MorganEnergy

Spanish generation giant, Iberdrola, has formally declared that it is no longer interested in buying a stake in British Energy (BE). The company had previously been one of those linked to rumors of a consortium that might outbid Electricite de France’s offer of around 680p per share. The market price of BE shares has been rising following the recent UK blackouts and takeover talk, but may have peaked as The Times reports a slight drop today to 740.5p – still well short of the 1000p that the company’s management thinks it is worth. Meanwhile Reuters reports that EdF’s share price is falling because traders fear that it may raise its offer for BE.

National Grid has issued its annual winter consultation document for the UK’s gas and electricity markets. The document is available from the Ofgem web site. The outlook appears fairly bullish, although there is some concern as to when the new LNG terminals at Milford Haven (Dragon and South Hook) will begin commercial operation. The Ofgem press release quotes a reserve margin in generation of 26.8%. However, perusal of the document shows that this is based on the Seven Year Statement’s figure of 79.4 GW of contracted capacity, whereas National Grid’s operational viewpoint suggests available capacity of between 75.4 and 76.1 GW.

A theme running through the electricity sections of the report is the difficulty of predicting availability from wind generation. National Grid presents figures showing that the load factor of wind plants varies significantly through the year, but is rarely over 40%. Historical data suggests that the average availability during the winter peak should be about 35%, but the actual figure for 2007/08 was only 8%. As the volume of wind capacity on the system increases, this will become more of a concern for system operators.

Well, so much for rumors. Judging by the most recent reports from the BBC and The Scotsman it would appear that the expected £10 billion offer for British Energy did not materialize. Perhaps EdF saw that everyone else was dropping out and realized that they didn’t need to improve on their existing £6.8 billion offer.

The Scotsman reports that Electricite de France (EdF) will be submitting a revised bid of £10 billion for British Energy, and that this will be accepted by the nuclear company’s board. Rival bidders including Iberdrola and RWE are now expected to drop out.

Meanwhile Paul Golby, Chief Executive of E.ON UK, is lobbying strongly for permission to build new nuclear power stations in the UK. As E.ON does not appear to be in the running to buy British Energy, the company is presumably planning to purchase brownfield sites from the Nuclear Decommisioning Agency. Golby is certainly correct that the UK will be in serious need of new capacity very soon, and past history suggests that meeting this requirement with renewables will be very difficult indeed given the level of public antipathy. Of course the British public may also protest against new nuclear sites. Stories such as the recent leak at the Krsko nuclear plant in Slovenia, and the sabotage alert at E.ON’s Oskarshamn nuclear plant in Sweden, will not help the nuclear industry’s cause.

In response to continued price spikes in its balancing market, ERCOT will be adjusting the way in which congestion rules are applied. An emergency meeting of the ERCOT board held on Friday voted to accept recommendations made by the Public Utility Commission’s independent market monitor, Dan Jones, that it hopes will reduce the severity of price spikes in the system. Although prices in the balancing market are typically in the region of $100/MWh, recent spikes have been as high as $4,500/MWh.

The Houston Chronicle cites congestion on a few key transmission lines and some unexpected outages as causes of the spikes. However, as the market prices have been well in excess of the market’s bid cap of $2,250/MWh it appears likely that some sort of market rule is being applied to create these high prices. Changing the algorithm will presumably reduce the incidence of spikes. The Chronicle quotes Jones as saying, “We were using a tool to fix certain problems that was not particularly effective.”

Meanwhile the high market prices are continuing to pose problems for retail companies. As the Chronicle article explains, ERCOT requires retailers to post collateral equal to three times the value of their wholesale power purchases. The price spikes have caused three small supply companies to default on this requirement and go out of business, while a fourth has applied for bankruptcy protection.

Xcel Energy, which serves eastern New Mexico and western Texas, has warned customers that it may be necessary to implement rolling blackouts through the summer because it will not have enough capacity to meet demand. Part of the reason is that temperatures are expected to be considerably higher than average. May demand for 2008 has been a massive 19.4% higher than last year. But an additional factor driving the surge in demand is believe to be farmers switching to electricity from diesel as a source of power because of the current high price of oil.

Inevitably there will be days when no earthshaking story comes across our desks. Our plan is to fill at least some of those days with brief reviews of others places around the Internet where discussion of energy economics issues can be found. We would like to start with the EU Energy Policy Blog.
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According to Platts the long-delayed capacity market in the Russian electricity sector will open at last on July 1st. Russia’s energy minister, Sergey Shmatko, is quoted as saying, “I hope everything will be all right.” Doubtless there was more spin on that in the original Russian.

Further information about industry restructuring in Russia is available via the RAO web site. A wholesale energy market has been operating since Sept 1st 2006 (though thanks to what appears to be another quirk of translation this is described as a “capacity” market).

The regulatory authorities in Texas continue to be worried about high power prices. Yesterday the Public Utilities Commission issued a press release announcing a conservation alert system that would help consumers know when it was necessary to turn down the air conditioning and take other power-saving measures. This is in response to “potential record high electricity demand for June.” Although the PUC expects supplies to be adequate to avoid blackouts, conservation by consumers could help prevent massive price spikes like those experienced in recent weeks.

As to the causes of the problem, the Dallas Morning News pins the blame on “hot weather and power line congestion.” A further clue can perhaps be gleaned from The Independent which reports:

Thousands of wind turbines in the US are sitting idle or failing to meet their full generating capacity because of a shortage of power lines able to transmit their electricity to the rest of the grid.

While building new power lines may well be a viable solution to the problem, they are not going to get built in time to save Texans from an uncomfortably expensive summer.

This report from The Times suggests that the UK blackout could have been prevented if National Grid had been prepared to accept what it regarded as an overly high price for power from E.ON‘s Isle of Grain power station. Isle of Grain is an oil-fired power station (as are RWE‘s Fawley and Littlebrook, from which the article says National Grid eventually bought power), so the bid price of £950/MWh ($1900/MWh) is not surprising. This does, however, highlight the fact that National Grid does have a certain amount of leeway as to how it manages meeting demand. It is not obliged to take every offer that comes its way if it thinks that a better one can obtained, and it is able to balance long-term considerations against short term expediency. Also National Grid is apparently insisting that Grain wasn’t actually available then needed though someone is obviously telling The Times that it was. Ofgem may have a little bit of trouble sorting this out.