May 13, 2020

Considerations for Generators Post COVID-19


COVID-19 and its consequences have permeated across practically all aspects of our daily lives, including electricity generation and transmission. 

Demand for power has reduced significantly in many regions throughout the world, the UK included. This combined with a reduction in the oil price, a corresponding fall in the power price and a general over-supply of power has resulted in reduced revenues for many generators. In addition, grid and distribution network operators have raised the potential of power blackouts, partly as a result of difficulties with engineer availability caused by absence as a result of illness and the impact of self-isolating.

Whilst power plays a key role in the UK’s struggle against COVID-19 it will also be crucial in driving the economic recovery in the post COVID-19 world.

Reliable generation together with well-balanced and reliable transmission and distribution networks will be of critical importance. Notwithstanding the objective of stimulating the economy as swiftly as possible, we should also not lose sight of our carbon emission objectives and targets.

During the COVID-19 pandemic generating plant have also faced challenges in terms of engineer and workforce availability. Social distancing within the confines of a power station raises particular practical problems for power station managers. The impact of illness and social distancing measures will be felt particularly by generating plant that are reliant on personnel being present on site for their day to day operation as opposed to being largely automated. It is the traditional thermal generation plant such as coal fired power stations and gas fired plant that typically require boots on the ground.

Regardless of the above, all types of generating plant will need to carefully consider how best to comply with social distancing requirements in the case of maintenance outages. It may be that during the COVID-19 lockdown, maintenance outages have been postponed until later in the year with a need therefore to be mindful of potential scheduling issues later in the year.

Whilst the primary concern of the grid system and generators alike has rightly been keeping the lights on, generators may now be turning their attention to (i) ensuring they can ramp up production once lockdown restrictions are eased and demand for power returns and (ii) considering the longer-term implications of a pandemic like COVID-19.

Mitigation Through the Market

One immediate concern raised by COVID-19 has been that generators may not be able to meet their power sales obligations (whether under power purchase agreements or in the traded market). This could result in detrimental financial consequences, including potential imbalance penalties.

Such risks may be mitigated by trading in the market, however, this is dependent on appropriate counterparties and trading documentation being in place as well as the necessary credit lines / credit support being available. A careful review of trading strategies, hedging arrangements, trading documents and credit support requirements may be useful going forward to ensure that the necessary arrangements are in place to provide appropriate routes to market and optionality in the event of any future crisis.

It should be noted that trading is not a “cure all” and in particular may not be ideal in circumstances of acute price volatility. Its efficacy is also dependent on there being sufficient liquidity in the market and a party being able to trade the volumes required.

Contractual “Stock Take”

It may be helpful for generators to undertake a “stock take” of their contractual obligations, including the application of force majeure provisions and the potential consequences and liabilities if a party is unable to generate or dispatch power onto the grid.

Force majeure definitions should be considered carefully to ascertain (i) what constitutes an excusable event and in particular whether the definition used expressly covers disease-related outbreaks with sufficient specificity; (ii) what impact a force majeure event must have in order for relief to be claimed; (iii) what notice provisions apply to claiming force majeure; (iv) the relief available in the event of a successful force majeure claim; (v) the consistency of approach across the entire contractual matrix to effectively share the force majeure risk; and (vi) the ability to terminate a contract in the event of a prolonged force majeure event. COVID-19 has shown that force majeure definitions vary considerably and that generic wording as is so typically seen in contracts may give rise to disputes.

In addition, generators may do well to consider what (if any) fixed term payment obligations they have, given that force majeure typically does not excuse payment. In such instances a party performing services for or delivering goods to a generator may be excused from such obligations to the extent impacted by force majeure, whereas a generator with a fixed term payment obligation may well still find itself liable to make payment.

Ensuring systems and processes are in place to comply in a timely manner with contractual notice provisions is important to safeguard relief rights. Consideration should be given to whether notice periods are appropriate going forward. For example, in circumstances where an outbreak has occurred in a particular location but there is a reasonable likelihood of the outbreak spreading, should a party have to wait until the outbreak actually impacts it or would it be more appropriate for an earlier notice trigger to arise?

Generators should also consider (i) whether the occurrence of a force majeure event results in time relief only or whether there is a mechanic for sharing the costs of a force majeure event between the parties; and (ii) whether the treatment of force majeure is consistent across the suite of contracts to which a generator is party. If the treatment of force majeure is inconsistent across a suite of contracts, a generator may find itself responsible for a greater share of the cost of a force majeure event than its counterparties.

A contractual “stock take” may prove useful to identify a generator’s current contractual position - to assess whether contractual arrangements are suitable to support future planned activity and supply chains are as robust as possible.

Workforce Availability

The recent COVID-19 outbreak has acutely emphasised how important it is to accurately ascertain workforce availability. One only has to look at the current limitations and complications in terms of COVID-19 testing to understand the potential difficulties associated with identifying which employees are safe to work.

Perhaps consideration could be given to an industry wide initiative co-ordinated with Ofgem to ensure key engineers for grid, distribution networks and generators are considered “essential” and have access to appropriate testing as soon as available. The industry could also push for clarity and consistency across the UK as to whether construction or refurbishment of generating plant  is considered essential and should be allowed to continue in the event of a pandemic.

A number of generators have delayed maintenance outages to later in the year in the hope that by such time, the situation will have eased and personnel and spare parts will be readily available. Such a shift may well present scheduling problems if a number of plant are seeking outages at a similar time. Generators would be well advised to consider lead times and plant warranties as well as any offtake contract obligations and forward price curves to ensure maintenance is scheduled for the optimum time.

UK Capacity Market Improvements

Looking further into the future, consideration should also be given to the potential role and importance of generation methods which are less reliant on teams of people present in one location to operate.

The COVID-19 pandemic may provide an opportunity to revisit the Capacity Market design and the ongoing discussions with the National Grid (as Electricity System Operator) as to the participation of renewables in the Capacity Market, particularly the de-rating factors as applied to certain renewable generation technologies.

“De-rating factors” are the Electricity System Operator’s assessment of the contribution a particular generation type may make to the energy system’s response to a System Stress Event. The methodology used by the Electricity System Operator for the determination of applicable de-rating factors, in particular the use of “Equivalent Firm Capacity”, has been the subject of much discussion.

The main metrics used in the de-rating factor methodology for renewables are:

  • Loss of Load Expectation – the expected number of hours in a year when demand is higher than available generation before any emergency or mitigation actions are taken but after system warnings and the system operator’s balancing contracts are exhausted;
  • Expected Energy Unserved – the expected amount of electricity demand that is not met by available generation during a year before any emergency or mitigation actions are taken but after system warnings and the system operator’s balancing contracts are exhausted; and
  • Equivalent Firm Capacity – the precise amount of perfectly reliable firm capacity a resource can displace whilst maintaining the exact same level of risk on the system.

The issue with renewable generation in this context is that the more variable a generator is the less reliable firm capacity it maintains. Whilst battery storage may help, it is typically of relatively short duration which in turn impacts the advantages it perhaps would otherwise be seen as providing in terms of reliability.

What is perhaps interesting to note, particularly in the current circumstances, is that the assessment of reliability has to date (and quite understandably) not focused on or addressed the availability of people to operate a generating facility. This issue has come into focus predominantly as a result of the current COVID-19 pandemic.

The current COVID-19 pandemic is unprecedented in modern times and indeed something we hope will be an extremely rare occurrence. As such, care should be taken to not “over provide” for inclusion of workforce availability in any capacity market/ de-rating assessment. Regardless, the current context does demonstrate how complex an issue workforce availability is, and that de-rating factors should be revisited and re-tested frequently and further finessed as required.

It also demonstrates the continued importance of renewable generation and battery storage in the UK’s generation mix and serves as a further reminder, if one were needed, that continued development and innovation in renewable technologies is key to ensuring the UK maintains a reliable power base.

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