Disruption in the energy markets caused by war in the Middle East has led to calls for the UK government to decouple electricity prices from gas to boost the potential of renewable energy.
Britain’s expansion into renewable energy has been “nothing short of remarkable”, said The Sunday Times, but it is also a “nightmare to manage”. Despite the UK’s energy capacity predicted to be “three times” higher than demand by 2035, it will be “completely useless” if problems with “Dunkelflaute” – the “haunting” German name for the “dark calm” of scarce winds and low light – and energy transportation networks are not addressed.
What is the system?
The UK uses a “marginal pricing” system to buy electricity from the wholesale market, which is similar to the trading seen in commodity markets such as food, oil and gas.
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In this system, electricity generators – such as power plants – “make ‘bids’ to sell electricity at a particular price”, said Carbon Brief. This allows the system to “match buyers with enough supply to meet their demand”.
These bids, depending on the estimated price, are placed in a “merit order stack”, ranging from cheapest to most expensive. This usually means cheaper, renewable energy is the first to be used.
Once the system is established, it will “accept the cheapest first and move upwards until enough is secured” in order to satisfy the demand, said Sky News. However, all providers get paid the same prices, which is “set by the last most expensive bid used to meet demand. In the UK, this is almost always gas-fired power stations, which are typically the most expensive source needed to fill the final gap in supply.”
What are the consequences?
There are some “obvious challenges” in the marginal pricing energy system, said University of Oxford researcher Hannah Ritchie on By the Numbers. As electricity prices are in effect “coupled” to gas prices, countries and their consumers are “at the whims of international fossil fuel markets. It’s hard to shield people from volatile changes in prices.”
The cost benefits of renewables are “not properly passed on to consumers” in this system. And this is not just about money. For many it makes “little sense” to support the rise of renewables if they are not making much difference to energy bills and the system disincentivises consumers from going green.
Fundamentally, for as long as electricity prices are coupled with gas, they will be “volatile” and “often high”, which “erodes a lot of the economic benefits” for consumers.
What are possible alternatives?
If electricity prices were decoupled from gas, household bills could be reduced by up to £203 a year, according to the think tank Common Wealth, said The Guardian. Its report proposes an alternative “single buyer model” that would remove low-carbon generators – renewables and nuclear power production – from the wholesale market. Instead, they would be paid “fair, fixed prices”. Gas would be placed in a “strategic reserve” to be used only when renewables could not meet demand.
Another option would be to introduce power-purchase agreements, which can have a “similar effect” to decoupling from gas, said Carbon Brief. Large users of energy could sign direct contracts with energy suppliers for a fixed price. In turn, this would take some electricity out of the wholesale market, “diluting the impact of gas prices”.
If we want lower prices organically, “we need to avoid turning gas on”, said Ritchie. By lowering demand in the system, we could theoretically bypass the need for gas altogether. Likewise, by improving the supply of renewables into the market, we could reduce dependency on fossil fuels. “Of course”, there is one fundamental problem: renewables often needs “backup to balance out the times when they’re not generating”. So “having other forms of energy storage is important”.
