Is National Grid’s Triad system past its peak?
Energy Blog, 7 November 2019
Michael Ware discusses the information assymetry of the peak demand Triads system in the UK.
My surly next door neighbour has finally had enough of my barking dog and my two young sons kicking their footballs into his garden and is selling his house. Not particularly earth-shattering news, I know, but what is interesting is that he hasn’t advertised the asking price. If you want to make an offer, you have to call his estate agent for some sort of over-the-phone vetting process, after which they may or may not tell you quite how much he is asking for his 4 bedroom Victorian semi in a leafy street in Epsom. We know this because we tried – and they wouldn’t tell us.
This secrecy creates an information asymmetry which, as classic economic theory tells us, will impede the working of the market. My neighbour knows how much he wants to sell his house for – but the buyers don’t know his price and will probably be put off as a result. His paranoid behaviour is impeding the efficiency of his transaction and will cost him money in the long run. When I tried to carefully explain this over the fence whilst retrieving my son’s football he was a tad less than impressed.
The importance of information symmetry and transaction certainty
Efficient markets rely on symmetrical information in which both sides know the price of a transaction and – equally critically – the conditions under which it will occur (or “transaction certainty” if you will). If these two conditions are not met, there tends to be fewer transactions, and they happen at a lower price, because buyers don’t want to invest the time and energy in resolving the information asymmetry.
This is why pretty much everything you buy has a price which is commonly available. Where the price is not available in, for example, an auction process, there are very clear rules on how and when the buyers and sellers will ‘discover’ the price, and in what circumstances the transaction will take place. Markets that don’t satisfy either condition are quite rare, because they are inherently inefficient and ultimately act against the interest of the seller.
That being said, we seem to have one with the UK National Grid’s use of electricity Triads as a way of paying for the network: a market which has neither price or transaction certainty.
The strange world of Triad charges
Now for those of you who are not too familiar with the intricacies of the UK’s electricity system, Triads (it’s not an acronym) are a strange concept whereby the UK National Grid retroactively surcharges consumers that bought electricity during high-demand periods. They retrospectively assess the three (hence triads) highest half hour periods of demand that are at least ten days apart, and impose substantial charges to commercial/industrial users that took electricity from the grid at that time.
Last year, the highest Triads periods occurred in November, December and January. The highest period was Wednesday the 23rd January at 17.30, when demand peaked at 46,870 MW. I am not sure what the UK population was doing at that time, but it obviously needed a lot of electricity to do it. For those unlucky commercial users connected to the grid in London, the cost was an eye watering £50,000 per MWh instead of the £150 per MWh they were paying only minutes before.
Indeed, there is no transaction certainty, as the three peak periods are not announced until months later – so users don’t know if they will be charged or not. Furthermore, there is no information symmetry, as users do not know the exact amount they might be charged.
So where does that money go? In a world of acronyms, Triad charges are used to pay for TNUoS, which stands for Transmission Network Use of System. The TNUoS is the charge for the cost of maintaining the high voltage electricity transmission network. The cost of maintaining and upgrading the ageing transmission network rises relentlessly, and it is forecast to be £3.7 billion in 2021. To put this in context, it was a mere £943 million in 2007. The TNUoS charge that pays for this is based on the user’s share of demand on the transmission network during the Triad periods. Or to put it simply: if you are using the grid during a Triad period, you will get charged an additional chunky cost per MWh which pays for the network via the TNUoS. Is that clear?
Predicting the future and the unintended impact of Triad avoidance tactics
This lack of transparency in the market has several negative consequences.
Because nobody knows when the Triad period will be, a sham industry amongst energy consultants has emerged. They try to provide buyers with transaction certainty by predicting the Triads half-hours, so companies can disconnect from the grid to avoid them.
Conversely, ‘embedded’ or local generators can earn payments if they are generating during Triad periods – but again, they don’t know when these will be. Either they have to generate every late afternoon in winter, or miss out.
This is slightly mad, as asymmetrical markets deliver suboptimal returns. When nobody knows either the price during a Triad period or when a Triad period will occur, buyers of electricity overreact. The Grid estimates that up to 2,000 MWs of demand regularly disconnects in response to spurious Triad warnings for fear of being charged.
This has even wider negative consequences for the UK. Although there are only three Triad periods industrial users will disconnect from the grid on more than three days every winter. Last year, for example, there were Triad warnings on at least 15 days. This invariably leads to substantial losses of manufacturing output compared to our German and Chinese competitors.
Ofgem, the UK’s regulator of gas and electricity markets, recognizes that because of its adverse effects on the wider UK economy, the Triad mechanism is probably not the most sensible idea they have ever had. But while they are reviewing it, the changes are more likely to affect the supply side of the equation (i.e. the payments made to generators) rather than the charges made to users.
Alternative solutions and the future of Triads
Of course, there are alternatives to all of this – on both sides of the supply/demand fence. The Demand Side Response mechanism also incentivises users to disconnect from the grid at peak times, but in a controlled and predictable manner whereby the value of reducing demand is known to users beforehand rather than penalised retrospectively. In the same vein, the cost of batteries continues to plummet to a heady sub-£500k per MWh, and users are now installing battery systems purely to avoid Triad costs. Finally, we are seeing a small but distinct growth in subsidy-free microgeneration, such as rooftop solar and private-wire arrangements directly between generators and users, hence avoiding the grid completely.
Although these initiatives will address the supply/demand imbalance at peak times, they won’t address the underlying question of how to pay for the network – which is the fundamental point of the Triad system. This leads to an accelerating downward spiral in which, as fewer users pay Triad charges, the costs to those remaining goes up and hence incentivises them to also avoid them, making things worse for the grid.
The future of Triads…
So in conclusion, my surly neighbour and the National Grid share a misguided belief that economic transactions based on asymmetrical information lead to optimal outcomes. As Margaret Thatcher famously proclaimed in March 1988, “you can’t buck the market” – and in the long run, commercial transactions that rely on asymmetrical information rarely prevail. However, other events will likely overtake them before they realise the error of their ways. My neighbour will sell his house eventually, probably for a slightly lower price than ultimately possible, and somebody else will have to put up with our barking dog and errant footballs. The National Grid will have to find an alternative way of paying for the transmission network, as the relentless fall in the price of storage means that eventually everybody will find a way of avoiding the Triad cost. It was surreal fun whilst it lasted, but one day paying for our transmission network by charging £1,000s to industrial consumers who just happened to be buying electricity for 30 minutes on a late January afternoon will go the way of smoking, watching snooker on the TV and not wearing seatbelts; something we all used to do as a nation but that now seems slightly mad in retrospect.