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.
I suggest the following reasoning for why the UK givernment is loathed to restructure our energy cost system.
The higher cost of renewable energy (driven by gas marginal prices) gives its investors good returns and hence frames the ongoing investment stream into the UK's offshore wind generation expansion. This avoids the UK government having to pay for it, so they dare not upset the apple cart.
I’ll take this as a jokey piece of cynicism. Since 2017 at least most wind power and solar farm prices are fixed (they run on ‘contracts for difference’), They don’t earn anything over and above this. Earlier RE projects funded under the renewable obligation and feed in tariffs were getting the benefits of the high marginal prices but were subject to windfall tax which the fossil fuel generators did not have to pay
There not fixed as they get an annual indexation of their strike price so have done very nicely from the inflationary surge ironically caused by the 2022 fossil fuel price spike!
Hows that its being increased annually so at least stays the same in relative prices. The issue is though the asset was built in Y but its now Y+how ever many years have elapsed but the initial cost hasn't changed so the profitability is improving every year. Some of the ROC assets are now getting over £200/MWh and yes they are time limited but many have upto a decade still left so they are going to benefit hugely. This isn't a good advert for renewables and reinforces why they aren't as cheap believe as the media only ever quote two things 1. the 2012 award prices and 2. the odd half hours when prices go negative less than 1% of the year.
And also some of the early offshore windfarms were very expensive during the oil cisis 2008-2011, so they needed a lot of support - but the investment has been successful in that costs have declined a lot - this has also ben true of solar PV and onshore wind.
Yes costs did decline on future projects although some of that has now been reversed but my point remains that these earlier ROC sites have benefited hugely from the rpi annual increases. Look at Greater Gabbard one of the 2011 group cleared 450m profit in the last two financial years ending March 24. Not bad going on assets in the books at 881m. ie they will have easily covered their capital costs multiple times over before the ROC expire. thats not what was intended
Agreed but there costs don't. Granted O&M costs do but the biggest burden on a windfarm is the cost of the debt and that is fixed so an increasing proportion of the income stream goes to the bottom line.
Can you elaborate on this with regards to "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."?
My (perhaps mistaken) understanding of that quote is if eg 90% of electricity is coming from renewables, and 10% from gas, the costs to consumer for the full 100% is set at the cost of the gas production. If the renewables electricity price is fixed low, and the gas electricity producers are only getting paid for their 10% contribution, who is profiting from the higher electricity charges?
Electricity is bought and sold on the wholesale power market every half hour. So what matters from the point of view of price setting is not the average composition of electricity production (concerning technology source) but what happens every half hour. Even if only 1% of power is met from gas during any half hour, the price of the most expensive component of that gas can set the price for all wholesale power in that half hour. Currently, most of the time, gas still acts as the price setter.
Thanks for the answer. It is still not clear to me, who profits in this case then if 99% of power is coming from renewables but the price is set high by the gas cost, and the renewables producers are only paid a fixed lower rate?
This is way more involved than is properly explained and it isn't as simple as gas sets the price for all the energy delivered. In the case of renewables most owners actually sell their energy through PPAs at fixed prices over potentially years ahead. So the gas price has little impact other than it influences the forward mkt pricing. However, unlike CCGTs renewable output is variable so a generator could find itself short or long on its commitments so has to deal with that by trading in the day ahead market and that is where marginal pricing comes into play. So a renewable generator sets its PPA at say 40% of output but has 80% available it will pitch its excess 40% into the day ahead market. They can afford to do this at a low price because they are guaranteed their subsidy payment (ROC/CfD) as long as they generate so they will then get selected in merit order and then whichever last generator that fills the demand hole sets the price. The other important thing here is most suppliers don't have enough or any generation so they are in the day ahead market everyday trying to balance their books. (c60-70% of daily usage is bought on day ahead market) so gas is always going to be called up unless its really windy on a sunny day. Then what you see is prices going negative because it doesn't matter to the renewables in that market they just need to get selected so they can generate then they can collect subsidies.
Then we get to the day of the races where NESO (grid operator) has to balance grid each half hour and critically ensure the transmission system isn't overloaded and is protected against failures. This is where the nonsense kicks in. Basically the transmission system hasn't been expanded to cater for all the wind built in N.Scotland so on even a medium wind day it gets overloaded so NESO have to constrain wind off the system and replace it with generation where there is transmission capacity. This happens to be CCGTs in middle/southern England who know this is coming and pitch their prices accordingly. NESO has to buy from them as well as pay the windfarms to switch off!! You couldn't make it up except OFGEM did as as they have created this situation by not allowing grid expansion when it was proposed. They've now flipped the other way and proposing an over expansion what we really need is CEGB MkII where new generation and transmission is coordinated.
Anyhow to answer your question renewables benefit from this as much as gas stations and be under no illusion that windfarms under ROC arrangements are doing very nicely from it.
Energy is contracted between generators and suppliers often via middle men energy traders as well. Most renewable companies actually sell their energy through PPAs which are fixed price contracts or ones that are linked to an index. Unlike a CCGT renewables have variability so they have deal with shortfall or excess and use the day ahead market to balance there position. Also c60% of energy used on a daily basis is acquired through the day ahead mkts (Nord Pool & EPX). It is in this market where marginal cost pricing set the rate each half hour.
at the moment, there's still around 25 per cent of the UK generation coming from natural gas on an annual basis. Owners of gas power stations such as RWE and UNIPER have earned substantial profits in recent years, especially in 2022-3. But at the end of the day, it is the oil and gas corporations that extract the gas in the first place that make the most money. The oil and gas companies have been pulling back investment in renewables. That will have a lot to do with the fact that they can make a lot more money quickly from selling oil and gas than longer-term investments in renewables
Other countries do have different pricing arrangements- UK Steel is complaining about that in the quote- some other countries do have more hydro, especially Norway and Sweden. But battery storage deployment is a work in progress everywhere. But it is growing quickly
All good questions that are surely relevant? Please publish more information on this subject.
Progress with the electrification of our heating, transport and industries is completely dependent on reducing the price differential between gas and electricity.
If the price is right, change will happen. If it is not, then it won’t.
Cross subsidies are only justified if the end game is Net Zero and will do nothing to deal with the cost drivers. The government cant have lower energy bills and net zero they are mutually exclusive. They need to make up their minds and take people with them.
Thats a possibility not a certainty though but if the imperative is Net Zero that becomes an irrelevance as the overriding factor is decarbonisation. Personally im agnostic on climate change but believe its highly probable that 8 Billion people are more than likely to be having an impact so its right we take action. However, a balance needs to be struck on rate of progress vs social impact which is why 2050 was set as the target not 2030. The UK has gone further than most and thus we have some time c10yrs to recalibrate out progress so we don't further burden consumers with additional costs now. For example its plainly obvious that expansion of wind in Scotland is pointless for at least the next five years as transmission capacity is already acute so why add more and create even more costs from constraints. What we need is a coordinating programme to build out transmission and generation in unison.
Would lower gas prices make UK electricity cheaper? If so, then net zero is to blame for high electricity prices as it is keeping gas prices high by severely limiting UK domestic supply.
I suggest the following reasoning for why the UK givernment is loathed to restructure our energy cost system.
The higher cost of renewable energy (driven by gas marginal prices) gives its investors good returns and hence frames the ongoing investment stream into the UK's offshore wind generation expansion. This avoids the UK government having to pay for it, so they dare not upset the apple cart.
I’ll take this as a jokey piece of cynicism. Since 2017 at least most wind power and solar farm prices are fixed (they run on ‘contracts for difference’), They don’t earn anything over and above this. Earlier RE projects funded under the renewable obligation and feed in tariffs were getting the benefits of the high marginal prices but were subject to windfall tax which the fossil fuel generators did not have to pay
There not fixed as they get an annual indexation of their strike price so have done very nicely from the inflationary surge ironically caused by the 2022 fossil fuel price spike!
if you’re talking about CfDs, they only get CPI uprated increases in line with inflation - so the income stream is worth a lot less than it was.
Hows that its being increased annually so at least stays the same in relative prices. The issue is though the asset was built in Y but its now Y+how ever many years have elapsed but the initial cost hasn't changed so the profitability is improving every year. Some of the ROC assets are now getting over £200/MWh and yes they are time limited but many have upto a decade still left so they are going to benefit hugely. This isn't a good advert for renewables and reinforces why they aren't as cheap believe as the media only ever quote two things 1. the 2012 award prices and 2. the odd half hours when prices go negative less than 1% of the year.
And also some of the early offshore windfarms were very expensive during the oil cisis 2008-2011, so they needed a lot of support - but the investment has been successful in that costs have declined a lot - this has also ben true of solar PV and onshore wind.
Yes costs did decline on future projects although some of that has now been reversed but my point remains that these earlier ROC sites have benefited hugely from the rpi annual increases. Look at Greater Gabbard one of the 2011 group cleared 450m profit in the last two financial years ending March 24. Not bad going on assets in the books at 881m. ie they will have easily covered their capital costs multiple times over before the ROC expire. thats not what was intended
You are confusing Renewable Obligation projects with CfDs. The ROCs are updated in line with inflation and their relative incomes remain the same.
Agreed but there costs don't. Granted O&M costs do but the biggest burden on a windfarm is the cost of the debt and that is fixed so an increasing proportion of the income stream goes to the bottom line.
Can you elaborate on this with regards to "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."?
My (perhaps mistaken) understanding of that quote is if eg 90% of electricity is coming from renewables, and 10% from gas, the costs to consumer for the full 100% is set at the cost of the gas production. If the renewables electricity price is fixed low, and the gas electricity producers are only getting paid for their 10% contribution, who is profiting from the higher electricity charges?
Electricity is bought and sold on the wholesale power market every half hour. So what matters from the point of view of price setting is not the average composition of electricity production (concerning technology source) but what happens every half hour. Even if only 1% of power is met from gas during any half hour, the price of the most expensive component of that gas can set the price for all wholesale power in that half hour. Currently, most of the time, gas still acts as the price setter.
Thanks for the answer. It is still not clear to me, who profits in this case then if 99% of power is coming from renewables but the price is set high by the gas cost, and the renewables producers are only paid a fixed lower rate?
This is way more involved than is properly explained and it isn't as simple as gas sets the price for all the energy delivered. In the case of renewables most owners actually sell their energy through PPAs at fixed prices over potentially years ahead. So the gas price has little impact other than it influences the forward mkt pricing. However, unlike CCGTs renewable output is variable so a generator could find itself short or long on its commitments so has to deal with that by trading in the day ahead market and that is where marginal pricing comes into play. So a renewable generator sets its PPA at say 40% of output but has 80% available it will pitch its excess 40% into the day ahead market. They can afford to do this at a low price because they are guaranteed their subsidy payment (ROC/CfD) as long as they generate so they will then get selected in merit order and then whichever last generator that fills the demand hole sets the price. The other important thing here is most suppliers don't have enough or any generation so they are in the day ahead market everyday trying to balance their books. (c60-70% of daily usage is bought on day ahead market) so gas is always going to be called up unless its really windy on a sunny day. Then what you see is prices going negative because it doesn't matter to the renewables in that market they just need to get selected so they can generate then they can collect subsidies.
Then we get to the day of the races where NESO (grid operator) has to balance grid each half hour and critically ensure the transmission system isn't overloaded and is protected against failures. This is where the nonsense kicks in. Basically the transmission system hasn't been expanded to cater for all the wind built in N.Scotland so on even a medium wind day it gets overloaded so NESO have to constrain wind off the system and replace it with generation where there is transmission capacity. This happens to be CCGTs in middle/southern England who know this is coming and pitch their prices accordingly. NESO has to buy from them as well as pay the windfarms to switch off!! You couldn't make it up except OFGEM did as as they have created this situation by not allowing grid expansion when it was proposed. They've now flipped the other way and proposing an over expansion what we really need is CEGB MkII where new generation and transmission is coordinated.
Anyhow to answer your question renewables benefit from this as much as gas stations and be under no illusion that windfarms under ROC arrangements are doing very nicely from it.
Energy is contracted between generators and suppliers often via middle men energy traders as well. Most renewable companies actually sell their energy through PPAs which are fixed price contracts or ones that are linked to an index. Unlike a CCGT renewables have variability so they have deal with shortfall or excess and use the day ahead market to balance there position. Also c60% of energy used on a daily basis is acquired through the day ahead mkts (Nord Pool & EPX). It is in this market where marginal cost pricing set the rate each half hour.
some good detail here - of course the RO supported plant will be phased out over the next few years to be replaced by CfD supported renewables
at the moment, there's still around 25 per cent of the UK generation coming from natural gas on an annual basis. Owners of gas power stations such as RWE and UNIPER have earned substantial profits in recent years, especially in 2022-3. But at the end of the day, it is the oil and gas corporations that extract the gas in the first place that make the most money. The oil and gas companies have been pulling back investment in renewables. That will have a lot to do with the fact that they can make a lot more money quickly from selling oil and gas than longer-term investments in renewables
Do other European countries have different pricing mechanisms for electricity? How do they differ? Would they help here in the UK?
Is the amount of battery / hydro etc storage proportionately higher in other European countries?
Other countries do have different pricing arrangements- UK Steel is complaining about that in the quote- some other countries do have more hydro, especially Norway and Sweden. But battery storage deployment is a work in progress everywhere. But it is growing quickly
All good questions that are surely relevant? Please publish more information on this subject.
Progress with the electrification of our heating, transport and industries is completely dependent on reducing the price differential between gas and electricity.
If the price is right, change will happen. If it is not, then it won’t.
I agree, although some progress can be made through cross subsidies regardless of price differences between gas and electricity
Cross subsidies are only justified if the end game is Net Zero and will do nothing to deal with the cost drivers. The government cant have lower energy bills and net zero they are mutually exclusive. They need to make up their minds and take people with them.
Sounds like a dogmatic statement. technologies used to pursue net zero may exist anyway and may be cheap or becoming cheaper
Thats a possibility not a certainty though but if the imperative is Net Zero that becomes an irrelevance as the overriding factor is decarbonisation. Personally im agnostic on climate change but believe its highly probable that 8 Billion people are more than likely to be having an impact so its right we take action. However, a balance needs to be struck on rate of progress vs social impact which is why 2050 was set as the target not 2030. The UK has gone further than most and thus we have some time c10yrs to recalibrate out progress so we don't further burden consumers with additional costs now. For example its plainly obvious that expansion of wind in Scotland is pointless for at least the next five years as transmission capacity is already acute so why add more and create even more costs from constraints. What we need is a coordinating programme to build out transmission and generation in unison.
Would lower gas prices make UK electricity cheaper? If so, then net zero is to blame for high electricity prices as it is keeping gas prices high by severely limiting UK domestic supply.