Experts at Cornwall Insight have predicted that the energy price cap could hit £3,359 in October and rise further to £3,616 in January 2023. This is following months of uncertainty, as UK households struggle to deal with the fall out of volatile wholesale gas prices caused by a surge in gas demand globally and exacerbated by Russia’s invasion of Ukraine.
In response, there have been some significant policy announcements by government, including the Energy Security Bill, which is currently being read by Parliament, and a fundamental review of the UK electricity market. Currently gas prices dictate wholesale electricity costs and we have been calling for this to come to an end for some time – it is unacceptable that UK energy consumers are still not able to fully access the economic benefits of renewables.
Below we unpick the changing energy landscape, the proposed policy and market changes and what this means for the future roll-out of renewables in the UK.
WHY ARE ENERGY PRICES SO HIGH?
Ultimately, prices are high because of the way the electricity market is currently structured. Energy suppliers and generators trade electricity in half-hourly auctions, with the National Grid responsible for matching supply and demand. Bids for each half hour of demand are stacked in price order, starting with the least expensive and flexible generators – renewables – and the price is then set by the last and most expensive generator into the auction – often, gas.
This means that the end price we pay for electricity is susceptible to any wider volatility in the gas market, which has become increasingly strained due to a global supply shortage. Several geo-political issues are also at play, including the world’s response to the invasion of Ukraine.
With gas flows being restricted by Russia, the government has subsequently raised concerns over the country’s energy security and the need to end our dependence on fossil fuel imports. That’s where the energy security bill comes in.
THE ENERGY SECURITY BILL
The Energy Security Bill was published in July, containing 26 measures that ministers claim will help reduce the UK’s dependence on imported gas. As we outlined in our initial response, it was positive to see the government aligning the strategy to net zero and recognising the important role renewables will play in both reducing carbon emissions and lowering the cost of energy long term.
However, we were disappointed to see a lack of support for certain clean technologies such as onshore wind, especially as new data from BloombergNEF has found that it’s now cheaper to build and operate new large-scale wind or solar plants in nearly half the world than it would be to run an existing coal or gas-fired power plant.
The bill, which has been called the most “ambitious package of energy measures in a decade”, also included the promise of a broad review into the UK electricity market which, amongst other things, aims to explore the ways we could decouple the wholesale electricity market price from fossil fuels.
ELECTRICITY MARKET REFORM
The Department for Business, Energy & Industrial Strategy (BEIS) launched the consultation in July as part of its Review of Electricity Market Arrangements (REMA). According to the press release, ‘REMA will focus on establishing a fit-for-purpose market design, identifying and implementing the reforms needed to GB electricity markets that work for businesses, industry, and households’.
Business and Energy Secretary Kwasi Kwarteng has said: “We’ve just seen the price of offshore UK wind power fall to an all-time low and gas is a shrinking portion of our electricity generating mix, so we need to explore ways of ensuring the electricity market is adapting to the times. That includes ensuring the cost benefits of our increasing supply of cheaper energy trickle down to consumers, but also that our system is fit for the future – especially with electricity demand set to double by 2035.”
Alongside a review of the marginal pricing model, another issue that has been raised is how we can incentivise consumers to use energy at times when renewables are cheap and abundant, instead of at times of high demand when power is more likely to be generated from high-cost, high-carbon sources like gas. It will also consult on the evolution and expansion of existing schemes, such as the Capacity Market and Contracts for Difference (CfD).
If done correctly, we believe that reform of the current structure will be a positive move and will support the UK’s acceleration towards a clean energy system. There is some work to be done on ensuring that initiatives such as the CfD auction work in favour of smaller projects too. We look forward to taking part in the consultation, considering how the reform will support future investment and development of clean energy projects, whilst working in the best interests of consumers during challenging times.
KEEPING UP MOMENTUM IN A CHANGING WORLD
Although almost 40 per cent of our electricity was provided by renewable sources in 2021 – the second highest year for generation on record – the UK still relies too heavily on fossil fuels. According to the latest Digest of UK Energy Statistics (DUKES), fossil fuel electricity generation increased by 11% last year, due to increased demand and lower renewable generation as a result of adverse weather conditions.
Given the current economic climate, there is a clear need to accelerate the roll-out of renewables in the UK, but this needs to be backed by favourable policies that allow investors and developers to move forward with building new projects quickly. The energy security bill and REMA go some way in increasing industry confidence and highlight an acknowledgement from government that moving to a cleaner energy system is both achievable and a priority. This is of course something we have known and championed for a long time, but we will continue sharing our insight to inform the important conversations unfolding. While we are facing increasingly difficult and uncertain times, one thing is for sure – there is no time to waste when it comes to ending our reliance on dirty fossil fuels. This is why Thrive was founded way back in 1994 and we’ll continue working hard to reduce carbon emissions and tackle the climate crisis.