Remember the summer of 2022 when politicians from Ed Miliband to Boris Johnson went around telling us that wind energy was ‘four times cheaper’ than electricity generated by gas. It wasn’t true then – even at the top of the spike in gas prices which followed the Ukraine invasion. But it looks like an absurd claim now. Miliband, in his latest auction for offshore wind farms, has just committed energy consumers to paying a wholesale price of £90.91 for their electricity, rising with inflation for the next 20 years.
Where does that fit with the Energy Secretary’s promise to save us £300 a year on our energy bills? No one knows the future course of energy prices, but the average wholesale price of electricity over the past 12 months was £79 per megawatt-hour.
In Miliband’s fevered imagination the latest tranche of wind farms are still somehow going to save us money because they will make us less dependent on gas. This seems to derive from a claim by the Energy and Climate Intelligence Unit lobbying group that the wholesale price of electricity would be even higher were it not for offshore wind – at between £96 and £101 per megawatt-hour in 2024.
Miliband’s latest auction is not going to save us money
And yet, why, if our offshore wind turbines are saving us so much money, did we have the highest industrial electricity prices and second-highest domestic electricity prices of any member of the International Energy Agency in 2024? We also happen to have the highest installed capacity of offshore wind energy in the world. How come we are paying through the nose when we have invested more in supposedly cheap offshore wind than anyone else?
When you look at the cost of intermittent energy like wind and solar power, you can’t just look at the price paid for the wind and solar energy itself – you have to look at the costs which are incurred in incorporating that electricity into grid, including back-up and energy storage. Even when wind power was notionally cheap (the price agreed in wind auctions has doubled in the past four years) it wasn’t really cheap because we were having to spend a fortune firing up gas stations for a few hours at short notice in order to meet the gaps in supply from wind farms.
This is a much more expensive way of using gas power than it would be if we were using those gas stations all the time. Idle plants still have to be maintained and still have to recoup their capital cost. As such, owners of gas ‘peaking plants’ have to charge very high prices when they are used only intermittently. In the US, which derives a higher proportion of its electricity from gas than Britain does and uses far less wind power, domestic electricity prices were just 40 per cent of UK levels in 2024.
The rest of the damage is done by ‘marginal cost pricing’. The UK wholesale market works on auctions every half hour, where generators bid to supply electricity for that period. But instead of being paid what they actually bid, they are paid the price bid by the highest successful bidder. If it sounds mad, it is. It is rather as if you bought 11 bottles of Prosecco plus one bottle of vintage champagne, then took them to the supermarket checkout and were charged for 12 bottles of the champagne.
Moreover, we are reaching the limits of the wind power that the electricity grid can handle. Last year, consumers paid £1.5 billion in constraint costs to compensate wind farm owners for the energy they could have generated but couldn’t because there was no spare capacity in the grid. This is rising year by year as wind farm construction runs ahead of improvements to the grid.
Miliband’s latest auction is not going to save us money. Quite the opposite: it is going to lock us in a cycle of high energy prices for even longer.
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