An immediate effect on UK electricity prices will be a sharp rise after July when the existing price cap expires. The reason of course is because electricity prices are linked to the highest cost source of generation - gas - no matter how little it contributes to overall costs of generation. Meanwhile, increasing amounts of cheaper green generation are lowering average costs despite the increase in grid costs and the double whammy of curtailment costs (paying to throw away energy) because UK has been slow to deploy storage. None of the benefits are being passed through to consumers or businesses but simply create supernormal profits for generators. There is a sort of rationale for this, rewarding investment in cheaper renewables. But as the market is effectively rationed by the capacity auction process, it’s unlikely that the incentive will result in improved speed of deployment. This situation will continue indefinitely until the last gas turbine is turned off. Meanwhile none of the market pricing signals from reducing generation costs will penetrate the wholesale market barrier, even though real costs are falling thanks to the drive for renewables. Until the existing wholesale pricing regime is reformed with wholesale gas generation priced outside the marginal cost mechanism, the UK will continue to see high electricity retail prices and reinforce Reform’s argument that net zero is a waste of money.
I get your general argument, but it is not true to say that none of savings from renewables will occur. That is because battery plus renewables etc will form an increasing portion of the time when they set the marginal wholesale price
Agreed, but it’s a question of when, not if. My point is that gas will only get displaced from the marginal cost pricing formula at times when no gas generation AT ALL is in operation. So it’s not going to be a smooth progression with gradually falling prices reflecting the proportion of renewables. Instead we will go from persistently high electricity prices to a sudden cliff edge drop as gas is suddenly no longer in peak periods of the daily mix. That might be the design intent, but I don’t think that’s widely understood.
Given the energy crisis you have thought the Labour government would lift defacto ban off with onshore wind!
An immediate effect on UK electricity prices will be a sharp rise after July when the existing price cap expires. The reason of course is because electricity prices are linked to the highest cost source of generation - gas - no matter how little it contributes to overall costs of generation. Meanwhile, increasing amounts of cheaper green generation are lowering average costs despite the increase in grid costs and the double whammy of curtailment costs (paying to throw away energy) because UK has been slow to deploy storage. None of the benefits are being passed through to consumers or businesses but simply create supernormal profits for generators. There is a sort of rationale for this, rewarding investment in cheaper renewables. But as the market is effectively rationed by the capacity auction process, it’s unlikely that the incentive will result in improved speed of deployment. This situation will continue indefinitely until the last gas turbine is turned off. Meanwhile none of the market pricing signals from reducing generation costs will penetrate the wholesale market barrier, even though real costs are falling thanks to the drive for renewables. Until the existing wholesale pricing regime is reformed with wholesale gas generation priced outside the marginal cost mechanism, the UK will continue to see high electricity retail prices and reinforce Reform’s argument that net zero is a waste of money.
I get your general argument, but it is not true to say that none of savings from renewables will occur. That is because battery plus renewables etc will form an increasing portion of the time when they set the marginal wholesale price
Agreed, but it’s a question of when, not if. My point is that gas will only get displaced from the marginal cost pricing formula at times when no gas generation AT ALL is in operation. So it’s not going to be a smooth progression with gradually falling prices reflecting the proportion of renewables. Instead we will go from persistently high electricity prices to a sudden cliff edge drop as gas is suddenly no longer in peak periods of the daily mix. That might be the design intent, but I don’t think that’s widely understood.
Great analysis David, very helpful