What are the risks of grid congestion in the UK?

How grid congestion happens in the UK

In the UK, bottlenecks in energy supply can occur when there is a mismatch between a high uptake in renewable builds and deployment and the transmission upgrades that service them. Distribution-level bottlenecks can occur in renewable projects where too much energy is produced in a concentrated area without the necessary infrastructure to transport it, for example, in local generation clusters such as rooftop solar. Excessive energy generation can also be an issue with larger renewable projects, for example, in Scotland. The abundance of renewable energy being generated in the region has led to network constraints in Scotland and along key north-to-south corridors, preventing bottlenecks from occurring. Connection queues for new energy projects also face long waiting times. Non-firm agreements can provide a quicker and more cost-effective connection, but the grid can impose curtailment.

It’s also due to the volatility of the weather that triggers renewable power generation and affects grid congestion. Weather patterns have a significant impact on this: patterns can amplify flows during high-wind and low-demand periods, resulting in more energy being produced than is required. Transfer capability can also be reduced when preventative work is done on plants, with outages planned in for maintenance on renewable facilities.

Financial and operational impacts of congestion

System imbalances, caused by the Balancing Mechanism set by NESO, can result in higher balancing costs that contribute to wholesale price volatility. Elements that affect this balancing mechanism include bids and offers by suppliers and generators. 

When the grid becomes overloaded with energy, for example, if there is a significant increase in wind energy due to a storm, curtailment of wind and solar output can occur, resulting in lost revenue for generators. Other financial losses due to grid constraints can occur when the effects of network limits prevent generators from dispatching in line with energy or ancillary demands, resulting in ancillary service opportunity losses. Cost creep can also cause financial impact. Cost creep refers to unforeseen costs that can impact a renewable project, including material issues, design adaptations, or labour shortages. There are also ongoing financial impacts on renewable projects, such as reduced availability for storage charging or even discharge at optimal times. 

Strategies to manage and mitigate congestion risk

In addition to facing challenges with grid congestion, the energy industry can also make certain decisions that will help mitigate congestion risk. Location screening can help to identify ideal locations for new renewable projects based on infrastructure, scoring nodes by historic constraints and future upgrades. 

Storage units can also be co-located with renewable plants to absorb peaks and shift energy quickly, without the need for long transmission networks. This means energy can be deployed where it needs to be, when it needs to be. 

Flexible offtake agreements can also help mitigate risk in the market for participants by stabilising revenue streams. Route-to-market options, such as revenue floors, can guarantee certain revenue returns, while collars can help guard against huge losses but also don’t allow large gains. 

Future-proofing energy portfolios can also help mitigate the effects of grid congestion. This can be achieved by hedging across regions, technologies, and contract tenors through forwards or options, which can mitigate the effects of price, currency, and interest rate fluctuations. 

Following market trends through active trading can also help future-proof investments by utilising intraday products and constraint-aware algorithms that recognise upward or downward movement in pricing. 

Real-time telemetry provides instant access to relevant data, offering robust operational insights for faster dispatch decisions.

Safety is also critical, with engagement between system operators and distribution operators crucial as part of outage plans, which manage costs, stakeholder considerations, and ensure full service to transmission and distribution networks. 

What to include in investment cases and contracts

Modelling hypothetical scenarios can help to prepare businesses for economic downturns or the introduction of competition, which might affect costs and cash flow in the future. To do this, curtailment scenarios can be built into a business's base cases and downside valuations, while indexation and predicted inflation terms can help to protect maintenance budgets. Potential challenges can also be analysed in advance. Elements such as fault levels, project deployments or grid congestion can be factored into a sensitivity analysis for connection timing and staged energisation. PPAs can also help guard against future risk by fixing energy pricing in the future. However, these agreements can detail how grid congestion will be addressed, with a clear allocation of constraint risk outlined in power purchase agreements. In addition to predicting future scenarios, it is also important to consider what is happening now and how availability and performance commitments can accurately reflect real grid limits. Future investment should also be considered, with grid study summaries and evidence of deliverability available to help lenders make informed lending decisions and release vital funds for new projects or upgrades to existing projects.