We are at war. Shameful profit in the energy market justifies radical intervention
The problem is basically this. The price of fossil fuels, which still accounts for about 55 per cent of UK electricity generation, is determined by the usual rules of supply and demand. If supply is restricted, the price escalates. However, in almost all other forms of electricity generation, be it wind, solar, hydro or nuclear, operating costs are essentially constant and, in the case of renewables, close to zero once capital costs are met. In any case, they are completely unaffected by changes in the cost of fossil fuels. Unlike gas, the energy source is free.
So, in theory, this generation capacity – about 45% of the total as it stands – should provide a strong counterweight to the exorbitant cost of gas generation. just no. Instead, the wholesale price of electricity, wherever it comes from, is dictated by the marginal cost of the more expensive product – most recently gas-generated. Separating these rates should be a top priority for the new prime minister, but it is difficult because it is bound to involve eliminating many of the existing contacts.
Let it be. Must needs. In the current situation, wind, solar, and nuclear have become major beneficiaries of Putin’s war alongside gas suppliers, yielding returns beyond the dreams of greed, and ahead of anything ever imaginable. Wind storms of this magnitude are unprecedented and unacceptable.
The latest offshore wind contract price, for example, was £48 per megawatt-hour. Wholesale gas is currently sold for nearly ten times that amount. In any case, most non-fossil fuels for electricity generation are fixed and low cost. But it does not affect the price of electricity.
The problem is that for the bulk of installed renewable energy, the old Renewal Commitment Certificates (ROC) system still sets the rates that can be charged. In order to revive the renewable energy sector, the government has approved large green subsidies. The providers can then charge whatever they can get in the market at the top. At the moment, this price is very high. The same applies to the legacy of nuclear capabilities.
This system has since been replaced by a “contract for difference”, in which a fixed price is set to be determined by auction. If the market price falls below the strike price, consumers make up the difference. But if the price goes up, the producer pays the consumers.
Government officials believe that in current circumstances, with market prices skyrocketing, Contracts for Difference (CfDs) are already cutting £20 off the average bill, which is a small amount in the context of the penalizing volume of gross bills, but you shouldn’t sneeze in. Even Hinkley Point looks cheap at today’s prices, with a differential strike price of £93.5 per megawatt-hour in 2012 prices.
Eventually, all of the old ROC’s power supply will be ported to the CfD system, but it will take time for these contracts to expire. Analysis by Adair Turner, chair of the Energy Transition Committee, concluded that not all old contracts will expire until 2030. The government hopes to voluntarily persuade suppliers to switch to the new CfD system early. Good luck with that, and in any case, negotiating such a change will take several months, even years. need now.
The law of contract should never be slightly broken. The confidence in the courts to enforce the law is partly what makes Britain an attractive place to invest. But millions of families are threatened by poverty. Meanwhile, the broader economy and public finances are facing ruin. This is war, and in war the normal rules do not apply.
It seems to me that there is also a strong case to put an end to the price of North Sea gas, since the same exorbitant levels of profits are being achieved. The alternative is a windfall dividend tax to pay grants, as suggested by the Labor Party, but this would be complicated to administer fair and broad to avoid.
Pricing is the most direct and effective approach. Again, this may involve cheating existing contracts. Domestic producers will also have to be prevented from selling their gas abroad at higher prices. Radical stuff, but there are no good alternatives that I can see.
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