Two stories: How wind power cuts UK wholesale electricity prices by a quarter and 2) How to cut electricity by curbing 'greedy gas'

The Energy and Climate Intelligence Unit (ECIU) has calculated that in 2024 UK wholesale electricity prices would have been over 30 per cent higher if there had been no wind power generated in the UK. Also, a Greenpeace backed expert report outlines how electricity costs can cut further by curbing ‘greedy gas’. (see the later section in this post). Greenpeace has launched a campaign to press the Government to do this - please support the campagn HERE

In practice in 2024 the wholesale power price averaged at around £75 per MWh. But without any wind power the price would, according to the ECIU, have been around £99 MWh. This difference has a significant impact on average (retail) energy consumer bills. It reduces them by an average of roughly £65 a year based on a typical household consumption as estimated by Ofgem.

The ECIU’s calculations are based on modelling the obscure workings of the UK’s half-hour electricity trading system. However, the logic behind the conclusions are pretty simple. A lot of what is now the most expensive gas power would no longer be needed.

As you will have heard before, the wholesale electricity prices are set by the highest price offered by gas fired power plant. This is referred to as ‘marginal pricing’. Usually, the price setting is done by a gas power plant. However the point is that offerings of power from gas fired power stations come in at a range of prices. They range from negative prices when there is a surplus of renewables (and when no gas power is needed) to well over £150 per MWh when there is little wind or solar power on the system.

The ECIU modelling analysed the half hour wholesale electricity prices in 2024. They studied the spread of bids from gas fired power plant at different levels of demand for GW of gas fired power plant. This is done by analysing the price setting in every half hour throughout the year. From this they could calculate what the marginal price would be at different levels of demand for gas powered plant. They set up a ‘counterfactual’ model that imagined there had been no wind power on the system.

The ECIU then calculated what the bid prices for the services of gas power stations would have been if there was no wind power. These prices would have been a lot higher for a lot more of the time. This is because higher-priced gas power plant would be needed to be brought into production for much more of the time than was actually the case in 2024.

The net result is garnered from averaging wholesale power prices across the whole of the year. This considers the volumes of gas power prices demanded in the year in total. The summary result for average UK power prices can be seen in Figure 1. The full ECIU analysis can be seen HERE .

Figure 1

Discussing the counterfactual

Of course, there is always a debate about what the world would have been like in a counterfactual situation - in this case if we had been stupid enough not to develop windfarms. One argument is that if there had not been any wind power then more, cheaper, gas fired power plant would have been built. The argument goes that they could produce power at lower prices than offered by gas fired power plant today.

There are two objections to this line of argument, though. One is simply that if Europe had been building no windfarms (or solar farms) then the input prices of natural gas would have been a lot higher. That is because Europe, including the UK, would have been consuming a lot more gas (not to mention a lot of other places in the world!). Gas supplies would have been a lot tighter, and prices would have increased earlier and faster! A second point is that currently the prices of building gas fired power stations are going up very quickly. This can be seen from coverage by the Rocky Mountain Institute (see HERE). Gas fired power plant are certainly not a cheap alternative to renewables.

Implications for the Government’s renewable energy programme

The next major step in the UK Government’s large-scale renewable energy programme is called AR7. AR7 stands for the 7th Allocation Round of bidding for contracts-for-difference (CfDs). This is mainly for new onshore wind and solar farms and offshore windfarms. CfDs involve developers who bid prices for the (Government backed) contracts which will give guaranteed prices for power generated by the projects for 20 years. The cheapest bids win the contracts to fill up the Government’s quota for giving out contracted capacity.

The results of AR7 will be announced sometime in the coming months. There has been a lot of flak coming from the anti-renewables lobby about how expensive all this will be. Certainly, the ECIU study puts this debate in perspective. The wind and solar contracts are going to be a lot lower than what the ECIU estimates would have been the wholesale power price without any wind power in the first place.

But regardless of all of this it just might be that the results of the AR7, in terms of the prices of contracts, might be lower than what people are expecting. Certainly, the anti-renewables pounced on the Government’s decision, at the end of July, to increase the Administrative strike price for offshore wind from £102 in the last CfD round (AR6) to £113 per MWh. The actual prices will likely be a lot lower than this anyway. The Administrative strike price is merely a reserve price to say that developers will get less than this in practice. In the last bidding round, AR6, the contracted prices were a lot lower than the administrative strike price.

However, upon analysis it seems that the ‘increase’ was not really an increase at all, but merely a change in the technical parameters whereby the bids are assessed. That is according to some detective work conducted by Simon Gill (see HERE). So, people were wrong to conclude from this that the renewable energy contracts are going to cost more this year.

Cutting electricity prices by curbing greedy gas

Consumer electricity prices could be slashed by taking gas plant out of the UK’s dysfunctional electrical market. According to recommendations made by the UK’s leading energy policy analyst, Adam Bell, the gas plant could be rewarded according to their capital and operating costs. That is without earning super-high prices and profits. These profits threaten to increase in the future unless action is taken.

The recommended change would save energy consumers an estimated £65 a year at current prices. - That is another £65 a year on top of the money renewables are already saving by cutting the need for gas supplies. See Powershift, published by Greenpeace HERE

The UK electricity market gives gas power stations sky-high returns when the costs of using the plant is only a fraction of what they get paid in practice. Greenpeace commissioned Adam Bell (a former Government energy civil servant) to design a system that works for the renewable energy world. This is as opposed to one than was put in place (over 25 years ago) with the assumption that fossil fuels would continue to dominate electricity production.

Electricity costs for the consumer are driven by the costs of gas in two ways. First, gas power plant prices form the price which is paid to all generators, even though the prices paid to gas are well above what is needed to pay other generators. Second, gas plants provide short term ‘capacity’ when there is not enough capacity to provide short term balancing. Again, gas power plant are paid according to the highest bidder offering to provide capacity. This gives the gas plant operators high profits, usually well above their costs.

There are two different so-called ‘competitive’ markets operating here. But the competition seems to be no more than people vying to be paid the highest inflated price. Under Bell’s system, the National Electricity System Operator (NESO) would organise a system whereby plants would be paid what they need to make reasonable profits, but not super-profits as at present.

The system would use the so-called ‘Regulated Asset Base’ (RAB) model. This is being used to fund Sizewell B. Yet the RAB would be much more suitable for gas power plant than Sizewell C. That is because gas plants have well defined, or definable, costs On the other hand the Sizewell C RAB threatens to melt-down as the inevitable cost overruns for Sizewell set in (loading the cost overruns onto consumers!).

The Bell/Greenpeace report recommends a series of electricity-cost-cutting measures. But within that the plan to take over the markets for procuring gas power plants would save consumers £65 at current prices. The other good practical steps that would reduce electricity prices for consumers by much larger amounts in total. However, the need to reign in the gas plants is especially important. See the report HERE. And sign up to Greenpeace’s campaign to curb greedy gas HERE.

Conclusion

The nub of this story is that wind power and solar power are not the cause of our problems, but part of the solution. Curiously, the power sources that are the most expensive, that is nuclear power plant, are the ones that find most favour amongst those keenest on scrapping the UK’s Climate Change legislation. The ‘anti-net zero’ campaigners seem also keen on plunging the world not only into ever worse climate change but also risking more fossil fuel price crises. What does seem clear is that it certainly doesn’t seem any more expensive to save the planet. That is compared to simultaneously roasting it and inflicting its inhabitants with regular oil and gas price crises. What we can be doing though, is ratcheting up renewable’s share of energy in gebneral and at the same time making sure that gas costs are curbed.