We know all about climate change deniers; perhaps it is time we turned our attention to energy bill deniers. This morning Ofgem announced that its cap on energy prices will rise by 4 per cent in October, taking the average household dual fuel bill to £1,723 a year. This is £60 higher than it is at present, wiping out the £44 saved by the temporary removal of VAT from fuel bills announced by Andy Burnham last month.
Far from Labour’s net zero policies saving us £300 a year, as Ed Miliband insisted they would during the general election campaign two years ago, average bills are currently up £150 on the level they were when Labour took office. And yet still government ministers continue to insist that their net zero policies are helping to bring down prices. According to Energy Security and Net Zero Secretary Miatta Fahnbulleh, ‘one of the problems we’ve got is that we are very exposed to global fossil fuel markets that we have no control over’. The answer, she insisted, is yet more renewable energy.
It is true, of course, that inflation in energy bills this year is largely down to events in the Middle East which have squeezed supplies: around a fifth of the world’s crude oil and liquified natural gas supplies used to pass through the now-obstructed Strait of Hormuz. This is to some extent being alleviated by the construction of pipelines to the Red Sea coast of Saudi Arabia, bypassing the Strait, although it will still be some months until oil and gas prices subside.
Blaming high UK energy prices on the Iran war alone misses something rather important
However, blaming high UK energy prices on the Iran war alone misses something rather important: we are paying far more for our electricity, and also for our gas, than other comparable countries are. A report by Civitas this morning shows that industrial users in the UK are paying £238 per megawatt-hour for their power, compared with £138 in Germany, £112 in France, £65 in the US and £44 in China. This differential has been around for years. It is little wonder that what remains of manufacturing and heavy industry is rapidly leaving our shores.
How come our prices are so much higher than other comparable countries when we have been particularly enthusiastic adopters of supposedly cheap renewable energy? We generate 28 per cent of our electricity from wind and 5 per cent from solar. In the US it is 10 per cent from wind and 7 per cent solar; in China 10 per cent wind and 8 per cent solar. Among the countries listed above, only Germany outdoes us on overall renewables generation: it derives 26 per cent of its power from wind and 14 per cent solar.
Wind energy was never as cheap as many people seem to think it is. It is true that the cost of generation itself fell sharply during the 2010s, but since 2021 that has sharply reversed. Wind was cheap when interest rates were on the floor because a substantial proportion of costs come up front, in capital investment. When interest rates began to rise, so did the cost of wind. The long-term guaranteed, index-linked prices offered by the government in its ‘contracts for difference’ auctions have doubled in the past five years.
But with intermittent renewables it is not enough just to look at the generation costs: you also have to look at the system costs imposed on the grid as a result of having large excesses of wind and solar energy one moment and shortages the next. You have to add on the cost of the backup and energy storage, which helps you cope with that.
In Britain, we are resolving this problem mainly by resorting to gas peaking plants, which provide power in short bursts at short notice. But just as the per-mile cost of running a car increases the fewer miles you drive, the per-unit cost of buying electricity from gas plants increases the fewer hours you use it. It might only be running 5 per cent of the time, but it still has to be maintained and its capital investment still has to be paid off. This has a huge influence on electricity prices because our wholesale market employs something called marginal cost pricing, where every supplier providing power at any one time pays the same: equivalent to the highest successful bid.
Fahnbulleh repeats the same old argument that new North Sea drilling will have no effect on energy prices in the UK because oil and gas are international commodities and will be sold at ‘the global price’. This argument is endlessly regurgitated in spite of being obvious nonsense. You can talk about a global oil price but, thanks to the cost and difficulty of transporting gas, wholesale prices are highly regional. They are several times higher in gas-starved Europe than in the US, where aggressive energy self-sufficiency polices pursued by presidents of both stripes over the past two decades have led to a shale gas boom.
Were a licence to be granted for the Jackdaw field, it could be supplying 6 per cent of our gas this winter. Moreover, it would feed directly into pipes feeding UK gas infrastructure. The idea that its producers are going to put it on a ship and export it to other parts of the world where it would fetch a much lower price than in Europe is ridiculous. Extra gas available on our doorstep will very definitely apply downwards pressure on prices – if the government can bring itself to face down the energy bill deniers in its own ranks.
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