Energy Costs for Beginners
Energy Costs for Beginners
Stripping away the complexity from UK energy prices
1 Summary
The pursuit of Net Zero in the UK by 2050, with the new Labour government’s insane interim target to “decarbonise the grid” by 2030, will irrevocably destroy the socio-economic fabric of the UK, along with much of our precious British countryside. The inevitable outcomes are depressingly predictable:
The price of rationed electricity approaching £1 per unit, compared with current price caps of 22.36p for electricity and 5.48p for gas.
A disproportionate impact on vulnerable, elderly and working class Britons, with further massive enrichment of charlatans in the renewables industry. We can expect to see a huge increase in deaths from hypothermia, and probably suicide, as the UK regresses to third world energy status.
Further catastrophic loss of competitiveness for essential British industries - leading to the export of yet more business to China and other far-east markets.
Massive degradation of the environment from a huge increase in onshore wind turbines and unsightly electricity pylons.
The engineering and financial complexities of the UK’s energy industry are documented, in detail, in several of our papers on this platform over the past couple of years (see our post archive for details).
Charlatans and cultists, pushing the climate emergency and Net Zero lies, use this complexity to constantly distract and bamboozle ordinary people, so it is important to occasionally strip away the details and focus on the basics. This is all the more important now that the UK has a Labour government - more determined than ever to mislead the population, in order to empower themselves while enriching a handful of corrupt party donors and industry lobbyists.
The purpose of this short paper is to provide a simple summary - for the lay public and opposition politicians - of the disastrously deleterious impacts of the establishment obsession with Net Zero.
2 The True Cost of Renewables
2.1 Ways of Looking at Electricity Costs
There are four levels at which we can consider the cost of electricity:
The “marginal cost” of generation, once the plant is already constructed and operational - essentially the cost of fuel (free in the case of renewables) and other non-fixed operating costs such as network losses, carbon taxes, and additional staffing.
The overall cost to the generator. This includes fixed costs, such as repaying capital investment, alongside marginal costs. The current industry standard method for calculating this cost is “Levelised Cost of Energy”, LCOE.
The wholesale price paid to the generator. Depending on specific conditions, this is related to marginal costs or LCOE, and includes generator and trader margins, as well as wholesale market operating (administration) costs.
The overall “whole system” cost to the customer. In addition to the wholesale cost, this includes the cost of transmission and distribution infrastructure, backup generating plant and storage, and supplier costs/margins.
In terms of marginal cost, renewables will - unsurprisingly - always win out. Once you’ve built a wind or solar farm, it makes sense to run it whenever the wind blows or the sun shines.
Industry propagandists quote (false) LCOE statistics to promote outrageous disinformation such as “wind is 9 times cheaper than gas”. No one involved in the industry, including Ed Miliband, is ignorant enough to actually believe such nonsense, so there is only one conclusion to be drawn. These people are lying to you, criminally.
For “dispatchable” generation, where fuel can be stored (e.g. fossil fuels, nuclear, biomass), or otherwise provided on a reliable “just-in-time” basis (e.g. tidal or large run-of-river hydro), wholesale costs are very closely related to LCOE, albeit with significant seasonal variations which reflect seasonal fluctuations in fossil fuel prices. Intermittent wind and solar, though, introduce huge volatility into short-term wholesale markets.
It is important to note that there are still, at present, two main components of the wholesale power market - long term (months to years) hedged contracts, and short-term (days) fine tuning and balancing transactions. The uncertainty around short-term market conditions nevertheless impacts long term market hedging, because baseload requirements for gas cannot be accurately forecast. This issue will become ever more important as gas generation is phased out completely - dramatically reducing the stabilising influence of long term hedged contracts.
The very existence of intermittent renewables therefore introduces massive volatility into gas generation prices, which then set the price of all electricity on the short term balancing market. It is a completely false myth that “gas sets the price of electricity”. In truth, it is the intermittency (unreliability) of wind and solar which causes price volatility, and therefore it is renewables which really “set the (short-term wholesale) price”. Renewables generators themselves are protected from this volatility via various subsidies, such as contract for difference strike prices as we have previously described, with the additional costs passed straight on to paying customers.
Over the longer term, though, e.g. on an annual basis, the average wholesale price is related to LCOE - and can therefore be used (minus generator margins and market administration costs) as an approximate proxy for LCOE. Ofgem publish breakdowns of retail price components, including wholesale costs, as we have previously referenced.
The simple Ofgem chart above does not provide a breakdown of retail price components by generation type. They are in the best position to do this but, since they are an integral part of the establishment Net Zero deception, do not hold your breath.
However, even the limited information Ofgem does provide shows that the overall contribution of wholesale costs to your retail bill was under 30% in 2021. Since many renewables subsidies are hidden in “Environmental” and “Network” costs, the wholesale component of renewables comprises significantly less than 30% of the total retail price for renewables (while the wholesale component of fossil fuel generation comprises significantly more - see section 2.2. below).
The use of LCOE figures (as a proxy for wholesale costs), let alone short term marginal costs, to assess the true cost of renewables is therefore one GIGANTIC FRAUD, knowingly perpetrated on the British people.
We have shown in previous papers that the whole system costs - the only thing that actually matters to customers - of renewables are already multiples of fossil fuel costs, and that things will rapidly and progressively worsen as the proportion of renewables grows. Below, we summarise the situation for lay persons and opposition politicians.
2.2 Simple Analysis of Whole System Costs
It will be easy (watch it happen!) for everyone to get side-tracked by “Great British Energy”, the Treasury’s “new National Wealth Fund”, the appointment of career bureaucrat Chris Stark to lead “Mission Control for Clean Power by 2030”, a ban on North Sea oil and gas exploration, the relaxing of planning regulations to allow onshore wind turbines and massive power lines, calls to increase the budget for the AR6 auction round, and more.
It is all chaff, purposely designed to deflect from the egregious lie that “renewables are the cheapest form of energy”. Ignore all of it and focus on the simple truth, that electricity prices are already double what they should be, and will treble or quadruple again - to as much as £1/kWh - if the deranged vision of Ed Miliband is allowed to proceed unchecked. Remember too that we are not just talking about electricity prices. As of July 1st, the Ofgem price cap for residential gas is 5.48 pence per kWh, so of course, Miliband wants to ban your gas boiler and charge you at least ten times the price for rationed electricity.
But how can we be so sure?
In 1980, none of the “green” madness had yet taken hold. There were no unreliable “renewables”, no carbon taxes, no contract for difference strike prices, and the UK electricity system was operated by the Central Electricity Generating Board, CEGB, and the Area Boards who delivered electricity and billed you for your use.
At that time, as per the following extract from a contemporaneous official report from the Monopolies and Mergers Commission, the retail price of electricity was 2.804p/kWh - 1.343p (48%) of which was for the cost of fuel.
Fuel costs were primarily for coal in 1980, but note the caveat “including purchases of electricity” - which would have included costs such as running coal and nuclear power stations, and pumping the water for hydro storage schemes (such as Dinorwig, which was completed later, in 1984). Taking these internal fuel costs into account, it is more reasonable for our purposes to use a 40% ratio of fuel costs to retail costs.
If nothing had changed since 1980, except for a switch from coal to gas fired power stations, we could use that same ratio to calculate a forecast retail price for electricity today. The wholesale price for natural gas in the UK is currently 72.8p/therm, or about 2.5p/kWh.
Modern combined cycle gas turbines, CCGT’s, can achieve peak efficiencies up to 60%, but a more realistic average, taking into account the need to run sub-optimally when “load following”, would be 50%. So we need to double the fuel cost to account for the wasted 50% (lost as heat at the power station).
This gives us an overall fuel cost of 5p/kWh. Now let’s use our knowledge that fuel (should) comprise about 40% of the (“whole system”) retail price, and we get a final price to the customer of 12.5p/kWh - versus the current Ofgem price cap of 22.36p. But the Ofgem price cap represents the average price of electricity, from all sources. It’s held down because a large proportion of our electricity still comes from gas and nuclear, as well as biomass (burning trees instead of coal or gas).
The true whole system costs of offshore wind is more like 33p, as we have previously explained in detail. Furthermore, as the proportion of wind power grows, including to replace 5.5p gas for your home heating, whole system costs of renewables in general will rise dramatically, doubling or trebling towards £1/unit. This will be due to three main factors:
The need to hugely expand the transmission and distribution networks as electricity demand increases
The necessity for increasingly idle backup plant, and
The need to massively “overbuild” the renewables infrastructure to account for complex “capacity factor” limitations - again, as we have previously covered in detail.
Of course, the need to overbuild also means a commensurate increase in the adverse environmental impact of onshore wind and solar plants.
Who needs gas boilers for 5.5p a unit, when you can have electric heaters (most won’t be able to afford a heat pump) for £1 a unit instead? Oh, and as we already mentioned - that electricity will also be rationed by way of the smart meters we are being increasingly coerced to accept.
The impact of exorbitant energy costs, especially at peak times, will be most keenly felt by the vulnerable in society, including the frail elderly & impoverished working classes. The unavoidable result will be that many people will die from cold, in Britain, in the 21st century! Others will be driven to suicide by the financial burdens imposed on them.
So where is the money going? To a cabal of grifting chancers who are openly lying to the country, in concert with the mainstream media and other establishment collaborators.
Don’t allow it to happen. Now is the time for us all to make our voices heard. Don’t get mad, get even - let’s work together to get our country back and jail the perpetrators of this egregious scam!
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As always, a good read. Thanks.