Energy price fixing works against users
New system would ‘instantly cut bills’
THE UK has many ways to generate electricity – renewables, nuclear, coal, hydro and gas. Most are used, except coal, which is now only for emergencies.
The price of generating electricity varies greatly. Gas at current spot market prices costs about £611 per megawatt hour (MWh).
Nuclear is about £60 per MWh, hydro £50, and £50 to £140 for on and offshore wind and solar.
The electricity delivered to our houses is from a mix of all these sources. Bizarrely, that’s not how the wholesale price is set here.
It is decided on “marginal costing”, which works against consumers’ interests right now.
It means the wholesale energy price is set so the most expensive producer can make a profit from the sales they make into the wholesale energy market.
Gas produced electricity is the most expensive to produce – and likely to remain so for a long time. Its manufacturing cost, plus a fair profit margin, sets the wholesale price for all electricity, however it is generated.
It also means nuclear, hydro and renewables producers are paid the price that the gas generators get. This makes no sense at all.
Profits for nuclear and renewables companies, who usually make more than half of UK electricity, increase dramatically, and unnecessarily when a marginal costing price setting model is used to suit gas generators.
There is an added twist. Many renewable producers have contracts essentially fixing their prices, with Government taking on the risk of variation.
Excess electricity profits of nuclear producers on fixed-price contracts – due to prices based on the cost of gas production – go to the Government. A little-known fact. There is also a pricing problem in the gas market.
The UK meets about half its gas needs, the rest is bought internationally at a price we can’t control.
Yet the energy regulation system lets UK produced gas be sold at the international price for onward supply to UK consumers, again massively increasing the profits of UK gas producing firms wholly unnecessarily, and solely because of the pricing model used.
The talk is a windfall tax could correct this. But that ignores that many problems we face have been created by dire regulation. The Government could change that regulation – as the EU is said to be considering.
Instead of all producers, whether of gas or electricity, being paid the price of the highest cost supplier, imagine they received their own fair marginal cost of production and a reasonable profit.
Then, presume the energy regulator priced the onward supply of wholesale gas and electricity to the energy distribution companies on the basis of the actual cost to produce (including fair profit) of the gas and electricity actually sold into the market each day.
For much of the renewables and nuclear sector this will not be hard because of the Government price guarantees already in place.
For gas, all you need is to mix
internationally
priced gas with UK produced gas at its fair price of production.
The law would have to change. The resulting yelling, screaming and legal threats from energy companies would have to be ignored because customers can no longer afford UK energy prices.
This is a national emergency. We suspended existing laws for Covid and we could certainly do it now.
Broadly speaking, gas prices may fall by 40 per cent and electricity by 65 per cent. This move would not solve all the energy problem overnight. The remaining prices are still problematic and huge reforms to the market would still be needed. But there would be instant cuts in energy costs saving households budgets, businesses and many lives.
It would mean a reduction in inflation and the pressure for state interventions to save households, pubic services and businesses.
We need courageous politicians willing to change the rules. I live in hope that this might happen but I’m not holding my breath.
Richard Murphy is a chartered accountant and campaigner. He blogs at taxresearch.org.uk/Blog/ and tweets @RICHARDJMURPHY.
Change the rules so all producers only get a reasonable profit RICHARD MURPHY CALLS FOR CHANGE TO SYSTEM