- Approximately 50% of the recent rise in electricity bills may be attributed to the rise in natural gas and coal prices. The rest may be down to the UK government’s Green, CO2 abatement measures.
- Feed In Tariffs (FIT) are paid to those who have installed small scale renewable energy at home. There is no benefit for those who haven’t but everyone has to pay in the order of £10 to £14 / MWh to those who do benefit.
- Renewables Obligation Certificates (ROC) are paid to large scale renewables producers such as large wind farm owners. There is no benefit for those who don’t own a large wind farm but everyone has to pay in the order of £6.43 / MWh to those who do benefit and this charge seems set to only rise into the future.
- “Free” energy efficiency assistance provided by large utilities benefit those who have participated in the scheme. The assistance is not free since the cost is added to energy bills. Everyone has to pay for the minority who have benefited from the scheme.
- Levelised life cycle cost for renewable electricity is currently far more expensive than oil, gas and nuclear. Consumers are being obliged to pay for these higher costs.
- The cost of balancing the grid is currently being met by large utilities, the owners of coal and gas fired power plant. They are losing market share to the high cost renewables. Faced with losing market share one has to assume they are raising prices to maintain a modest level of profits (that are regulated). This is the hidden cost of running two parallel electricity systems (the existing conventional and the new wind based).
- The government has more pain planned for UK consumers in the form of carbon capture and storage (CCS) or carbon taxes that could easily add another 50% to the cost of gas fired electricity.
- The Brave Green World is resulting in a redistribution of wealth from those who do not own renewables generation to those who do. I suspect those who are paying most are those who can least afford it.
- Individually ROCs and FITs probably don’t add much to energy bills since the renewable electricity generated is such a tiny amount. But collectively the points detailed here combine to produce significant upwards pressure on electricity prices in a sociably inequitable manner.
- The UK and much of Europe does have an energy crisis in the form of diminishing supplies of indigenous primary energy production. The only scalable, affordable and sensible option to address that crisis is nuclear power perhaps supplemented by shale gas.
Last week I gave prominence to a piece by Simon Jenkins writing in The Guardian that produced a furious response among some of my wind developer associates:
Never in the history of public subsidy can so much have been paid by so many to so few…Simon Jenkins writing in The Guardian
This is, as usual, shockingly dishonest
This resulted in a 97 comment email thread on the old Oil Drum list with a vast amount of information on electricity prices exchanged. To what extent is the rise in electricity prices down to the rising cost of fuel and to what extent is it down to UK government and EU policies?
At the outset I need to declare that I am no expert in the electricity market and how it works. I have found it extraordinarily complex to understand – and this complexity in itself is a problem.
The cost of electricity in the UK
Figure 1 The cost of an average annual electricity bill in the UK according to the Department of Energy and Climate Change (DECC). The data are from spread sheet QEP221, tab 2.2.1 (St) and the Standard Credit rates are plotted. DECC have anchored real prices on 2005 which gives the illusion that 2012 real price was £421 when the actual price is £500. I think DECC need to explain the rationale for doing this.
In real inflation adjusted terms UK electricity prices are only marginally higher than they were in 1996 begging the question what all the fuss is about? The chart shows that for a decade, the population had grown accustomed to cheaper electricity but then the corner was turned post 2003 as rising fossil fuel prices bore down on the market. The financial crash and recession provided some respite (not a good remedy) but prices are now once again heading higher. And it’s not just electricity but food, natural gas, petrol and diesel have all gone up sharply in the last decade.
The cost of fuel
Most electricity in the UK (and throughout much of the OECD) is still generated by burning coal and natural gas. The cost of both of these fuels has shot up since the year 2000 (Figure 2) and this naturally impacts the price of electricity produced from these sources. In N America there is actually a glut of natural gas and coal and prices there are much lower offering the USA and Canada significant competitive advantage. Europe is in competition with E Asia (Japan, S Korea and China) for liquefied natural gas cargoes (LNG) and new supplies of coal and gas from Russia. The closure of nuclear power plants in Japan post Fukushima sent already high LNG prices even higher. This is the competitive energy market that Europe finds itself in.
Figure 2 European coal and UK natural gas annual average prices according to the 2013 BP statistical review of World Energy. The figures are not inflation adjusted.
With natural gas costing $2.71 in 2000 and $9.46 in 2012 (according to BP) this 3.5 times uplift in price must obviously feed through to the price of electricity. According to this rather outdated summary from the Committee on Climate Change (Figure 3) somewhat more than half of the rise in electricity prices between 2004 and 2011 can be attributed to the rise in fuel cost.
Figure 3 Slightly outdated from the Committee on Climate Change, apparently not advised by DECC. Much of the recent electricity price rise took place in the time interval 2004 to 2011 (Figure 1). I would urge DECC to provide their own breakdown of how changes in global market prices and policy changes are impacting electricity prices in the UK.
It is at this point that government action goes off on an extraordinary trajectory. Confronted with spiralling prices on the international energy market one may have thought that government would do all that it could to ease the pain for its hard pressed tax payers. In fact, the opposite has happened. Through pursuit of CO2 reduction targets and other environmental goals enshrined in the UK 2008 Climate Change Act and EU legislation, the UK and other European governments have set out to redesign the continent’s electricity generation infrastructure. The main focus is on the CO2 intensity of generation and hang the cost and other environmental impacts. It is this part of the story that is complicated.
Cost comparison of generating sources
In this report DECC provide figures (estimates) for the various generating options in the UK. The data from Table 6 of the report are summarised in Figure 4 (below). The numbers are for £ per MWh of electricity produced (1 million Watts produced for 1 hour). High, central and low numbers are given for each type and I use only the central numbers in this cost comparison. The numbers are “levelised costs” for the “full life cycle” of each generating type and therefore built in are assumptions about the life span of generating plant – wind turbines and gas turbines, and the future cost of fuel in the case of gas. The cost of borrowing money is built in at 10%. It is impossible to forecast any of this with any certainty more than a few years into the future.
Figure 4 Data compiled from table 6 of this report. See text for explanation.
The costs shown in Figure 4 are for new plant to be commissioned in 2014, 2020 and 2030 and do not apply to the cost of electricity from old plant that is already operating. A few key observations:
- For new plant to be installed in 2014, combined cycle gas turbines (CCGT) are by far the cheapest option despite high gas prices
- The cost of CCGT is projected to rise only a little in the future. This is surprising for me since scarcity of gas and even higher prices may persist with current policies
- The cost of nuclear shown is the strike price for Hinkley Point in 2023 and is not directly comparable with the levelised costs shown for the other categories.
- The cost of wind and large solar are forecast to fall sharply in the future. The cost of solar has been falling for many years and it seems a reasonable assumption that this trend will continue. But according to this report by UKERC the cost of wind has not changed much since 1997 and there seems little justification for assuming that this trend will change in future.
The bottom line is that cost forecasts such as this have so much uncertainty to be all but meaningless. But the provision of information that shows the cost of CCGT going up and wind coming down does serve to support government policy.
There are other cost estimates for the different electricity sources that are more or less alined with those published by DECC for example Mott MacDonald and UKERC final synthesis report. And so there seems little reason to doubt that the DECC figures for 2014 are in the correct ball park.
The UK government has rigged the electricity market so consumers are compelled to pay for and subsidise the most expensive forms of electricity generation currently available to us. Little surprise then that prices are going up.
How renewables “subsidies” work
An important point to make at this juncture is that there are no government subsidies sensu stricto for renewables. What exists is a set of market mechanisms that 1) gives renewable electricity priority to the grid and 2) guarantees a consumer paid subsidy for that electricity. For small generators such as home based solar photovoltaics the mechanism is called a Feed In Tariff (FIT) and for larger scale producers like wind it is called a Renewables Obligation Certificate (ROC).
Feed in tariff (FIT)
The easiest way to explain the FIT is to use an example of a home owner with a photo voltaic array mounted on the roof. Let us imagine the array is large enough to provide all of the home owner’s electricity during day light hours. Setting aside the capital cost of the array, the home owner gets “free” electricity during the day. But the home owner also gets paid the FIT by his normal electricity provider, currently of the order £10 to £14 / MWh – here’s a simple table that explains it all! The cost of the FIT (the “subsidy”) gets paid by everyone else. If the home owner produces more electricity than can be used then it gets sold to the grid for the going rate of electricity + the FIT. Great news for the owner of the solar array, bad news for everyone else.
Renewables Obligation Certificates (ROC)
The ROC is a government imposed market regulation that obliges the traditional power generators to buy renewable energy from the likes of large wind farm developers. It is a complex mechanism that I still do not fully understand. UK utility EoN provide this explanation:
The Renewables Obligation (RO) is a mechanism designed to support large-scale renewable electricity generation. Through the RO, the Government places an obligation on all licenced electricity suppliers, like us, to source a proportion of the electricity we supply to customers from renewable energy sources. All suppliers in England, Wales and Scotland are affected by the charge.
We meet our obligation by purchasing Renewables Obligation Certificates (ROCs), either from renewable generators or from the ROCs market.
The Department of Energy and Climate Change (DECC) sets the RO obligation level each year; this dictates the number of ROCs that suppliers – like us – are required to produce for each MWh we supply.
To help build a sustainable energy future we need to invest in and support power plants that can generate renewable energy, so we can hit ambitious Government climate reduction targets. Due to this, the UK is generating much more renewable energy than ever before, so the level of supplier obligation and consequently the cost to you – as our customer – has also increased. In the early years of the RO, the charge was relatively stable and predictable. However, future renewable energy sources, such as generation plant conversions (eg fossil fuel to biomass) and large offshore windfarm developments, have less predictable capacities and delivery timescales, making forecasting for future years difficult. The graphs below show how quickly the RO charge has increased over the last ten years and our predicted view for the next three years*:
Figure 5 History and forecast of the ROC and buy out price provided by EoN.
If you are not following along, and I’m struggling, perhaps it is simplest to look at the graph (Figure 5). The ROC is determined by multiplying the column on the left by the column on the right. In 2012 it was 0.158*£40.69 = £6.43 / MWh. This gets paid to the renewables developer and is added to your electricity bill. EoN’s forecast shows ROCs heading higher and I imagine they will keep going up until the people revolt – at the ballot box.
The ECO Green Deal
The UK has had a series of initiatives designed to help householders to become more energy efficient, not because energy efficiency is an essential common sense thing to do in our current energy “crisis” but because it is believed that energy efficiency will lead to reduced rate of CO2 emissions, which it won’t, but that is a story for another day. The Green Deal is a straight forward government backed scheme to provide interest free loans to assist families with energy efficiency measures – insulation, new gas boiler – fine!
The Energy Companies Obligation (ECO) is the more insidious scheme operated under government diktat through the six big UK power utilities (Scottish and Southern Energy (UK), British Gas (Centrica, UK), EoN (German), Scottish Power (Iberdrola, Spanish), NPower (RWE, German), EDF (French). The ECO is like earlier schemes, where “free” help is offered to home owners to improve energy efficiency. Its just that the “free” help gets added to electricity and gas bills.
The ECO will be funded by energy suppliers.
Those who have taken up the schemes benefit through lower energy usage that should outweigh the increase in energy bills. Those who haven’t, don’t have any benefits but have to pay for those that do.
The costs of various generating technologies shown in Figure 4 misses what is likely to be one of the biggest costs of introducing intermittent renewables onto the grid and that is the cost of load balancing. Figure 6 shows quite clearly the impact of intermittent wind on the distribution of power supply and how gas and coal fired power are wound down to make way for wind when the wind blows – this is the plan to displace use of fossil fuels. Without extremely large scale energy storage (that would also add significant costs) wind cannot exist on the grid without fossil fuel load balancing. The reward for the fossil generators for providing the invaluable load balancing service is loss of market share. I believe this is likely to be one of the main upwards pressures on electricity prices today. This is bonkers capitalism.
Figure 6 The share of UK electricity generation in the UK for the month of November 2013. The “other” category sums inter-connector imports and exports, pumped storage and hydro. Data from the truly excellent Gridwatch.
A leaked board room report from a large European utility said this:
The severe crisis impacting [our company] and the entire established energy industry is primarily a crisis of the power generation business. The massive erosion of wholesale prices caused by the growth of German photovoltaics constitutes a serious problem for [our company] which may even threaten the company’s survival. The only solution to this problem is a reform of the market’s ground rules, primarily to safeguard conventional generation by an adequate remuneration for the provision of capacity.
The curious thing here is that high cost photovoltaics are lowering wholesale prices in Germany – leaving me somewhat confused. Presumably everyone is making a loss, unless of course market mechanisms transfer money to renewables providers enabling them to turn a profit.
The government is only getting started with its Green mania and has lots more pain in store for the populace. In particular the introduction of carbon capture and storage (CCS) should be particularly effective at sending electricity bills way higher. And there will be no way out for utilities, they will either have to pay for CCS and pass this cost on to consumers or pay for being allowed to vent CO2 to the atmosphere and pass that cost on to consumers.
Table 10 of this report shows the future (2019) cost estimate for gas (CCGT) minus the carbon tax to be £61 / MWh* while gas (CCGT) fitted with CCS to be £95. So consumers of gas fired electricity can look forward to another 56% hike in their electricity bills to fund this madness.
* note that this number is at variance with the figure given in Table 6 of the same report – £82 estimated for 2020
Futility and failure
The Green effort so far in the UK has resulted in wind contributing about 2.3%, solar 0.15%* and biofuels 0.16% of all the energy we use (Figure 7). All the economic pain and landscape degradation inflicted so far is making a negligible impact on the total energy budget. To make any significant impact the current levels of deployment would need to be multiplied 10 to 20 fold. Do any of our main stream political parties really want to inflict this on Britain?
Figure 7 The relative contributions of various energy sources to the total primary energy consumed in the UK in 2012 according to the BP statistical review 2013. Note that wind is converted on the basis of thermal equivalence assuming 38% conversion efficiency in a modern thermal power station, i.e. the amount of energy generated is grossed up to make it comparable with thermal generation where there are significant waste heat losses.
Since the Kyoto Protocol was adopted in 1997 the combined actions of European States has had negligible impact on European emissions and no measurable impact upon global emissions (Figure 8). Current energy policies have taken on the form of a futile crusade.
Figure 8 Global fossil fuel consumption expressed in millions of tonnes of oil equivalent (mmtoe) from the 2013 BP statistical review of world energy. Mmtoe converted to CO2 by assuming CH2 as general formula for oil with molecular weight=14 atomic mass units (amu) and a molecular weight for CO2=44 amu. The arrows show landmark dates in the Kyoto process. During this period, CO2 emissions accelerated. The only process to halt the relentless rise in CO2 emissions is spikes in the oil price causing recessions in 1974, 1979 and again in 2008.
The UK and other European governments need to find a way of supporting energy efficiency measures that are equitable. They also need to wake up to serious energy security issues as indigenous supplies of oil and gas decline. Intermittent renewable electricity, in particular wind, does not provide energy security. Focus also needs to turn to the provision of affordable energy to combat spreading energy poverty. Current pursuit of a renewables based carbon free vision is failing at every level. Nuclear power provides the only scalable, affordable, secure and sensible way forward, albeit with some manageable risks attached. Shale gas and oil may help provide a bridge to that nuclear future.
The author does not own any small scale renewables, apart from a couple of wood burning stoves, and therefore does not benefit from FITs. I have considered installing photovoltaics on a number of occasions, and having read once again how heavily rigged the system is in favour of participants it seems foolish to not participate. A major barrier for me is the fact that northern Scotland is cloudy and receives little direct sunshine in winter when energy demand is highest.
I am interested to hear in comments from folks around the UK and Europe who have installed solar, what the costs and benefits actually are.
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