Energy and Utilities

Smart Power | How can generation projects react to UK grid constraints?

Published on 12th Jun 2023

There are options for asset operators to mitigate the impact on projects of this new long-term feature of power networks

The crisis around available grid capacity, and the lengthening queue for new transmission and distribution grid connections, has been building for some time – and is keenly felt by parties operating in the UK energy market.

It is now common for new development projects to be offered connection energisation dates well into the 2030s. Once operational, those projects will likely then be subject to constraints (on their ability to export) imposed by the relevant network operator, such as power curtailment and active network management. Together, these factors all serve to diminish the fundamental ability for a generation project to export power to grid when it needs to, damaging available revenue streams and harming the financial case for investment.

Critical mass

It is looking likely that this system-wide issue has now reached critical mass: in April, the Electricity Networks Association published its action plan to accelerate grid connections, and last month Ofgem launched its own policy review on reforming the grid connection system. Nonetheless, regardless of the outcome of these proposals, grid constraints will be a long-term characteristic of the UK power network.

However, there are a number of options available to generation asset operators to mitigate the impact this may have on their projects. In addition, there may be new opportunities to restructure projects in ways that could provide viable alternatives to a straightforward grid export arrangement. The main potential options available include repowering, co-location and optimisation

Repowering

Provided there is capital available to do so, repowering a site is a key option for maximising the benefits of an existing grid connection. Many wind farms are reaching the end of their lifetime and there are many benefits and considerations when repowering, which can help the UK hit its onshore wind targets.

Co-location

From a grid constraint perspective, co-locating existing on-site generation with an alternative energy storage or demand option – such as a battery energy storage system or a private wire – avoids exposure to a constrained connection, and diversifies the revenue stack for a site. Please see our previous article on this topic looking at the key legal and structuring considerations involved with co-locating battery storage.

Optimisation

As well as replacing or adding generation equipment, there are numerous other ways of optimising an asset to ensure it is working as smartly as possible, without necessarily incurring capital expenditure.

Considerations include:

  • Market selection. Do you have the right revenue stack and are you participating in the right markets? As subsidy support for renewable electricity generation tails-off, asset operators will need to be comfortable with managing merchant risk, and should include contractual mechanisms within their power purchase and optimisation arrangements to require regular benchmarking against prices in the ancillary services, balancing and wholesale power markets.
  • Site Operation. What is your strategy for maximising revenues and how is it performing? Timing of trading and dispatch is crucial: in the case of co-located generation and battery storage, if assets are exporting to the grid at the same time export capacity will be clipped and revenue lost. It may make sense for some asset owners to contract with a specialist optimiser or energy aggregator to help design and implement an effective route-to-market strategy.

Hydrogen

Even the best managed generation assets will still be impacted by grid constraints to a certain extent. As such, unless that curtailed power can be utilised through on-site demand, it risks being wasted. Diverting power to a hydrogen electrolyser – to produce green hydrogen – could therefore present an attractive opportunity to diversify the demand profile of generation assets.

The UK hydrogen market, whilst still in its infancy, is growing fast and the government is currently consulting on introducing regular green hydrogen Contract for Difference auctions from 2025. As the UK hydrogen market matures, it may become more profitable for remote (or floating) renewable generation to exclusively serve on-site electrolyser demand. This could remove the need for an export grid connection altogether; fundamentally changing site identification and route-to-market considerations.

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* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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