Redcar steelmaker SSI opts to shut down large chunks of its operations up to 30 times a year to avoid paying higher energy costs.
With electricity bills of up to £30m large industrial plants find these self-imposed ‘brownouts’ can save hundreds of thousands of pounds a year.
But concern is now growing that enforced brownouts – or even blackouts – will become a feature of the North East landscape as early as this coming winter, with businesses hit before households.
Mark Stephenson, policy and research manager for the North East Chamber of Commerce (NECC), said: “If we have a bad winter this year, as we did in 2010, then the most optimistic position is that we will have brownouts.
“The most likely scenario is we will be facing blackouts. It’s a frightening situation.
“The spare capacity margin is down to 5%, which is the lowest level for 20 years, and with a further 20% of existing capacity coming offline before any meaningful new base-load capacity is built, this a major concern for the UK.”
At the NOF Energy annual conference in Gateshead earlier this year former UK Energy Minister Charles Hendry, the Conservative MP for Wealden, said businesses may be asked to shut down during peak hours to ease the strain on the UK powergrid.
The National Grid says the winter evenings of 2014/15 and 2015/16 are the time when Britain will be most at risk.
It estimates the margin of spare generating capacity could fall to less than 2% and the risk of some disconnections could be as high as 50%.
In response, the grid has commissioned more short-term capacity in the form of high carbon emitting and extremely costly, stand-by, diesel-powered generators.
Participating operators – which can include schools, hospitals, prisons, military bases, police and fire headquarters, and council offices – must be able to provide at least 3MW within four hours of receiving an instruction.
Latest figures show that diesel’s contribution to the grid’s Short-term operating Reserve (STOR) has risen to 17% of the regular 2.3GW capacity the National Grid has available to support the system – replacing much of the role previously played by coal.
The National Grid is also considering new measures for the next two winters including asking businesses to use less electricity during the winter peak hours.
Companies which could be affected by looming blackouts or brownouts will include many of the region’s chemical and process clusters.
NEPIC (North East Processing Industry Cluster) represents over 500 North East businesses in the pharmaceutical, biotechnology, and chemical sectors.
They generate in excess of £10bn of sales and comprise 30% of the region’s industrial base, and NEPIC’s chief executive Stan Higgins believes its members will be affected before households.
He said: “Energy intensive industries like those in the chemical process industry have for many years worked under duress from the energy companies with contracts that threaten the switching off of their electricity or gas supply under peak winter energy demands by consumers.
“This is often despite paying supposedly non-interruptible tariffs to the energy supply companies.
“As far as industry is concerned the fact of the matter is, unlike in many other countries, we in the UK will switch off energy to our industry in preference to consumers mainly because of the political fall-out that might occur.
“UK politicians need to understand that if some large-scale energy intensive industries are switched off in an untimely manner, irreparable and sometimes irreversible damage can be done to furnaces and other equipment.”
The Government has three main aims with energy policy; to keep the lights on, keep the costs down and increase the contribution of renewables.
It is on target to hit its renewable goals but many in business fear it’s at the expense of security and cost.
Andy Collier, membership and external affairs manager of manufacturing body the EEF in the North East, said: “We do have concerns on energy costs and believe there is a case for a review of the Government’s approach to its climate and environment policies which are set to add 30% to UK industrial energy process costs by 2020 and 50% by 2030.
“Clearly in an international sector such as ours energy costs make a huge difference and are a threat to UK competitiveness.”
Stephenson added: “In our quarterly surveys energy costs are regularly the biggest concern and it’s not just the high-energy users. Energy is a major cost base and has risen sharply in recent years.
“Most of the larger industries are foreign owned and when they look at where to invest and whether to develop their North East business, the cost of energy in the UK and its exponential growth does not favour us.”
The disappearance of spare capacity is mostly the result of policy. Dozens of older coal-fired and gas-fired power plants are closed and under the terms of the EU’s Large Combustion Plant Directive (LCPD).
They are being replaced by increasing amounts of wind generation, which is intermittent and less reliable.
Despite the recent measures introduced in the Energy Act which has been designed to encourage over £100bn of investment in electricity generation over the next decade investors are still wary of the UK energy sector.
Labour’s price freeze promise and a number of Coalition policy U-turns have damaged confidence.
Stephenson added: “The constant shifting in policy, such as the recent announcements to cut solar photovoltaic subsidies are causing major headaches to the investment community and making the country a far less attractive place to invest.
“Investors look at a 20-year timescale, but with politicians working to a five-year electoral timescale there is mismatch which is causing major headaches for potential investors. This is creating a perfect storm. Brownouts seem inevitable, but if there’s a bad winter there will be blackouts.”
Higgins warned of the severe economic impacts any potential blackouts may have, saying: “I am unaware of such an emergency switch off occurring in recent times, although I understand we have been close to this position on several occasions.
“Should it happen it could mean that some factories might be closed rather than re-opened due to the significant capital costs involved. Therefore in my opinion our energy strategy during the winter months needs to take this into account.
“Most people would accept some discomfort at home, for a short period of time, rather than being laid off to allow their work place to undertake major repairs or in fact to lose their job because it does not reopen due to the damage done to their workplace.”
The price paid to back-up diesel generators can be over ten times the current wholesale price and diesel emits around the same levels of carbon dioxide as coal.
The new measures to try and avoid blackouts are set to cost £1bn a year by 2015, adding 5% to energy bills.
Prof Ian Fells, the emeritus professor of energy at Newcastle University, is one of the region’s leading energy experts.
He said: “It all smacks of desperation, and could have been avoided if only successive governments had acted on what has been well-known for years.”
Measures to cope with capacity issues
The National Grid proposes creating two new mechanisms to curtail demand during peak periods over the next two winters while also aiming to provide incentives for generating units that would otherwise be mothballed or decommissioned to remain on stand-by in case wind farm output proves insufficient.
Between November and February in 2014/15 and 2015/16, the projected Demand Side Balancing Reserve (DSBR) would pay customers who agreed to reduce their consumption by a specified amount for up to two hours in response to an instruction from the grid, principally during the peak demand period on week days between 4pm and 8pm.
The National Grid has so far received submissions from two dozen interested parties offering up to 1GW of capacity.
It is also proposing to create a Supplemental Balancing Reserve (SBR) that would pay operators to keep a number of generating units that would otherwise have been mothballed or decommissioned on standby between November and February of 2014/15 and 2015/16.
For the SBR some 2GW of currently mothballed capacity has been offered along with 7GW from plant currently available in the market.
Colin Harrison, director of energy management at Teesside energy business px Group says the two new measures are an insurance policy to cover what is already in place.
While there are increased risks over the coming years he believes there will be enough capacity to cope with all but the most severe winters.
Bob Nicholson, former station manager at the Alcan power station in Northumberland and now a member of the North East Energy Leadership Council, says the capacity issues reflect the loss of much coal-fired capacity.
“Many coal power stations were able to operate at below maximum capacity and then at times of stress in the system could increase the load they delivered to the grid,” he said.
However the grid is proposing allowing coal-fired power stations, which would otherwise have been mothballed or decommissioned, to remain on standby between November and February of 2014/15 and 2015/16.
To avoid disrupting the wider market and government objectives for cleaner electricity, the grid says it would call on these measures as a last resort.
If all else fails, National Grid can resort to ‘MaxGen’, instructing generators to run flat out, or request emergency assistance from other system operators in Ireland and France via the interconnectors.
As a last resort, the grid will issue instructions to the regional distribution network operators such as the Northern Power grid to reduce or disconnect demand.
Redcar steelmaker SSI shuts down some of its operations in a bid to second guess what is known as the Triad charges.
There are three half-hour Triad periods every year at times of peak demand, during November to February, and the National Grid uses them to determine charges for the whole winter period.
Large industrial users try to second guess when these are, and will receive Triad warnings from market watchers in a bid to keep costs down.
One business says it costs £27 to boil a kettle during a Triad period.
A spokesman for SSI said: “We have to take these measures on somewhere between 20 and 30 occasions in a year, which is not only a disruption to our operations but also a significant cost to the business.
“As a large continuous steel manufacturing business we cannot simply shut down the whole of the operations.
“However, in an attempt to avoid paying the peak charges, we do have to close down parts of the process during the Triad warnings where it is safe to do so.
“We cannot stop the steelmaking process but some of the ancillary activities, such as processing the iron ore to make sinter, can be shut down for a period
“We have to try and second guess when the Triad period is. Electricity can be a significant cost running into many millions of pounds.”