soaring energy prices
Soaring energy prices are dominating the news, both in the UK and around the world. The price of gas has reached an all-time high, taking with it electricity prices and forcing the UK government to intervene to supporting people and businesses.
Great Britain Energy price billintroduced on October 12 to “provide for energy price control”, is a “unprecedented intervention”. This is emergency legislation and is expected to become law before the end of October. This means that the Senedd will not have time to fully reflect consent for the bill in the usual way. Instead, the Plenary will debate a last-minute debate legislative authorization protocol (LCM) this afternoon.
This article will examine energy pricing, the link between gas prices and electricity generation, recent trends in energy prices, and the causes and responses, including the energy price.
The price of energy
There are three key elements that intersect to give us energy at our fingertips:
- Generation – historically, electricity has been generated by burning fossil fuels, but increasingly renewable energy is used, as well as nuclear energy and imports from other countries;
- Transmission – energy is transported through a network that manages supply and demand; and
- Markets – as consumers we get our gas and electricity from suppliers who buy energy on the wholesale market and sell it back to us.
The energy market is like any other market, it is driven by the balance between supply and demand. There is, of course, a number of factors at stake that influence the wholesale price, which is one of the main components of the customers’ overall energy cost.
There are a wholesale price for electricity in the UK, which is unregulated, i.e. open and competitive. Electricity producers bid to contribute to the electricity grid. These offers are accepted until the demand is met in what is called the ‘order of merit’. In simple terms, it is a ranking in order of preference, so that the least expensive sources, usually renewables, are accepted first, and sources such as gas and coal-fired power plants are the last.
Figure 1: illustration showing “the order of merit”; the cheapest sources are chosen first, but the power from any source that meets the peak demand sets the overall wholesale price. The proportions of each energy source are approximate and for information only.
The cost of the last source used to meet demand, usually gas, sets the wholesale price of electricity. The institute for government Explain :
…although low marginal cost generation methods (including renewables and nuclear) produce the majority of electricity in the UK, the price paid in the wholesale and retail markets is much higher, marginal cost of generating electricity with gas.
Apart from the wholesale price, the rest of the price we pay for energy is a combination of other operational costsincluding:
- Network costs – the cost of using the network;
- Costs of environmental and social obligations – a contribution to government energy policies, such as improving energy efficiency in homes and businesses, helping vulnerable people and encouraging the adoption of renewable technologies; and
- Operating costs – things like customer service and billing, as well as business profits.
The wholesale price of energy is increasing, the main factor being the increase in the cost of gas. This is due to a combination of eventswhich translates into a reduced supply coupled with an increasing demand.
The Russian invasion of Ukraine led countries reduce their dependency on Russian gas. While there are no gas pipelines directly linking the UK to Russia and imports from Russia amounted to less than 4% of total UK gas supply in 2021, avoiding Russian gas reduces supply levels globally, while demand remains the same. This drives up the price.
2021 has been a difficult year for some of the UK’s energy sources, including unplanned outages at nuclear reactorsand one fire in kent affecting energy entering the UK from France. Winter 2020/21 has been particularly cold and long, which meant we were using more gas than usual to heat our homes and businesses. This led to gas storage in the UK, already limitedbeing at historically low levels.
European suppliers have their own problems. When you can’t get the power you need from one place, you usually go to another. But all the places where the UK usually gets its electricity are struggling to keep up with demand. Asian and South American countries are also buying more gas, further increasing demand.
UK legislation introduced in 2018 asked Ofgem, the energy regulator, to limit the tariffs a supplier can charge domestic customers. It put a “price cap” on the cost per unit of electricity and gas, as well as limits on ongoing charges for each, and reassessed every six months.
The Default price cap was introduced in 2019. As wholesale prices increased, Ofgem increased the price cap level. In February Ofgem announcedthe price cap would rise another 54%, which he called “extremely worrying.”
In August, Ofgem confirmed the price cap will be updated quarterly, rather than every six months, and will set the price cap levels for the 9e period; October 1, 2022 – December 31, 2022. This raised the price ceiling again, with the average energy cost between £3,549 and £3,764.
In response to the cap increase, the The British government has announced that average bills will be maintained at £2,500, under the Energy price guarantee. This means that the October price cap will no longer be fully enforced for customers.
While the price cap was calculated according to a methodology based on market prices and regularly revised, the Energy Price Guarantee sets a maximum unit price (below the level at which the price cap was to increase). It was originally set for two years from October 2022. However, it has recently been reduced to six months. This is reported that average energy bills could exceed £4,000 after April 2023.
Among other measures, the energy price guarantee includes a temporary suspension of the costs of social and environmental obligations (known as green levies) for customers, transferring the costs to the UK government.
The UK Energy Pricing Bill
Great Britain Energy price bill aims to provide a legislative framework for measures aimed at controlling the price of energy. This includes the energy price guarantee, as well as other recently announced government measures; there ‘assistance scheme for energy bills »and the “energy bill reduction scheme”, mentioned in a recent paper from Senedd Research.
The bill contains measures to set a temporary fixed price, or “cost-plus revenue limit,” for low-carbon producers. This is designed to break the link between high gas prices and the price of electricity from low carbon generators.
To put it simply, if the wholesale price of electricity is set by the price of gas, generators that do not use gas do not have rising costs but profit from rising wholesale prices. The bill’s measures essentially limit the profits that low-carbon generators can make.
This has been described as a ‘tax on windfall profits” on clean energy generators, with fears this could have an impact on investments in the development of renewable energies, and in turn zero emissions targets.
Concerns have also been raised by energy developers, on the bill’s powers for the Secretary of State to amend energy licenses and “give directions”. These powers have been described as a ‘power grab’, which allows the Secretary of State to effectively overrule Ofgem.
You will find more details on the provisions of the bill and its passage by Parliament in this House of Lords Library briefing.
Article by Lorna Scurlock, Senedd Research, Welsh Parliament