Get used to power freezes and price hikes

The cold snap that has gripped much of the Northern Hemisphere in recent weeks isn't just lowering the mercury. It seems to be causing energy systems to freeze up and crack, too.

In China last month, surging electricity demand amid plummeting temperatures led to blackouts across central and eastern provinces. Workers in office towers were forced to use the stairs after elevators were switched off, and a school in affluent Zhejiang province was kept at near-zero temperatures to save on heating, Australian Broadcasting Corp. reported.

It's a similar picture elsewhere in the world. In Japan, utilities have asked users to cut back on consumption. One generator has turned to fuel oil to power an out-of-action coal-fired plant after shortages drove prices for power and LNG to record levels. Peak electricity in the UK changed hands for  1,500 pounds per megawatt hour this week, while rare snowfall in Madrid drove Spanish gas prices to a record.

All that suggests an alarming prospect. If electricity networks are buckling under the strain of winter weather now, how much worse might things get under a renewables-based system, where electricity is harder to switch on and off at will?

The real problem is both less serious, and more profound.

The worst of the current disruptions have happened in grids with ample supplies of conventional power. Wind and solar make up just a tenth or so of generation in China and Japan, the most severely hit locations. In Spain and the U.K, where such variable renewables made up about 40% of generation last year, the disruption has been far more modest.

In Germany, the major economy with the highest share of variable renewables, peak and baseload electricity prices are still below winter highs hit in early 2018. Korea Gas Corp., which has been facing similar climate conditions as its peers in Japan and China, has said it wouldn't be seeking additional LNG supplies because inventories would be sufficient.

The takeaway is that these problems are an idiosyncratic result of poor grid management in a few locations after a run of unusually mild winters, rather than the consequence of any fundamental problems with the transition to lower-carbon grids.

Even so, the episode underlines how vulnerable our power systems are to unexpected switches in the weather. If we're to avoid similar problems down the track, we'll need to spend much more reinforcing our grids against such eventualities.

At the most basic level, the world is shifting toward greater use of electricity in heating, as boilers using gas, oil, coal and wood are phased out. That means keeping buildings warm is going to fall increasingly on the electrical network alone. One 2018 study of the UK predicted that the variability of seasonal peak electricity demand from one year to the next would increase 80% by 2030, and that the number of megawatts needed at the peak would exceed historic levels as soon as 2020. 

Making matters worse is the fact that the climate itself is becoming more variable as the planet warms, so fundamental heating and cooling demand will see sharper spikes. By 2100, there will be roughly four times as many days when maximum demand exceeds the current 99th percentile level under the likeliest warming scenarios, according to a 2016 US study. That alone could require spending $180 billion on additional peaking generation capacity over the century, the authors wrote.

The good news is that the solutions for this are familiar. There's nothing new about sharp rises in electricity demand. In the UK, the rush of households to boil electric kettles in television commercial breaks once caused such stress on the grid that the country built pumped-storage hydropower stations in north Wales to manage it.

Major gas contracts, too, perennially surge in the winter and plummet in the summer, as the system struggles to cope with a commodity that emerges from the ground at fairly constant rates but must be stored at high cost for the cold months.

Boring old insulation is one of the most effective ways of reducing the amount of energy needed to keep buildings comfortable — and while that spending dipped at the height of Covid lockdowns, it appears to be recovering. Wider use of heat pumps will also make building heating more efficient.

That doesn't make the problem go away. Winter heating loads can be substantial and long-lasting. Such seasonal variability is always going to be harder to fix than daily fluctuations in demand. Coping with this will be the most intractable problem for power grids as they disconnect more and more fossil generators, which can operate at the flick of a switch.

Still, it's price spikes like the ones seen in recent weeks that are needed to encourage investment in low-carbon peaking capacity. That will help ensure short-term demand surges don't lead to power cuts. Looked at this way, record-high prices for power and gas aren't so much a bug of the system. They're a feature.

David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Disclaimer: This article first appeared on bloomberg.com, and is published by special syndication arrangement.