NOBODY can deny that the UK’s electricity market is well and truly broken.
The new energy price cap, set to come into effect next month, will be £3,549 a year, meaning it has tripled since the start of last year. Even more horrific forecasts are being made about next April’s cap.
Year-ahead wholesale power prices, which historically averaged around £50/MWh, reached at £375/MWh at the end of July, and are even higher for this winter. This increase has occurred on the back of similarly drastic rises in the international wholesale price of natural gas.
Catalyst Digital Energy
Gas generation accounts for only about a third of the UK’s electricity, so in an ideal world electricity prices would be largely cushioned from spikes in gas prices.
Unfortunately the electricity market does not work like that, as the National Grid explains: ‘At the highest level, there is national pricing. This is where there’s one price for electricity across the country at any given moment. For each settlement period in a national wholesale market, the wholesale price of electricity clears as a uniform price across the market’s entire geographical area. In each trading period, this provides a single wholesale price to all market participants – both demand and supply – regardless of their location on the network.’
So all sellers of electricity receive the same wholesale price in each ‘settlement period’, which is half an hour. And that price is set by the ‘last source of supply’, in other words the most expensive. This, under current market conditions, is usually gas-fired generation; or occasionally coal, not because coal is intrinsically expensive, but because it costs a lot to fire up a coal power plant at short notice just for 30 minutes of generation. Even electricity sold on forward contracts a month or a year ahead is effectively priced at what the spot price is expected to be at the time of sale.
This electricity market system has been in operation since the 1990s, and is also used across most of Europe. It all sounds a bit arcane, but what it means is that all generators receive the same high price, even if their costs have not increased in the same way as gas power plants. In an ideal world, the current wholesale price of £375/MWh would apply only to the third of generation which uses gas. The rest would still be supplying at the historic rate of £50/MWh.
It is true that those generators covered by Contracts for Difference (CFD) have to repay the difference between the price earned and the CfD price, but these produce only about 20 TWh a year, 6 per cent of the total.
The government has announced a review into the design of the electricity market – see here – but I suspect this will be a lengthy affair, and dogged by vested interests. It will certainly not address the problems facing energy consumers now.
However there is short-term emergency action the government could take, which should include the following:
1) One of the most egregious scandals of the current market mechanism is that generators trading under the Renewable Obligation system not only benefit from these record high wholesale prices, but still receive massive subsidies funded via electricity bills which are estimated to cost £6.6billion this year. These schemes account for 80 TWh a year, a quarter of all generation. Intermittent wind and solar account for 54 TWh of this. Their intermittency means wind and solar power have less value intrinsically, and therefore should not be allowed to participate in the electricity market. Instead they should be paid on a Feed-in Tariff basis, as smaller wind and solar farms already are. I would suggest an FIT price of £20/MWh for this, which reflects historical wholesale prices prior to 2020, discounted to allow for the costs of intermittency imposed on the grid.
With 12-month forward wholesale prices now at £375/MWh, this could potentially save consumers £19billion a year. Generators would, of course, be allowed to retain their ROC subsidies.
2) The other main recipient of ROC subsidy is biomass, mainly Drax. As these generators are dispatchable, it would not be appropriate to switch them to FITs. Effort should however be put into switching these contracts over to Contracts for Difference, already employed at a third unit at Drax, which is being paid £126/MWh this year.
Much of Drax’s output has been sold on forward contracts, so they have not yet fully benefited from high market prices. A switch to CfD might be attractive to Drax, as it gives them long term security, while at the same time protecting consumers from gas price spikes in future.
If they refuse, I am sure there are plenty of threats to their long-term business plans that could be employed!
3) Nuclear and other non-gas generators, such as coal and hydro, also benefit hugely from current wholesale prices. These account for about 60 TWh.
The same Drax approach could be used, with CfDs offered. A reasonable, guaranteed price, say around £100/MWh, would certainly be tempting for ageing nuclear plants. And any offers to coal power plants would have to come with an extended life guarantee, beyond the mandated shutdown in a couple of years’ time, which would make it worthwhile to them. Guarantees to buy all of their output for, say, the next five years would also be attractive for them.
4) Finally, the UK Carbon Pricing system must be immediately suspended, as this artificially raises the cost of gas and coal generation.
In total these actions could save consumers in the region of £40billion a year, about £1,500 per household, a similar amount to the latest rise in the upcoming Energy Price cap. This saving is based on a wholesale price of £375/MWh, but even a lower assumption of £300/MWh would still generate savings of around £30billion.
The renewable lobby would doubtlessly kick up a fuss, as it is renewable generators which are profiteering most from our broken system. But they must be faced down.
No, Mr Marlow – renewable energy is not ‘the way out of this mess’
IT IS sad to see how far journalistic standards have declined at the Telegraph.
Ben Marlow describes himself as their Chief City Commentator, but you would not know it from reading his article last week, called ‘Renewable energy is the only way out of this mess’, which was little more than shilling for the renewable lobby.
Basically he argues that we should abandon fossil fuels, forget about fracking and embrace wind and solar power because:
• Wind and solar are dirt cheap
• Fossil fuels are expensive
• Fracking is opposed by NIMBYs
Let’s start with this nugget: ‘The wholesale price for electricity generated by gas has averaged £446 per MWh over the past week. Meanwhile, the most recent auctions for renewable power, staged in July, came in at an average cost of £48 per MWh.’
Marlow calls himself a financial journalist, but a competent one would check the Annual Accounts of offshore wind companies, which consistently show that construction costs have not come down in the way he claims. Indeed they show that the real costs are around £100/MWh. And, of course, this does not start to reflect all the indirect costs.
And surely he must understand the laws of supply and demand? The price of natural gas does not reflect the cost of extracting it, but is the result of reduced supply. The answer to that problem is to increase supply, not cut it further as he suggests.
And he clearly does not understand that wind power is hopelessly intermittent. He says: ‘Critics are quick to point to the intermittency of renewables as a fatal flaw. In the case of wind, that is less of a problem offshore, but the sheer size and hi-tech nature of the latest turbines means they are much more efficient and reliable than the previous generation anyway.’
Only this January we saw just how volatile even offshore wind power can be:
What on earth does he think will happen in a few winters’ time, when we are totally reliant on renewables?
He goes on to argue the case for solar power. Nobody appears to have told him what happens to solar power in winter, when demand for power peaks. During December 2021, for instance, all of the UK’s solar farms worked at just 1.8 per cent of capacity.
Even this assumes that we have sufficient battery storage to smooth out supply during each day and night.
The government’s target is to have 36 GW of solar power by 2030, but in winter this will supply only a tiny 0.6 GW on average. Maybe Mr Marlow does not appreciate that by then we will be needing 60 GW or more of power?
Finally he claims that fracking is a ‘sideshow’.
According to Cuadrilla, who are prepared to put their money where their mouth is, the Bowland Shale alone could supply 50 years of current UK demand for gas.
I don’t call that a sideshow.
Isn’t it time the Telegraph started employing proper financial journalists?