UK faced one of the largest jumps in the cost of electricity in Europe last year
The state of play has become so drastic in Britain in recent years that even the usually laissez-faire energy ombudsman Ofgem has been forced to back a new energy price cap as of 1 January 2019
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Why is this happening? Well, let’s start by deconstructing that cap a bit. About £521 relates to wholesale fuel costs, mainly gas. These move up and down and have recently been rising. Fair enough, you might say. The next big chunk is network charges, which is in effect the cost of operating all the wires that carry power from generator to consumer.
Then we come to so-called “policy” costs, which account for £151 — or 12.5 per cent — of that £1,254 dual-fuel bill, or near 20 per cent if you strip out gas and just look at electricity. These are the consequence of the environmental policies the government has introduced to support decarbonisation, and are tacked stealthily on to customer bills.They are much stickier. Many relate to contracts struck with low carbon energy generators stretching far into the future, which guarantee fixed sums indexed to inflation, or pay an increment over the prevailing wholesale price. What’s more they are still growing as a proportion of customer bills. In 2015, the environmental bill was just £91 per household, according to Ofgem data.
As a recent paper from the energy economist Dieter Helm points out, that upward march will continue as more low carbon capacity comes on at relatively high fixed prices in substitution for gas and coal baseload generation. True, the latest offshore wind contracts are actually slightly below current wholesale rates. But they aren’t due to come on stream until the mid 2020s. Meanwhile, earlier pricier cohorts of legacy deals still need to be paid.
There’s also the fact that the whole market has mutated. The government is increasingly the central buyer through state-backed contracts, a process that steadily ousts market-based competition. All this means prices are likely to ossify, or even go up.
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