Energy bills: Couple discuss the increase in their prices
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Household energy bills have been far more costly for millions of Britons due to an “injustice” in the electricity market, analysis has revealed. In fact, bills have risen collectively by up to £7.2billion across two years, according to a report by the Carbon Tracker Initiative (CTI). This is because the market system forces energy suppliers to pay the highest price for wholesale electricity, regardless of how much it costs to generate.
This means lower-cost renewable energy is ending up just as expensive as pricey fossil-fuel generated electricity. As a result, energy bills have remained at record highs.
While gas-fired power stations are the most expensive way of generating electricity, they only account for around 40 percent of all electricity used by British homes. However, households are forced to pay over the odds for power generated any other way.
The CTI, a not-for-profit climate think tank said that electricity bills in Britain would be far cheaper if an average price was used instead of a bidding process.
Its analysis found that an average price for wholesale electricity would have made the bill in the two years from 2021-22 £7.2billion cheaper. That is the equivalent of around £250 per household.
Wholesale electricity costs are currently set by a bidding process. This involves each generating company telling suppliers what it would be willing to accept to produce a unit of power.
When the right weather conditions like strong winds help the UK meet demand for electricity through renewables, the wholesale cost drops to close to zero, according to the Department of Business, Energy and Industrial Strategy (BEIS).
But when this is not the case, the wholesale cost is set at the level that all providers will accept, which is the highest bid.
Prof Paul de Leeuw, from the Energy Transition Institute at Robert Gordon University, explained to Express.co.uk: “UK electricity prices are determined – every 30 minutes – by the cost of the last unit of energy acquired to meet the UK’s electricity demand and the electricity required to balance the grid.
“Most of the time, the marginal electricity required is generated by using gas-fired power stations. This means lower-cost renewable energy is sold at the same price as more expensive fossil fuel-generated electricity.
It also directly links the cost of electricity in the UK to the rocketing and often highly volatile spot market for gas, which has a disproportionate impact on UK electricity prices.”
Simon Francis, co-ordinator of the End Fuel Poverty Coalition, said there is an “injustice” in the electricity pricing system at a “shocking scale”.
He added: ”It cannot be right that consumers have been prevented from benefiting from the reduced cost of generating electricity.”
This also comes after analysis by the Carbon Brief found that the Government granted a number of contracts to offshore wind farm producers to generate electricity at an average price of £48 per megawatt-hour (MWh). This was nine times cheaper than the £446/MWh cost of running gas-fired power stations at the time.
However, there is plenty of scope for the UK to take advantage of this with the right reforms.
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Prof Paul de Leeuw said: “With a large amount of new renewables capacity coming online in the coming years, the volume of gas the UK needs for future electricity generation is likely to decline rapidly.
“This will then provide a real catalyst to change how electricity prices are determined and to ensure that customers benefit from cheaper forms of electricity generation.
“The UK will need to look at reforming the energy market and at mechanisms to decouple the electricity and gas markets. By decoupling electricity prices from gas prices, the UK will be able to price electricity closer to the actual costs of electricity generation.
“Inevitably this will be a complex and time-consuming process, but the prize for the consumer will be lower and more predictable utility bills. This will be a smarter, cheaper and greener way to manage the cap in the long term and should be a ‘win-win’ for all.”
Meanwhile, firms generating energy from renewables have been receiving far more for their power than it costs them to produce. However, the Government revealed a plan to slap a windfall tax on the ”extraordinary returns” of low carbon generators in the UK, which came into effect in January.
The measure is aimed at raising more than £14.2billion by the time it draws to a close on March 31 2028. It will add a 45 percent charge on wholesale electricity sold at an average price that surpasses £75 per megawatt hour.
The Treasury has argued the tax is a “response to the fact that, as a result of exceptional and unforeseen geopolitical events, some electricity generators are realising extraordinary returns from higher electricity prices”.
It added: “The continued investment of generators in the industry is vital to our long-term energy security, and this levy leaves them with a share of the upside they receive at times of high wholesale prices.”
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