Will large scale manufacturers’ lights stay on this winter?

Posted on 6 Nov 2014 by The Manufacturer

David Topping, E.ON’s Director of Corporates, looks at the impact of security of supply on large energy users.

We’ve all seen the headlines about threats to the UK’s energy security, the closure of older or inefficient generation plants, and the warnings that supply could struggle to meet demand during a cold winter. The ‘will the lights go out’ debate is not about to go away; the risks to security of supply are increasing and this continues to be a concern from a national infrastructure point of view.

From political tension in the Ukraine, to the growing amount of unpredictable renewable generation, to unplanned power station outages and shifts in energy consumption – our energy markets are becoming ever more complicated, with an increasing number of variables affecting both supply and demand.

Each October, National Grid release a Winter Outlook report that compares the level of power supply with forecast demand, and presents a view of system security over the coming months. The 14/15 report is due any day, and looking back over previous years reveals some interesting trends.

National demand has remained relatively flat, with the winter 13/14 peak forecast at 54.8GW compared to a forecast of 55.8GW for winter 11/12.The predicted impact of cold weather has also been fairly consistent, with an ‘Average Cold Spell’ (ACS) expected to add around 1.5GW of additional demand. It’s a trend we expect to continue, as increases in energy efficiency start to offset the impact of economic growth.

Perhaps more important is the trend in generation capacity, which fell from 81.3GW in winter 11/12 to 74.7GW in the 13/14 report – again a trend we are expecting to continue – meaning the ‘surplus’ between generation and supply is likely to narrow further from the 8% predicted last year.

Despite this, we’re confident the lights won’t go out this winter.  Such ‘surplus’ figures present a fairly conservative view, excluding some of the less predictable sources of supply such as wind generation or the European interconnectors.

However history tells us that should energy demand threaten to outstrip supply, the costs of sourcing the required level of supply can be very high. A clear example came in April 13, when cold weather, combined with low levels of gas in storage, saw day-ahead gas prices jump to over £1/therm, with similar movements in power prices.

Purchasing energy in the short-term markets can be a very effective buying strategy and one that has the potential to bring about savings – however it isn’t without its risks and can lead to considerable volatility in energy bills. Opting for longer-term purchasing or fixed price contracts both offer protection against this uncertainty, although this security can come at a premium.

It’s important for businesses to make conscious and informed decisions about the right purchasing strategy for them – and to do this ahead of the more unpredictable winter period.

From our experience, finding the right answer isn’t just based on understanding the energy markets, but understanding each business’s needs and objectives. E.ON Portfolio Solutions (EPS) – an independent, wholly owned subsidiary of E.ON Global Commodities – offer market intelligence and advice on risk management strategies, working with customers to support them in creating bespoke solutions for their businesses