UK Energy Contracts: Why More Longer Durations Are Necessary

Since privatisation, UK energy contracts for major capital investment into infrastructure-scale plant and equipment that was not planned before privatisation have been undertaken under special financial instruments (ROCs, OFTOs, CATOs, CfDs, CM etc.) that guarantee 15+ year contracts. Unfortunately, regulation change is going in the direction of ever-shortening contract notice times and durations.

Examples of these shorter energy contracts in the UK include the move to day-ahead single-day STOR contracts, the abandonment of Fast Response and the adoption of Dynamic Containment. While incumbent operators can adjust their trading, there is no commercial case for new entrants, or especially for new technologies. This in turn impedes the decarbonisation of the grid, contrary to the claims on National Grid’s website relating to these changes.

These contracts are in response to the European Union’s Clean Energy Package, adopted by European legislation in 2018-19. One of the few positives to arise from Brexit is our ability to turn away from such counter-productive legislation, so it is particularly puzzling why this government, regulator and grid operator are so hell-bent on implementing it.

While some short-duration contracts are beneficial for plants not requiring major capital expenditure, and such contracts help control prices for consumers, they are useless for plants requiring either construction or major refurbishment/upgrade: these need long- and medium-duration contracts respectively.

A few years ago, battery storage was accelerated by developing the EFR (Enhanced Frequency Response) instrument which gave a 4-year contract length – half the planned operational life of such assets. But this is not sufficient for large-scale UK energy projects such as the roll out of long-duration energy storage which will require contracts of significantly longer lengths.

Problems with Shorter Contracts

The consequences of this trend are easy to see, if only you look for them:

  • Post privatisation, ministers trumpeted that this short-term contracting market, mostly of 2-year contracts, was delivering the continent’s second cheapest electricity. Now, it’s among the most expensive.
  • At privatisation, the grid and infrastructure-scale plant on it needed major replacement/refurbishment programmes. Since then, the average age of such assets has grown by almost a year every year because the necessary replacement and refurbishment is not completed.
  • At privatisation, we were concerned to build interconnectors to export our surplus electricity. Now we are obliged to import during times of system stress (high demand and/or low renewables generation) just to keep the lights on.
  • Due to the lack of investment, the grid’s future is in doubt:
    • National Grid Future Energy Scenarios consistently rely on technologies that have not yet been developed to a point at which they can be delivered at either the scale/cost/duration (e.g. CCS, batteries, DSR, V2G) or on-time/to-budget (e.g. nuclear).
    • The grid relies on non-inertial systems to deliver the inertia required by the system, paying for curtailment and other substantial actions and costing a forecast £1bn p.a. by the 2030s according to National Grid.
    • National Grid is looking into hugely expensive and unnecessary actions to provide Distributed Re-Start capability.

A New Structure for Energy Contracts in the UK

To avoid the problems caused by too many expensive short-term contracts, a truly sustainable grid will engage most or all services under contracts of lengths that both encourage investment and minimise cost. Such a structure could include: 

  • 1/3 of energy under 15–20-year contracts, with delivery to start following grid connection, these contracts only being available for new build; 
  • 1/3 of energy under 5–8-year contracts, with a split between new and existing plant to be decided according to the reviews of the system from time to time; 
  • 1/3 of energy under contracts of up to two years, for all plant. 

There is indeed some measure of uncertainty as to future demand. This can be accommodated by (a) letting such contracts in rolling annual or biennial auctions and (b) flexing the exact amount of mid- and short-duration contracts. 

There is a very simple, much better and vastly cheaper alternative way of regulating and contracting grid services. It can be implemented gradually, without a big bang. And, by enabling us to diverge from European directives, its implementation may be one of the very few benefits that Britain can accrue from Brexit. Please see the proposal: A 21st Century Electricity System.

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