The Untold Story: How Gas is Quietly Making Electricity Unaffordable

A guest blog by Barry E. James of Humane Energy

The rocketing price of gas is driving up the price of electricity going into the grid - including from sources that do not use gas!

How can this be?

The rocketing international price of gas is driving up electricity prices in the UK too. Less than half of UK electricity is produced from gas, but gas is ‘amplifying’, driving the price of electricity up for all sources. Adding significantly to the pain (1) (Up to 33% to be exact). 

Here's why:

Image credit Good Energy Blog "Why does the price of gas drive electricity prices, including renewables?"

Gas makes up around a third of the cost for a typical household bill, electricity two thirds. For those who use electricity for heating and/or cooking it can be much more.

Electricity is much more expensive per unit of energy.  (Eg. after the most recent Ofgem cap 52p/kWh for electricity and 15p/kWh for gas - almost three and a half times as much). This is despite the fact that electricity is much cheaper to produce from all other sources apart from oil. See above.

So electricity costs to consumers and businesses are a major fact driving the crisis - despite the fact that it is the international price of gas that is skyrocketing out of control. 

How can this be?

 This is because, believe it or not (and yes both Ofgem and the government are well aware of this and both Boris and Rishi have mentioned it recently), electricity generators are, in effect, paid on the basis that all the electricity delivered to the grid was produced by gas, even though it produces only a fraction. Again, see above.

This is due to a pricing mechanism that is failing us because it’s based on assumptions made obsolete by the gas price crisis. Principally assuming that the costs for electricity generated by burning gas would on the same scale, be similarly priced to that produced by other means.

As this blog from Good Energy explains, the UK has a single wholesale market for electricity which uses a ‘marginal price’ algorithm (involving the 'Merit Order') setting prices. Which means that the worst (least meritorious / most expensive) form of energy supplied into the generation mix at anyone time determines the price for every unit supplied to the grid!

The practical effect of this is that the wholesale (and so retail) price of electricity to the grid is set by the price of electricity from gas.

I've heard this variously described as 'insane', 'bonkers' (Boris if memory serves) and 'criminal' (by a leading UK energy expert). It is!

It's a major reason why not just gas but electricity prices have also skyrocketed. Despite the fact that the majority of our electricity is either captured (at near zero marginal cost) or generated by other means.

Frankly emergency measures are called for and it should have been suspended, at least two months ago when all this became clear... and FIXED by now.

Instead Ofgem have launched a lengthy consultation that will take months to complete and longer to lead to any action.

There are a range of emergency measures that government could take now. These include placing restrictions or caps nearer the sources of the problem - including on the price paid to generators.

This would significantly lower the price of electricity - helping small businesses (many of which are struggling and may not survive as a result of all this) as well as households.

This could be done using existing mechanisms - such as 'Contracts for Difference' aka CfDs. Keeping prices within reasonable sight of the cost of production.

As things stand today it will probably have to get much worse before we see any action. Whether that's because of the strength of the energy lobby or not I will leave to your imagination... but I do have it on very good authority that emergency changes could be made in days rather than months... if the political will was there.

The Humane Energy project (which is part of Humane Economics) is working hard on this issue as a matter of urgency so watch out for more in the next week or two as the new government take the reins…

To stay in the loop JOIN ME here for more on how we get to Humane Energy.

(1) Look out for the forthcoming Humane.Energy report which details how this 'amplification' can be fixed.

Barry E James, Founder Humane Economics