DESNZ - Previous governments should have raised electricity prices even more

Usually, I treat Government responses to press inquiries about my work as background noise - mostly nonsense but not worth bothering about. However, occasionally a response is so revealing that it warrants closer attention. Such a case was passed on to me by journalist who has written a piece based on my study of the cost of Net Zero that was the subject of my last post.

The full response from DESNZ was as follows:

“We wholly reject these findings, which are fundamentally incorrect on what has driven higher energy prices.

“Every family and business has paid the price of rocketing energy bills because previous governments failed to invest at scale over many years in the clean, secure home-grown power our country needed, so we have been left exposed to volatile international fossil fuel markets.

“As shown by the National Energy System Operator’s independent report, clean power by 2030 is achievable and will deliver a more secure energy system, which could see a lower cost of electricity and lower bills.”

OK, there is no surprise about the first paragraph. DESNZ is not going to go back on the core argument for their current policies.

However, let us think through the implications of the second paragraph. What DESNZ claims is that the previous Conservative administrations should have spent even more money on supporting investment in renewable generation, i.e. solar and wind power.

Imagine we could go back to 2012 or 2016 in order to follow this advice by doubling the levels of investment in new solar and wind plants. No one with any practical knowledge of large projects in the UK will believe that the unit costs of building new plants would have fallen as a result of doubling investment. Indeed, we know from many examples and analyses that unit costs would have increased by a considerable amount - at least 25% and perhaps as much as 50%.[1]

David Turver has examined the cost of ROCs. In SY23 - the current fiscal year from April 2024 to March 2025 - the estimated cost of the ROC program was just under £8 billion. Doubling the amount of renewable generation supported by ROCs with the exclusion of Drax, that cost would increase to about £18 billion per year at 2024 prices.

In another article David Turver reported that total CfD subsidies for renewable generation excluding biomass in the calendar year 2024 amounted to £2.0 billion. Thus, doubling the commitment in the 2010s and allowing for higher costs would increase the total support to a minimum of £4.5 billion per year at 2024 prices.

Doubling solar and wind output would lead to complex market adjustments. We may assume that generation from fossil fuels and imports would be reduced in periods when the additional output allows that, but it cannot be assumed that any residual renewable generation could be exported. Using the price equation for 2024 a reduction from average imports of 3.8 GW to 2.0 GW would low the average market price by £7.5 per MWh (from £72.6 to £65.1).

However, the large unknown concerns curtailment and congestion costs. There would be a very large increase in network congestion and, thus, balancing costs including constraint payments. Total balancing costs in 2024 amounted to £3.0 billion, of which more than 80% was linked to renewables output. At a conservative estimate, the increase in balancing costs would be at least £2.4 billion per year.

A larger issue is how to deal with surplus solar and wind generation after imports and generation from fossil fuels were reduced to zero in the relevant periods. Over the whole of 2024 this would amount to 39 TWh or 4.1 GW averaged over all periods in the year. There is no practical way of using such surplus generation, so that the only way of avoiding grid instability would be curtailment - i.e. switching plants off. Paying for curtailed output at market prices that would cost £2.3 billion per year.

Putting these elements together the additional cost of subsidies, balancing and curtailment would be £17.2 billion per year which translates to an average of £62.4 per MWh of total consumption. Offsetting that would be the reduction of £7.5 per MWh in the average market prices, so that net cost would be about £55 per MWh. Simply passing that additional cost through as a uniform levy on all electricity customers would have increased average electricity prices by 17.5% for household customers and 19% for business customers. In terms of DESNZ’s focus on electricity bills, these would have been £198 per year higher for the average household customer.

Now I can understand the press official at DESNZ saying: “… but that is not what I meant …” . Indeed, I can accept that point. The conclusion is that the Department has not got even the smallest grasp of how the electricity market works. It makes claims whose logical implication is that electricity prices and bills in 2024 would have been substantially higher than they were in reality, but it fails entirely to appreciate those implications.

What this example illustrates is the almost complete incompetence of the Department that is responsible for making the decisions about Net Zero and, in practice, the future of the UK economy.

Some are inclined to conclude that this is a consequence of ideology combined with a reckless disregard for the impact of that ideology on the population. Sadly, I doubt that anything is that organised. We have seen from all of the institutions of the UK government that influence energy and climate policy that they are all, without exception, incapable of doing anything competently. That is the true measure of the UK today - a country run by fools who are determined to run our economic ship into the nearest iceberg.

There is a further aspect of the press statement by DESNZ which follows from this discussion. The final paragraph refers to the Clean Power 2030 document produced by NESO. But, would any independent analyst have expected NESO to have come up anything different? The bureaucracy will never allow NESO to take any position that might be seen as challenging the government’s policies.

By nationalising the system operator, the current and former government have removed the last vestiges of independence from the process of making and implementing energy policy. In the medium and long term that will prove to be a disastrous step because, as we have seen, policy decisions will be divorced from the constraints on implementation and operation.

It would be wrong to claim that the US structure is ideal. Still, the existence of the independent National Electricity Reliability Corporation plus regional Reliability Organisations reduces the chances that system operators and regional transmission are captured by political interests. Serious mistakes have been made - most notably leading to the widespread power outage in Texas in 2021 - but the overall system is capable of learning and adopting corrective measures.

Even in the US there are the usual advocates for central control based on a Platonic view of policymaking. What happened in Texas is the best argument against that view. Its regional Reliability Organisation (ERCOT) only covers Texas, which succumbed more easily to political lobbying at a state level by various interest groups.

The US and Canada are rather prone to serious power outages caused by severe storms - not just hurricanes, but also ice storms, tornadoes, and extratropical cyclones. Improving the performance of transmission and distribution networks in coping with such events is crucial, but that means a willingness to permit independent reviews. The UK has a long history of hiding problems and resisting external scrutiny. By nationalising the system operator that tendency will be reinforced by bureaucracy’s resistance to anything that might embarrass its political masters.

In summary, the DESNZ press response encapsulates the problems of ignorance and incompetence that have overtaken energy policymaking and management of the UK’s electricity system.

[1] See, for example, my analysis of the costs of building solar plants in the 2010s.