Net zero is NOT making UK industrial electricity prices higher than other countries - here's why

Anti-net zero campaigners have, for some months now, been using the fact that the UK has higher industrial electricity prices than other Western countries to blame ‘net zero’ policies. But pinning the blame for higher industrial electricity prices on the net zero target is a lie. In fact solutions like batteries, more international interconnections, and replacing gas power with wind and solar power are the biggest answers to our problems.

For a start, if it was the case that the high prices were caused by the amount of wind and solar generation we have in our electricity system then we would expect that the UK would have higher proportions of wind and solar electricity generation than other European countries. But this is patently not the case.

Let us define ‘Net zero’. Most of all it is about eliminating the use of fossil fuels. In my view, the most sustainable (and cheapest) way of achieving this is to use energy efficiency and clean renewables. At the moment these clean renewables are mostly wind and solar PV.

Now if the UK’s use of these two (fluctuating) fuels WERE causing higher industrial electricity in the UK (compared to every other country) you would expect that the UK would have higher levels of wind and solar PV generation compared to other comparable countries. But the UK clearly does not have the highest levels of wind and solar generation as a proportion of total electricity generation. You can see in Figure 1 below that Denmark, Spain, The Netherlands, Germany, and Portugal all have higher proportions of electricity generated from wind and solar PV compared to the UK.

Figure 1

Source of data: Ember and also Energy Institute Review of World Energy (2023 figures)

So really this knocks out the ‘net zero skeptic’ line of attack without much need for further discussion. Obviously if achieving net zero in electricity is driven most of all by maximising the generation of wind and solar, then, logically, net zero policies cannot be the cause of the UK’s higher industrial prices compared to other European countries. For that to be true the UK would have to have a higher proportion of electricity coming from wind and solar than these other countries. But this is not the case. In fact the UK comes out sixth out of 8 in the league of solar+wind proportionate generators shown in Figure 2. But we would still like to know why the UK does have higher industrial electricity prices than other countries?

So why are UK industrial electricity prices higher than other countries?

One fact which should be obvious is that the most important factor driving up UK electricity prices generally has been the price of natural gas. Natural gas electricity generation sets the price paid for electricity the majority of the time since it represents the highest ‘marginal’ price’. The only time that high-cost gas generation will not set the wholesale price of electricity in the UK is when there are enough of other generation sources combined to supply all electricity demand. Currently, this is only a small minority of the time.

The relationship between gas and electricity prices can be seen in Figure 2. I have taken this Figure from a previous blog post that I did last year entitled ‘Why does UK electricity consumption keep declining?’, See HERE. It can be seen that there is a clear relationship between the price of gas and the price of electricity. When gas prices have gone up, so have electricity prices.

Figure 2

Source: drawn from data series associated with Digest of United Kingdom Energy Statistics and Department of Energy (note: 2010 = 100)

In gas trading, the UK is a price taker on the international market. In this market gas prices have, in recent years at least, been set by the price of liquified natural gas (LNG). This LNG market is global, and the fact that the UK produces around half as much natural gas as the UK consumes makes no difference to such prices and what we have to pay for gas.

Of course this general explanation as to why electricity prices have risen does not explain how it is that industrial electricity prices are relatively higher in the UK than other countries. Here it would be a good idea to see what industrial groups have to say about the subject. The steel industry is a prominent industrial electricity consumer.

However, the trade group UK steel are not talking about the abandonment of net zero policies. Their biggest ‘ask’ is to ensure that industrial electricity consumers pay less for network costs. These are the costs of the electricity transmission and distribution system which are paid for through ‘network charges’ added to electricity bills.

UK Steel say that the biggest factor in pushing up industrial electricity prices relative to comparable European countries is the way that electricity network costs are distributed in the UK. According to UK Steel, in the UK, industry has to pay a rather higher proportion of network charges compared to other European countries. In other countries domestic and commercial consumers pay for most of the network costs. UK Steel says (for source see HERE):

‘The Government will only (offer) 60% network charges compensation compared to the 90% offered by Germany and France, leaving industry facing network charges over ten times that of their European counterparts. The gap between German, French, and UK electricity prices is particularly driven by higher network charges in the UK, which have almost tripled after the implementation of two network charge reforms. The two reforms have left UK steel producers paying around 30 times higher network charges than their immediate competitors.’ UK Steel wants, in effect, other consumers to pay for most of the charges for transmission and distribution of electricity.

There are other (overall most important) factors that also push up UK electricity prices in all sectors (domestic, commercial and industrial). In essence, this is because of our reliance on gas generation, and our slowness in building batteries and international electricity interconnections. Gas power is being used to provide electricity when there is not enough power from wind, solar and other sources (‘balancing power’). The gas generators are charging a lot for providing this service.

As Adam Bell (a former Energy civil servant) has said, since the end of coal-fired electricity generation, there is currently a lack of competition to supply balancing power. This has handed increased profits to the gas generators, and increased prices to be paid by consumers. Bell says: ‘The absence of coal - even with relatively healthy capacity margins - handed considerable market power to gas-fired power plants, and although gas still sets the price of power, it does so at a heftier margin than in the 2010s. One can observe this by looking at the gross profits of Uniper UK, whose primary business is running gas power plants (see HERE).

(Note: This last paragraph has been taken from an earlier blog post I wrote (see HERE).

A good remedy in the short to medium term to the problem of gas generators having too little competition is to install as many short and longer-term duration battery systems - as quickly as possible. The storage capacity will mean that renewable energy can be stored in the batteries during periods of excess renewable energy production. Then this stored renewable power can be used to compete with the gas power at other times, so driving down the cost of the peak gas generation itself. Ultimately the remaining gas generation can be replaced completely.

There is a very large amount of battery capacity in the planning system (see my earlier post HERE). Its deployment needs to be speeded up as soon as possible. In addition we need to speed up the deployment of wind and solar power to reduce the amount of gas generation.

A further good remedy in the medium term is to increase the number and capacity of international electricity interconnections. This will further increase the competition with, and replacement of, UK gas generation. Yet the net zero skeptics generally seem not to like international interconnections either. This is a stupid attitude.

In short, we need to seek practical solutions to the problems of high electricity prices in the UK. Railing against net zero may serve fossil fuel interests and the politicians who support them, but not the consumer. Clearly, the pursuit of net zero is not a good explanation for higher UK industrial electricity prices. Other countries have higher proportions of electricity from wind and solar, but they have lower industrial electricity prices.

The best path for both the consumer and the climate is to phase out fossil fuels. Fossil fuels should be replaced with renewable energy, energy efficiency, and storage. These are more reliable technologies in that they are not subject to the international price spikes which afflict fossil fuels. Additionally, there should be rapid steps towards organising more and better international electricity interconnections.