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Ember: Fossil fuel costs driving force behind UK electricity price increases

Thinktank Ember has detailed how rising fossil fuel costs account for 86% of UK electricity price increases. Image: Getty

Thinktank Ember has detailed how rising fossil fuel costs account for 86% of UK electricity price increases. Image: Getty

The need to switch away from imported fossil fuels to domestic renewables has been thrown into the spotlight by a new analysis from thinktank Ember.

Rising fossil fuel costs account for 86% of UK electricity price increases, with this trend set to continue into the winter, meaning the need to switch from imported fossil gas to domestic wind and solar generation “has never been more apparent or urgent”.

The UK relied on fossil gas for 37% of its electricity production in 2020, making it unsurprising that the exponential rise in fossil gas prices has resulted in substantial increases in UK electricity prices, according to the thinktank.

UK power prices have tripled year-on-year from £36/MWh in August 2020 to £107/MWh in August 2021, while the cost of generating electricity from fossil gas, including the associated carbon allowance costs, has also tripled to over £100/MWh in August 2021 from £29/MWh in August 2020.

The price of carbon allowances has also risen over the same period from £42/tonne to £66/tonne, although its contribution to the increased cost of electricity generation is minimal compared to the fossil gas price.

The average day ahead price of fossil gas has more than doubled from 45p per therm in December 2020 to 109p per therm in August 2021.

This increase is due to a number of factors, including a cold northern hemisphere winter which depleted fossil gas storage levels, increased demand and prices in Asia which resulted in liquefied natural gas shipments being delivered there rather than to Europe, global demand having risen as COVID-19 restrictions were lifted and fossil gas imports from Russia and Ukraine not having stepped up to meet the increase in European demand.

Ember pointed to the latest renewable generation costs from IRENA which show that generating electricity from existing UK fossil gas power plants is three times more expensive than from new onshore wind and almost twice that from new solar.

Ember's push for domestic renewables over fossil gas imports echoes similar sentiments expressed by the Department for Business, Energy and Industrial Strategy yesterday (20 September), stating that the UK’s exposure to volatile global gas prices underscores the importance of the government’s ambitions of building a “strong, home-grown renewable energy sector”.

It comes during a period of consistently record-breaking power prices in the UK, with the GB imbalance price hitting £4,000/MWh on 9 September, and the day-ahead auction for 14 September clearing at new records across the board, with prices at the peak being £1,675.30/MWh for EPEX and £1,750/MWh for Nordpool.

Concerns for the winter period are mounting as a result, with Phil Hewitt, director of power market analyst firm EnAppSys stating that the high prices alongside an outage of 1GW of capacity of the IFA1 interconnector as a result of a fire could put the UK in a "risky position for the winter".

This follows National Grid ESO itself warning of tight margins due to supply uncertainty in an early view of its winter outlook, released in July.

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