With a snap election called for early July the difference between the main political parties appears narrow. However, their respective views on the energy system are very different.
The Conservatives would like to see a new fleet of gas-fired power stations come online, whereas Labour will seek to fully decarbonise the grid five years earlier than the Conservatives. The adoption of Conservative policy will mean higher electricity bills for consumers. David Cunningham, director of cleantech & renewables at Gneiss Energy, argues there are better and cheaper ways to keep the lights on.
In March the incumbent UK government announced a slew of new gas-fired power plants to deliver spinning reserve to cover the GB grid for those windless winter days with no sunshine.
At the time, Energy Secretary Claire Coutinho said: “There are no two ways about it. Without gas backing up renewables, we face the genuine prospect of blackouts… There are no easy solutions in energy, only trade-offs… As we continue to move towards clean energy, we must be realistic.”
On the face of it, the argument appears sound, however evidence would strongly suggest otherwise.
With increasing penetration of cheap renewables onto the grid, the cost of marginal gas generation will become increasingly expensive and will drag up consumer bills.
This is a genuine paradox – more cheap renewables equals higher electricity bills – and is an unfortunate consequence as we advance intermittent green power across a grid system originally designed for dispatchable power sources utilising coal, gas, nuclear and hydro.
As Coutinho says, trade-offs are required, but if we want consumers to truly benefit from the cheapest forms of electricity (e.g. renewables) and fully embrace net zero, then some new approaches are required.
Renewables are cheap
No one can now dispute that renewables are cheaper than fossil fuel generation, as evidenced by the graph below showing the LCOE of different technologies. We now see capacity additions outstripping their fossil fuelled equivalents globally.
By 2025, renewables are on track to overtake coal as the largest source of global electricity generation.
The UK is in the vanguard. In 2023, renewables supplied 47% of the country’s power, up from just 2% in 1991. Low carbon nuclear power supplied 13%, while the remainder was fulfilled by gas suppling 31%, coal circa 1%, and 7% imported via interconnectors from the continent.
However, despite the increasing penetration of low-cost renewables, over the last five years the UK socket price for domestic electricity has risen at a compound average growth rate of 12.8%.
In the UK system, non-fueled power generation from wind and solar has short-run marginal costs close to zero and will always undercut fueled systems in the merit order system (i.e., the cheapest power is dispatched first).
This is all well and good when there is plenty of wind and sun – but if there is not enough to go round, then our spinning reserve gas plant has to fill the balance. This then sets the price for all electricity delivered in that half hour period.
Over the last five years, gas delivered at the National Balancing Point (NBP) – the virtual trading point for UK natural gas – has increased from 34.4p/therm to 76.0p/therm delivering a compound annual growth rate (CAGR) of 17.2%. At the point of use over the same period, gas prices have a compound average growth rate of 16.4% while electricity is up 12.8%.
The balancing mechanism cost shown on the above chart is also playing an increasing role inflating electricity costs to the consumer. The UK’s National Grid, the electricity system operator, is tasked with constantly balancing supply and demand for electricity on the grid. It operates in real-time, meaning adjustments are made throughout the day to ensure a stable flow of electricity.
However, because of an increasing share of low-cost intermittent renewables displacing gas to power, there is now greater risk in matching supply with demand. In the event where forecast demand is not matched by generation, National Grid will make a call for power via the balancing mechanism at a premium price from dispatchable sources, which are largely made up of carbon-emitting gas-fed power generators and the heavily subsidised, inefficient Drax biomass plant (circa £800 million per annum).
These balancing mechanism costs were £2.9 billion in 2023 (compared with £4.2 billion in 2022 which can be directly linked to the gas price spike after the Russian invasion of Ukraine). The combination of balancing mechanism costs plus constraint payments due to insufficient grid infrastructure are equal to £139 for an average electricity bill payer, representing 11% of the annual consumer electricity bill in 2023.
It is therefore no coincidence the marginal price setter of gas to power in the merit order has a strong influence on the cost of delivered electricity in the UK.
Consumer Utility Costs
To evidence the cost of electricity to the consumer we have provided a breakdown based on Ofgem data from Q3 2023. Electricity bills are built up from a number of components which vary over time impacted by economic activity (demand for power), inflation, infrastructure spend (e.g. grid upgrades) and commodity price movements from gas to power. The four main elements which make up an electricity bill are: wholesale costs to generate power; grid costs covering transmission, distribution and balancing costs; environmental and social obligations including net subsidies to renewables; and operating costs.
Data from the UK government Department for Energy Security and Net Zero (DESNZ) demonstrates the impact of gas to power pricing feeding through into the retail utility bills as the marginal price setter combined with increased gas heating costs.
The spike of 2022 was a consequence of the Russian invasion of Ukraine with the panicked switch from piped gas to LNG, resulting in abnormal wholesale and balancing systems costs.
The commodity price spike from gas to power led to UK government intervention through the introduction the energy price cap to keep a lid on overall consumer bills. Despite this intervention, around 28 energy suppliers collapsed with the liability (£2.7 billion) socialised across bill paying consumers.
Balancing act
As renewables take increasing market share in the UK, there will be economic consequences to keep existing and new gas generators online to stabilise the grid as well as provide backup in periods of low wind and solar resources.
Although balancing costs fell with gas prices in 2023, future gas turbines will be required to deliver less primary power and only balancing. This means that not only will the requirements for balancing rise, but the balancing market will have to bear the capital cost of turbines, driving prices much higher.
This problem will only increase as renewables take more market share. As gas to power capacity utilisation shrinks, the cost of balancing the grid commensurately rises.
The impact of reducing gas to power utilisation is increased capacity payments to these generators, with the last unit of demand being fulfilled by the most expensive power delivered.
Source: Gneiss Energy modelling assuming 8.5% owner IRR (unlevered), NBP prices indexed, capex opex numbers from BNEF.
Aurora Energy Research estimates that 5GW of unabated gas-fired back-up capacity will be needed at a cost of £5 billion, which would put an average of £178 on each household’s annual energy bill for a decade.
These costs will only increase when gas-fired generators are required to capture and store their carbon.
In reference to Coutinho’s comments about the need for backup power from gas, this should be put into context with renewable energy resources across Europe. Mereological data confirms periods of little to no energy generated by wind and solar is commonly known as dunkelflauten. Across Northern Europe these events occur on average between two to ten times a year, or between 50 and 150 hours on average per month during the peak winter months of November, December, and January (3.4% annually).
There are sufficient backup sources from waste biomass and biomethane to support these periods combined with increasing pumped storage, hydro and untapping 11GWs of predictable tidal power within the UK.
Labour’s plans involve not only the creation of a new UK energy company to crowd-in the private market but to also move the net zero grid to 2030. Ed Miliband is keen to use the tools at his disposal to drive grid decarbonisation which will likely mean increased allocations under the CfD mechanism which will no doubt involve ramping up predicable dispatch from the likes of hydro, pumped storage and tidal.
So, although UK Energy Secretary Claire Coutinho was right to say that trade-offs are required, is building an expensive new gas fleet, which will only increase bills, the best way forward?
It will not be surprising that redoubling our efforts to make our grid fit for a net zero future will be key. But it is not only on the power generation side—in tandem, we need a much clearer national strategy to stimulate grid digitisation and demand-side management solutions, which will enable the drive to electric heating.
Technology at our disposal includes:
- Increase the size of the grid system, providing capacity to transport large volumes of renewable power from a lowest cost location (e.g. highest wind speeds, highest solar irradiance).
- Digitise the grid and infrastructure between low and high voltage connection points plus end users.
- Demand management – turn up demand and turn down to compensate for variable power from renewables.
- Bi-directional grid capability – a must for vehicle-to-grid (near zero marginal cost) and rooftop solar.
- Heat batteries to time-shift demand and decarbonise hard-to-abate gas-fired heating.
- Energy efficiency and insulation.
Demand management and bi-directional power conditioning equipment will be key to removing the need for three-phase signal power from fossil-fed thermal power plants, which would allow for a greater share of renewables on the grid in step with greater grid utilisation.
If we want a decarbonised and fully electrified energy system, the technology is available to remove the need for an expensive balancing mechanism and backup power supported by the mass burn of wood chips and gas-fed power generators.
If we manage this, we can deliver a renewables-dominated grid that can displace higher-cost unabated/abated gas and become the low-cost marginal price setter, delivering lower prices at the socket.
If not, we will not solve the paradox of low-cost renewables resulting in higher prices for consumers – and will fail to convince voters that net zero is a price worth paying.
