various flexibility services to manage congestion in regional electricity grids. In 2019, they published a roadmap setting out the steps they intend to take to enable a smarter and more flexible energy system.

“As we transition from DNOs towards Distribution System Operation – a wider set of functions and services to run a smart distribution grid – the regional networks will be open to market-based flexibility solutions. DSOs will be able to compete on a level playing field, offering options for network reinforcement. As DNOs move from trials to more structured flexibility procurement, harmonisation and effective coordination with the national markets will be the key pre-requisites to reveal the true value that flexibility can bring to the energy system,” argues Torres.

“To build a modern and resilient grid we will need a wider lens on what’s possible. It’s going to be an exciting journey on the road to net zero!”

This story is part of a series on the lesser-known electricity markets within the areas of balancing services, system support services and ancillary services. Read more about black start, system inertia, frequency response, reactive power, voltage control and reserve power. View a summary at The great balancing act: what it takes to keep the power grid stable and find out what lies ahead by reading Balancing for the renewable future.