‘Soaring wholesale gas prices are behind 96% of the increase in UK household bills between last summer and next Spring’ says Simon Evans from Carbon Brief. So, basically, Green levies are not to blame. He says they ‘will fall below 3% of bills’. Indeed, given the way the Contracts for Difference (CfD) system is constructed, with the cost of wind and solar generation now at an all-time low, well under the gas-defined market price, consumers should actually benefit. As Boris Johnson noted in his farewell speech ‘offshore wind is nine times cheaper than gas’.
Unfortunately though, there may still be problems for some renewable energy projects, and, although some generation costs will fall, most energy retail costs will still rise. As Simon Evans makes clear, we are currently facing a series of unprecedented energy-related shocks, including post-Covid demand surges, Russia’s invasion of Ukraine, and a range of climate change impacts, all leading to higher gas prices. The CfD system is designed to ride out market price variations, but there may be limits and possibly delays.
The IET journal notes that ‘the wind farm projects expected to come onstream by 2025 have agreed to deliver power at just under £40/MWh and will, if they are in the contracts-for-difference (CfD) scheme that sets a minimum price for their electricity, wind up paying back the money from higher prices to the publicly owned Low Carbon Contract Company normally used to offset payments for the following quarter. The first quarter of 2022 saw the scheme return money to electricity suppliers for the first time.’
However, the IET goes on, ‘the prospect of starting off their CfD arrangement by paying out has seen a number of generators delay their use of the 15-year contracts on their latest farms in order to benefit from the full market price of energy in the short term: they can hold off potentially for as long as three years. According to management consultancy Cornwall Insight, 90 per cent of the hourly periods used to calculate electricity prices from the start of 2022 up to mid-May were above the strike price. On average the wholesale price was more than double the agreed CfD price.’
Clearly it would be helpful if this delay for new projects could be avoided and also if a shift to CfDs for old existing renewable projects could be speeded up- some are still getting higher levels of subsidy under the old Renewables Obligation. A bit oddly, at one point, the UKERC seemed to think nuclear could also benefit from that, but as far as renewables go, a revised CfD scheme for older renewables may now well emerge.
Although this could help on prices, with overall UK energy bills still likely to hit more than £4000 or even over £5000 around the end of the year, and possibly even more later, something additional also has to be done – and fast. If we want more renewables in place quickly, the current version of CfD may not help much- we need an expanded accelerator system, speeded up and widened. Same for energy efficiency upgrades- which can be a fast way to cut costs. That’s what windfall tax money could be spent on. What we don’t want, arguably, is big new investments in new large nuclear plants, which will do nothing to cut consumer bills, but instead, under the RAB system, will add to them.
It's all a bit different in France, where consumers are better protected, with a fixed cap on retail prices. However taxpayers carry the can, for example for nuclear power plant construction and repair. That funding system in the past made nuclear look cheap, but now it’s beginning to look like a very poor deal- with EDFs nuclear plant operational problems and nuclear programme renovation and expansion costs escalating alarmingly. Around half of EDFs nuclear plants have been off line for various reasons, including corrosion and cracks, and, embarrassingly, France has had to import power from Germany. Although Germany too is having problems, given that, although it has cut back, it still relies heavily on imported Russian gas. Indeed, few of the international responses to Russia’s invasion of Ukraine and the subsequent gas crisis are good news in terms of climate change. Shortages of gas are leading to a return to coal in some countries, with CO2 emissions therefore rising.
It could all get quite serious this winter and beyond. With Europe desperate for gas, key countries in Africa are looking to expand their gas production and export, rather than focussing on renewables so as to cut emissions. It looks likely that, in terms of global climate policy, it will all come to a head at COP 27, the next meeting of the Conference of Parties to the UN Climate Convention, in November in Egypt. There seems no question that we have lost ground since COP 26 in Glasgow, and even that was a bit of a fudge. With the USA and China also at loggerheads over Taiwan, and halting bilateral talks on climate, it doesn’t look too good politically.
Globally, unless we can change tack, the full cost of the gas crisis may be more than just a cash cost, as climate impacts also hit. However, it’s not all grim. Some arguably quite sensible ideas seem have emerged from Labour in the UK. They want an expanded wind-fall tax re-spent on sustainable energy, although they are still wedded to nuclear, which, being costly and slow to deploy, risks undermining any cost gains from vital low-cost renewable expansion. That’s not an issue in Australia. Although it is a major exporter of uranium as well as coal, it has avoided nuclear power and its new progressive government seem keen to speed up climate action, which had been stalled for some while. Renewables recently supplied 35% of its power, well ahead of the current global average of 28%. And Biden’s new climate plan means the USA is back to trying again, after the Trump denials, sidesteps and blocks, with a 40% cut in emissions now seen as possible by 2030. Meantime US wind and solar are booming, with renewables overall supplying over 25% of US power in the first part of the year. China, although still heavily into coal use, is doing even better on renewables, and its potential, just for wind and solar, is vastly more than it needs to reach climate neutrality.
So, being hopeful, as long as the political will is forthcoming and political blocks can be overcome, it may not all be bad news longer-term. But with fossil energy prices being very unstable, in the short to medium term, and in the upcoming winter in the north especially, it could still be hard for many people around the world. In addition, climate change is still a big threat to us all, with the last year or so of storms, floods, droughts, wild fires and heat waves, giving us a tase of what are likely to become recurrent, costly and worsening features of life (and death) on this long-suffering, much abused, planet.
Comments
Post a Comment