It is one of the world’s great mysteries: if wind and solar energy are supposed to be so cheap then why does the UK – which generates a higher proportion of its electricity from wind or solar than virtually any other developed country – have higher electricity prices than any other member of the International Energy Agency? There are several reasons for this, in fact. Wind and solar energy are only cheap if you look at the marginal price of generation, which is very low because the wind blows and the sun shines for free. Add on the cost of back-up and/or energy storage to make up for the gaps in generation and it becomes a very different story.
But Citizens’ Advice claims to have come up with another reason for Britain’s sky-high electricity prices. It claims that ‘network companies’ – such as National Grid, UK Power Networks and Scottish Power – which between them operate the grid, have enjoyed a £3.9 billion windfall because Ofgem over-estimated the cost of servicing the debt on their investment.
Like so much concerned with supposedly ‘privatised’ utilities, the business of distributing electricity around the country is not quite the free market many might think. It is a heavily regulated structure in which Ofgem effectively decides how much profit the distribution companies are allowed to earn – through what is called a price control financial model. One of the inputs into this model are assumptions about what the network companies need to pay in interest on their debts. It is this which Citizens Advice contends Ofgem has got wrong, over-estimating the cost of interest payments to the tune of £3.9 billion over the past four years. This includes excess profits which Citizens Advice says have been made running the gas network as well as the electricity network.
That is not the end of the perverse workings of our electricity market. There is also ‘marginal cost pricing’, where all suppliers of electricity at any one time are paid the same rate. The wholesale market is divided into half hour periods. For each period, the operators of wind farms, solar farms, nuclear plants and gas plants all submit bids to provide energy at a certain prices.
The market accepts the bids in order from low to high, stopping when sufficient power is being generated. But then all chosen providers get paid the same, regardless of the bids they submitted. If the last bid to be accepted is from a gas peaking plant which is charging an elevated rate because it is only going to be switched on for a few hours to counter a shortage of electricity, then we are all going to be paying through the nose.
It is rather as if you go to a supermarket looking for twelve bottles of Prosecco, but when you get there you find the shop only has eleven bottles. So you put a bottle of vintage champagne in your trolley to make up the twelve – and then when you get to the checkout you are charged for twelve bottles of vintage champagne.
Wind and solar energy never were as cheap as Ed Miliband likes to make out – because much of the cost of these forms of energy comes in the form of upfront capital costs; wind and solar prices are very sensitive to interest rates. When rates were on the floor, as they were for a decade, the cost plummeted. When rates started to rise, so, too, did the cost of wind and solar energy – very sharply.
But there are other factors in the high cost of Britain’s electricity which are only gradually coming to light. We will not have cheaper energy until they are resolved.
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