London December 13 2022: British consumers are paying one of the world’s most profitable trading houses a record price to keep their homes warm and lights on as freezing temperatures boost demand.
Vitol Group’s Rye House gas-fired power station, just north of London, earned as much as £6,000 ($7,348) per megawatt-hour from the National Grid Plc’s operator to generate electricity on Monday afternoon. That’s about 100 times the normal price of power before the energy crisis.
When markets are tight, the grid has to balance supply and demand, including securing supplies at short notice — sometimes at exorbitant cost. In November last year, the cost of balancing the market was £60 million in a single day, and the regulator Ofgem called out operators for “immoderate” behavior.
Ofgem said it’s processing responses following a review into the balancing market rules. A new license condition “preventing generators from making excessive profit” would be the best option to reduce balancing costs, a spokesperson for the regulator said.
“When cold weather coincides with extremely low wind generation, flexible gas plants respond to underpin GB electricity security of supply, and this can be at high prices,” a spokesperson for VPI, the power operating unit of Vitol said. “Rye House experienced technical issues over the weekend with engineers working tirelessly through the night in order to return the unit for one of the coldest and tightest days this winter.”
Britain’s balancing market is where the grid fine tunes supply and demand. When the market is tight, typically when the wind drops, operators have an opportunity to provide power at an elevated rate, as the the grid manager is left with few options.
Vitol is cashing in on a historically tight day for the British power grid, with prices reaching a record for peak evening demand in a day-ahead auction on Sunday. Low wind speeds combined with a cold, snowy day prompted the grid to ask Drax Group Plc to warm reserve coal plants in case of a supply crunch.
Rye House is running at 410 megawatts, earning Vitol millions in revenue from a single day. The rate charged is a record for a gas plant in the balancing mechanism.
Balancing costs have been rising as the cost of inputs like gas have soared and hit £492 million in November alone. Between 2017 and 2020, total winter balancing costs for the four-month period November to February averaged just under £500 million.