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Are energy bills going upEnergy price cap explained | Ofgem
- Are energy bills going up
Not for the first time, global energy markets are in turmoil. Internationally traded gas prices more than quadrupled in In their wake, many energy suppliers have gone bust and household bills across Europe are set to soar. Some of the causes of sky-high energy bills are unavoidable — there is little that most governments can do about the wholesale price of gas itself. Fossil fuel companies make huge investments that take years to mature, breeding periods of moderate prices followed by supply squeezes when prices rocket.
Gas prices softened over the previous decade and the arrival of the pandemic in depressed demand. Regions without domestic gas supplies or which have depleted most of their gas reserves in recent decades get a lot of their gas by importing it. European periphery countries, including the UK and many parts of the Mediterranean, assumed they could rely on global supplies of liquefied natural gas.
But tankers from the big gas producers such as Qatar can turn to Europe or Asia depending on who pays the highest price. Now there is a scramble, and Asian demand dominates.
The knock-on effect to energy bills is amplified in the UK and other countries in Europe where electricity is organised through wholesale markets in which generators bid to operate if the price is right and in which most homes rely on gas for heating. Up to half of the rise will come not from the gas you burn, but from the impact of gas on electricity prices.
So why is a gas price crunch being felt just as strongly in electricity bills? Renewables generate over a quarter of UK power, nuclear and imports another quarter. The last fixed-price government contracts offered for offshore wind energy in Britain — hardly the cheapest of renewables — were under 5p per kilowatt hour kWh.
Households are paying for their electricity several times what it now costs to generate and transmit it from the cleanest energy sources at scale. The design of electricity systems has failed to catch up with the revolution in renewable energy. Competitive electricity markets, established in many countries to try and minimise costs, are actually suffering the greatest price rises.
This is not because governments elsewhere use taxes to subsidise electricity though some do , but because in wholesale electricity markets, the most expensive generator sets the price. Governments offer long-term, fixed-price contracts to generators for their output of renewable energy. This has been the biggest driver of investment, while competitive auctions of these contracts, to companies keen to build renewables, have slashed building costs the most. In contrast, households and other small consumers can rarely buy fixed-price contracts more than a year or two ahead, given the uncertainties in wholesale prices along with governments encouraging competitive switching between suppliers.
The electricity generated from renewables contracts is fed into the rest of the system, which balances the variable output from renewables by generating more or less from conventional sources.
That adds about around 1p per kWh to the cost of renewable electricity in the UK and Europe. Even accounting for this, the gap between cheap renewables and expensive final electricity is becoming unconscionable. Countries are likely to continue burning gas for some years.
But with the drive to cut emissions and the advent of cheap renewables, electricity is likely to dominate the energy system in future, powering heat pumps, electric vehicles and more. This golden age of electricity cannot arrive as long as the price of electricity is decided by fossil fuels and their carbon costs.
What would electricity markets appropriate for renewable energy look like? In research I led with colleagues on electricity prices , we proposed a green power pool which would aggregate long-term contracts with renewable energy generators and sell the power on to consumers. The price would mainly be set by the actual investment costs of generators, rather than gas-driven wholesale markets. To minimise those costs and emissions , contracts could give discounts to customers who can use electricity outside of peak times, or those with two-way electric vehicle connections who can sell power back to the grid.
But new electricity needs a new market — one which cuts energy bills at the same time as decarbonising the energy system.
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Michael Grubb , UCL. Events More events.
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