Opinion piece: Will the UK maintain a global standard for competitive clean energy?
Within the UK, wholesale energy prices are extremely volatile and are expected to remain that way. The energy markets were taken by surprise by the escalation of events surrounding Russia’s invasion of Ukraine. It caused the largest one day spike in gas prices since 2005. Additionally, sanctions to Russian energy exports such as the suspension of the 9.5 billion euro project-Nord stream 2 in the wake of these events and a retaliatory reduction in Russian gas exports have led to bullish prices. To this extent, Brent Crude Oil broke the $100/barrel benchmark, gas wholesale price for March hover at the 325 p/therm and power averaged at 255 £/MWh. Despite this, the capacity for 2022/23 from low carbon sources of 31.8 GW will b met. This aligns with the UK’s nationally claimed net zero goal by 2050.
While reserves within the UK for gas remain at 88%, the energy mix could potentially become more fossil fuel intensive and more expensive as the crisis in Ukraine continues. Additionally, the mean wind levels available within the UK are moderate, which could lower wind generation output. However, temperatures are expected to be around seasonal average or higher for most parts of the country, which could keep demand lower than expected.
The simultaneous occurrence of these events over the next couple of months are strenuous. This much is evident. Accordingly, recent announcements from the government have placed short term plans for the next round of Contracts for Difference (CfDs)allocations in March 2023. They begin a series of annual auctions. The announcement for which came in February, 2022.
CfDs are the government’s main mechanism for supporting low carbon electricity generation as it incentivises investment in renewables and provides developers of projects with a long life time of protection from volatile wholesale prices.
Within a year’s time, it is expected to drive down the cost of technologies playing an important role in leveraging £90 billion of private investment by 2030. BEIS aims to reduce exposure to expensive gas prices in international markets through clean, cheap and secure generation of electricity by expanding domestic renewables.
Additionally, the government has announced up to £1.7 billion to enable a final investment decision on a large-scale nuclear project in this Parliament. The Nuclear Energy (Financing) Bill, a £120 million Future Nuclear Enabling Fund, and a £210 million grant to a Rolls-Royce-led consortium to develop a UK Small Modular Reactors design are additional components of this bill.
These various strategic decisions show a willingness on part of the government to stay on track with the UK’s net zero goals as well as continue to let the market create its equilibrium price for energy. It identifies efforts to increase electrification which is necessary for a low carbon transition and aims to curb supply shortages, at least in the short run.
However, reality in a year’s time may not appreciate these attempts. They could potentially be viewed as having not done enough to protect consumers and market players from the volatile ever increasing prices forecasted for the next 12–16 months. This is largely due to the extremely high price that makes it unaffordable for consumers and difficult for producers to participate in the market. It is an unfortunate truth, that energy is not only a necessity but also a luxury for the citizens of the UK.
At the moment, generators bidding for CfDs may have subsequent contracts for highest bids to secure generation. Therefore, Low Carbon Contract Companies, that are primarily government owned bid for contracts with generators. This may be viewed as a mechanism to have money flow through the market fluctuations (at a specified strike price) between different government owned bodies with the generator in the middle. While this may not upset the playing field for competition and development within the UK, it does raise concerns on the international stage.
On a global platform, organizations such as WTO would definitely raise concerns about maintaining competitiveness and subsequent trade deals for energy and other industries may be affected. Of course, investigation into such matters would be underway. The outcome of which is yet to be seen.
However, such contracts that have been the primary tool to push for economic forces to align with environmentally conscious efforts such as the uptake of energy. The lack of diverse competition among the players of renewable energy within the UK could be seen as government regulation and goes against the free-market economic thinking that the UK upholds.
Written on 01.04.2022
