The UK gas and power price problem

The  UK government wants to break the link between gas prices and power prices, but that’s hard when some power is generated using gas and some renewables are still supported by the Renewables Obligation (RO) subsidy system that in effect uses gas prices as a base - a marginal price approach dating from the time when gas was cheap, renewables expensive. Now gas is very costly, around four times the cost of renewables, but consumers are not yet benefitting from the lower cost of renewables. So, as UCL Prof. Mike Grubb has noted, in some cases ‘households are paying for their electricity several times what it now costs to generate and transmit it from the cleanest energy sources at scale.’                                                   

In a way, it’s a problem of success. As Simon Cran-McGreehin, from the Energy and Climate Intelligence Unit, has put it: ‘The green levies that paid for the early wind farms kick-started a renewables industry that is producing ever-cheaper power, and bill payers should now be able to start cashing in on this net-zero dividend. Translating those cheap renewables to cheaper bills is much needed.’

So what can be done? The government’s wind-fall tax is just on gas and oil profits, not on power production, but something also has to be done about power. The Contracts for Difference scheme avoids the renewables overpayment problem and CfDs are taking over from the RO, so all should be well there as CfDs expand- although their expansion has to be accelerated. And it not just greens saying that. Interestingly, recognising that that blocking green power may push up power bills, the Daily Express has complained about the capacity caps for on shore wind and solar in the new CfD auction. It noted that had been claimed that , without them, on top of the 12GW expected from the new CfD round ‘the UK could harness a further 8.5GW of offshore wind farms, along with about 3.9GW of onshore wind and about 5GW of solar farms, all of which are “shovel ready” and could be built quickly’. 

The CfD system obviously needs a boost, and to be widened, as RenewableUK has argued recently, but even with that, we will still have a framework in which green super-charges are put on power use, whereas it is fossil gas use that the government wants to phase out.  Moreover, at the same time it wants to keep all energy prices down. Not an easy task when it also wants to support costly nuclear. Though in its coverage of the issues, the Times said it was now claimed that even power from nuclear was half the cost power from gas, so that, at £92.5/MWh, according to a Whitehall source, ‘Hinkley point C, it turns out, was the deal of the decade.’ Well that’s stretching it, given that renewables cost about half that- and the Hinkley CfD is inflation index linked, so it will get much more by the time the plant is running, maybe in 2026, unless there are more delays. The adjusted strike price has already reached £106/MWh. 

European changes

 Clearly something needs to be done- and fast. A windfall tax on current power producers will probably not be wise - it would hurt green projects. Accelerating and expanding the renewables CfD would probably be better, and, as I noted in an earlier post, that idea is now also being discussed elsewhere in Europe, where Ukrainian war-related gas prices rises and  significant reliance on Russian gas are even bigger issues than in the UK, which doesn’t import much Russian gas. So big changes are likely in the EU power market. Indeed that’s already happened in Spain, although the results, in the recent hot weather, have been mixed, in part since, although Spain has lots of wind capacity, oddly, it doesn’t yet have much solar capacity in place- not even as much as in the UK. Clearly solar is only cheap if you have some installed.  

While renewables are building up, that will take time to have an impact, and there will also be pressure across the EU to increase the import of LNG from outside of Europe. That may not be a good idea in climate/energy transition terms, and also in social and political terms, given the likelihood that Africa could become a major source of gas. Of course Africa could also become a major source of cheap renewable energy, possibly converted to green hydrogen for export. But is that what Africa should do? Surely it should expand and use its green power it itself, and let the EU sort out its own problems.    

All in all the gas price rises open up a host of issues- and choices. It ought to mean that renewables will be favoured everywhere, but it may not, given the commercial lure of international trade in gas. However, the rising cost of gas could kill off the idea of using it to make so called blue hydrogen by steam reformation of fossil gas coupled with CCS, with green electrolytic hydrogen being, comparatively, a cheaper,  as well as cleaner, gas option.

Nuclear may of course look a bit more attractive economically to some, given the high cost of power from fossil gas plants, but its basic nature hasn’t changed and it still faces many technical problem, the EPR especially, as well as opposition. For example, the EU has yet to finally decide on whether it and fossil gas are to be counted as sustainable energy options in the ECs new Investment taxonomy.  Their inclusion as green options has recently been blocked by euro-committee intervention, though that decision may be reversed: both options have their backers in the EU. That would be tragic, slowing renewable uptake, but so too is the failure, in most countries so far, despite the EU's efforts, to take energy saving seriously enough- that could be the cheapest option, for buildings especially.  

So what next in the UK? 

The UK may be dragging its feet on energy efficiency, but, otherwise, it does like to see itself as taking the lead. However, the Telegraph claimed that ‘Ministers  [were] backing away from a windfall tax on Britain’s electricity generators in favour of a French-inspired consumer price mechanism ... Under plans being drawn up in Whitehall, a new system would break the link between the price of low-carbon electricity and that of natural gas ... to allow energy suppliers to take advantage of the comparatively cheaper cost of electricity generated by wind and solar farms – and pass on the savings to households and businesses.’ 

That sounds a fine aim, as far as it goes, but we will have to wait and see what emerges in the event, with a policy announcement due any day now. Meantime though, prices continue to rise, as do pressures to cut emissions: not an easy crisis to resolve if you insist on supporting nuclear and also down play energy saving.