NISMs as market signals

In 2015, electricity supply shortages are live-tweeted. Like acolytes of some obscure sporting event, energy-ultras spent much of yesterday whooping and hollering in response to National Grid’s “Notification of Inadequate System Margin”, a call for backup electricity capacity to cope with a sudden shortage. There was much consternation when BM Reports, Cricinfo for the energy sector, went down. In the end it was okay — National Grid paid a lot of money for some back up capacity and paid some extra money to businesses that agreed to dial down their consumption.

We hadn't had a NISM since 2012, but as Ed Davey pointed out there were 111 NISMs between 1999 and 2008, so whilst they are a relatively bold measure they are not on their own an indication of imminent civilization collapse. Papers were wrong to print “blackout” headlines — “silly press”, Davey said, with the patrician weariness of a former Secretary of State who must have hated the approach of each winter’s alarmist stories.

I agree that “blackout” headlines are unhelpful. What this and previous NISMs demonstrates is that National Grid have a perfectly adequate set of tools for dealing with sudden supply crunches. The NISM is not even their tool of last resort — if needed they can move to a “High Risk of Demand Reduction”, then “Demand Control Imminent”. The problem with a blackout story is that it focuses on an (unlikely) worst-case scenario, rather than the (actually happening) sub-optimal. “Sub-optimal” in that NISMs result in quite expensive measures (deals for electricity were rumoured to reach £1,000/MWh on Wednesday).

There was a slightly strange headline over at the FT, which concluded that “UK electricity price spikes are here to stay until new power plants are built”. That seemed to read NISMs as a kind of market signal to build new capacity in response to low margins. The fact that we had 111 NISMs during the 2000s, when we had much higher margins, tells you that doesn’t quite add up. NISMs are a tool for managing reliability, not a reflection of overall capacity.

But in one sense the NISM could act as a market signal, in that it might panic DECC into putting more money into the capacity market. The Secretary of State will not have liked the FT’s coverage, and the response may be to go into December’s auction with a determination to purchase enough GW to bring forward new plant. In which case the NISM will have acted as a kind of market signal, but one audible only to DECC, not market participants.