I posted this thread to Twitter this morning:
There is much talk happening on how to solve the so-called cost-of-living crisis. Most of it fails to recognise that the problem is much bigger than that: the whole economy is in meltdown. None seems to address the cost of energy itself. A thread on the last point….
No one now doubts that the UK has an economic crisis on an unprecedented scale. My estimates suggest 60% of households are going to struggle to pay their energy and other bills this winter whilst public services and hundreds of thousands of companies might fail.
The focus of most comment so far has been in households. Don't get me wrong. Their inability to pay matters, enormously. But hospitals, schools, care homes and businesses are also facing impossible bills.
I have set out a comprehensive plan to address this in a report called ‘Surviving 2023'. It might cost at least £144 billion to get through this winter, which only quantitative easing can provide. Let's not pretend otherwise.
However, there is a dimension to this which is not discussed at all, which is changing the way in which domestic energy is priced in the UK. The rules are set by Ofgem, the government regulator. These prices are set to make matters as bad as possible for everyone but energy companies.
What follows is a little technical. I have checked the facts with energy expert Mike Parr, to whom I am grateful, whilst accepting that all remaining errors are mine alone, having said which I think all that follows is true.
It's important to remember that the goal of energy regulation in the UK is to preserve the privatised energy ‘market', whatever else is claimed. In essence, everything it does is meant to ensure that at least some of the companies engaged in this ‘market' do not fail.
The way it sets energy prices reflects this. There are lots of ways to generate electricity in the UK. Renewables, nuclear, coal, hydro and gas all play a part. Most are used, except coal, which is now only in emergency use.
The cost of generating electricity using these various methods varies greatly. For example, using gas at current spot market prices costs about £611 per megawatt hour (MWh) right now. Other sources cost about £60/MWh for nuclear, £50/MWh hydro and in the range £50 to £140/MWh for on and offshore wind and PV. Those are big differences.
The electricity we actually get delivered to our houses is from a mix of all these sources. It is total nonsense, for example, that anyone supplies pure renewable electricity. All electricity from all generating sources is mixed together when it goes down the wires to our houses.
Bizarrely, however, that's not how the price is set. The wholesale price of electricity in the UK is set on what is called a ‘marginal costing' basis. This is much beloved of economists but is working against the interests of all consumers of fuel right now.
What it means is that the wholesale energy price is set so that the most expensive producer can make a profit from the sales they make into the wholesale energy market.
So, since gas-produced electricity is the most expensive to produce right now (and is likely to be so for a long time to come) its cost of manufacture plus a fair profit margin sets the wholesale price for all electricity right now, however it is generated.
What that means is that those producing electricity from gas can still make a profit and so stay in business at present. But what it also means is that the nuclear, hydro and renewables producers are being paid the price that the gas generators get.
This makes no sense at all. For example, there is no ‘marginal cost of production' for wind and solar power: the wind and sun are free. In those cases a marginal costing is simply the wrong one to use.
That is also true of nuclear power, where the cost of production is based on the capital cost of the plant spread over its useful life. Again, a marginal costing basis for pricing makes no sense when the amount of variable input into the nuclear process is tiny.
The result is obvious: the profit in the nuclear and renewable producing companies, who usually make more than half of UK electricity, increase dramatically, and wholly unnecessarily when a marginal costing price setting model is sued to suit gas generators of electricity.
I should, however, add a twist. Many renewable energy producers are already subject to contracts that essentially fix their prices, with the government already taking the risk on price variation. See https://www.lowcarboncontracts.uk/.
Where these contracts exist, and where fixed price contracts guaranteed by the government exist with nuclear producers, the current excess electricity profits arising because prices are based on the cost of gas production already flow to the government, a little-known fact.
There is also a pricing problem in the gas market. The UK produces about half its gas needs, the rest it has to buy internationally. We can't control that international price.
But the energy regulation system lets UK-produced gas be sold at the international price for onward supply to UK consumers, again massively increasing the profits of UK gas-producing companies wholly unnecessarily, and solely because of the pricing model used.
The talk is that a windfall tax could correct for this. That, however, is to ignore the fact that much of the problems that we face has been created by dire regulation, and changing that regulation is also within the scope of government.
Suppose that regulation was changed. Instead of all producers, whether of gas or electricity, being paid the price of the highest cost supplier in their market they were instead paid their own fair marginal cost of production, including a reasonable profit margin.
Then presume that the energy regulator priced the onward supply of wholesale gas and electricity to the energy distribution companies on the basis of the actual cost to produce (including fair profit) of the gas and electricity actually sold into the market each day.
I stress, that for much of the renewables sector and for nuclear this will not be hard to do because of the nature of the government price guarantees that are already in place.
For gas, simply mix internationally priced gas with UK-produced gas at its fair price of production. That's all that is required.
This would, though, require a change in the law. There would be yelling, screaming and shouting from some energy companies despite what I have noted and legal threats galore. These will need to be ignored for one straightforward reason.
That's because customers can no longer afford UK energy prices all UK focussed energy companies are technically bust. There is no market let for the energy they might produce, whether gas or electricity, at the prices currently being asked for it, at least without state aid.
In that case the state can intervene - to save these companies. I am sure a lawyer, somewhere, will see a chance to bring a legal action to dispute that, but the reality is that their chance of success might well be low.
If in doubt, the UK needs to declare this a national emergency with existing laws suspended since, as a matter of fact, it is a national emergency. And if we could do this sort of thing for Covid we could certainly do it now.
What would the impact be? Obviously, it's not precisely possible to say, but broadly speaking the price of gas might reduce by 40% whilst the price of electricity could fall by maybe 65%.
I stress these are estimates and that this move would not solve all the energy problem overnight: the remaining prices are still problematic and massive reforms to the market would still be required. But we would win three things.
The first would be instant reductions in energy costs. Households and businesses, let alone many lives, might be saved as a result.
Second, inflation would be reduced, although not eliminated. Massive pressure would be taken out of the UK economy.
Third, the pressure for state interventions to save households, pubic services and businesses would reduce - although by no means entirely go away.
Those are three massive wins that almost no other reform that could so simply be put in place could deliver.
So why won't this happen? First, because no one in politics seems to know about this. Second, because politics (of most sorts right now) is terrified of upsetting ‘the markets', even if those markets crush consumers.
Third, as a result politicians who lack the courage to hold the positions to which they have been elected will not do what is required to protect us from harm.
A decade ago I wrote a book called ‘The Courageous State'. It was all about the need for politicians who believed in the power of the state to deliver good for the benefit of the people that they might govern.
The sad fact is that we don't have such politicians right now. If we did they would be taking action to change energy price regulation right now to protect us all from the harm that those regulations are causing.
We need courageous politicians right now who might be willing to act in the public interest to change the rules of the energy price game to save us all from harm. I can live in hope that this might still happen. I am not holding my breath.
Thanks for reading this post.
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Every time I put on the news, there are dire predictions.
I am of the opinion that those outcomes are avoidable , not entirely but largely so.
It needs leadership of imagination and courage.
Gosh! Same page. National emergency, Emergency Powers Act, all oil and gas produced in British waters should be charged at March prices. Britain should be the priority customer. They will still have plenty of profit.
We can’t really blame the Ukraine war for this – it’s casino capitalism and City spivs. Even tho we’ll still have to supplement from abroad it’s a way to take the likelihood of economic and social meltdown off the agenda at a far lower cost.
Changes to regulations, accounting and emergency legislation can all be enacted very quickly- which is exactly what is needed.
One likely comeback is the following:
If the UK and many other countries ALL isolate their domestic gas supplies from the global market, won’t this restrict the real volumes of gas available to the International Section of the market leading to further increases in the International Prices? Could this negate the intention of the action (wrt to gas but not renewable energy)?
This would be like the person at a football match standing to get a better view. This only works until everyone else does the same.
Are there any arguments against this contrary view?
Our gas supplies are not on the international market
We’re just paying that price for them
In that case I cannot see what you suggest happening
Call me a cynic but if British gas prices were set lower than the international market, British gas producers might be inclined to sell to the more profitable international market, or am I missing something?
Did you note I said we might need to declare a state of emergency?
Yes I did note that thanks. Would the state of emergency apply to foreign owners of gas fields in the British sector?
Yes, re UK production, which is under Uk licence
Thanks
“The wholesale price of electricity in the UK is set on what is called a ‘marginal costing’ basis.”
This is simply not true. Energy prices are not set on a marginal cost basis at all. From this error the rest of what you say then is totally wrong.
Prices are market driven with generators selling to suppliers for different settlement periods as well as the BMs.
Given that you are claiming something (marginal costing) that doesn’t exist in the UK energy market and haven’t mentioned the actual pricing mechanism at all, it is clear neither you or Mike Parr actually know what you are talking about.
Dieter Helm too then
With respect, you are the person who really does not know what they are talking about
Really? Which part of what I have said is wrong?
Energy suppliers forecast their demand and buy ahead in 30 minute time slots. They place bids for energy into the market. Generators then fill these bids. The balancing mechanism (BM) is then used to adjust for discrepancies in supply and demand.
This means that all energy bought and sold for a given 30 minute slot trades at essentially he same price, regardless of how it is generated. Immediately proving you wrong – no marginal pricing.
Anyone with actual knowledge of the UK energy market knows this.
What definitely doesn’t happen is what you are claiming. That the price is set so that the most expensive marginal producer can make a profit. This is simply 100% false.
Going through the rest of your piece there are also a series of other massive howlers. Judging by this I can only assume that you have literally zero knowledge of how the UK energy market works, let alone a very poor understanding of basic economics.
I assume you are going to tell me now that a retired accountant who has zero experience in he energy industry is an expert in it though, aren’t you?
That is marginal costing……
Richard,
Your idea of marginal costing is that every producer gets production cost + X% profit margin.
You state this in the article above.
This is of course not what happens in reality. Every producer gets the market price, which may or may not be higher than the cost of production and is set by demand, and has nothing to do with cost of production.
So using your terminology, not marginal pricing.
I am saying that there is no market niw, if there ever was
How hard is it to understand that?
You can say what you want Richard – doesn’t make it true. Your fantasies don’t project into the real world. You know that, right?
https://www.eex.com/en/
For example.
That said, it is funny watching you claim there is no market in energy in the UK.
Would be a big surprise to all the generators, suppliers and all the people involved in that market directly.
There are very few customers who can afford to pay
Your fantasy market has failed
Time to get real
Please don’t waste my time again
Can’t tell which is worse. Your stupidity, your narcissm or you ego.
All trolls say that
Because they have nothing of value to say
Like you
But a quick question. Where does all your hate come from?
Others largely agreeing with Richard and Mike:
https://www.linkedin.com/pulse/uk-energy-crisis-time-split-power-market-michael-liebreich
https://www.express.co.uk/news/science/1657517/octopus-energy-renewable-electricity-gas-prices-bills-greg-jackson (sorry re source)
On Government plans that have been stymied https://twitter.com/jessralston2/status/1544610630254186496?s=20&t=GTe_6tnk4Ya5KqthfLk0aA
Rob: if as you say: “Prices are market driven with generators selling to suppliers for different settlement periods as well as the BMs.”
then I’d guess that buyers of elec from the generators (i.e. retailers) would buy at a wide range of prices? If this is the case & given only elec from gas has rocketed in price, how come:
a) day-ahead prices are very very high (day-ahead for delivery Sunday 28th Aug 1400hrs was £400/MWh)
b) retail elec prices have sky-rocketed – even though they are a composite of gas+nuke+RES+hydro
If as you assert “marginal pricing” does not exist – then what does? what market mechanism does the UK electricity market use to
a)balance the system
b)arrive at a price.
I suspect you will get no reply Mike
Mike,
I don’t think you understand how the markets work. All electricity is the same once produced, and there is only the bid and offer price. So the only drivers for the price of electricity are supply and demand. If there was abundant supply from cheap sources that would drive prices down, but there isn’t so….
In answer to your specific questions:
a) day ahead prices are high for various reasons. Spot prices are higher, and gas prices are very high. Renewables are cheap (ish) but need to be backed by steady state production, which in the UK means gas, because they are unreliable. Spot prices being so high pushes the forwards up.
b) retail prices are driven by supply and demand. When the bulk of generation and backup generation is gas, that is going to have the biggest effect on those retail prices. You seem to be working under the same fallacy that Murphy is that there are different output prices for different types of electricity. There aren’t – once it hits the grid it is all the same.
If anything, given BTUs have gone up about 5x in price whilst retail prices have only gone up 3x.
As I mention above – Richard Murphy’s “marginal pricing” where generators get cost + profit doesn’t exist. As you surely should know (if you know **anything** about the energy industry), both the UK and Europe have a pay to clear energy system, where all energy for a given time slot is cleared at the same price, regardless of the supplier.
So to answer your next questions:
a) BMs balance the system, via the national grid. It is quite costly to buy short dated or spot, so suppliers try not to do so.
b) Supply and demand. Suppliers put their bids in, then those bids are met via the standard market mechanism. Highest bids are met first, leaving the overall price discovery being akin to a Dutch auction.
Really not that hard. But definitely not as Richard Murphy is claiming. Which points to the fact that he doesn’t know what he is talking about, and I suspect you don’t either.
You really are a troll
Alright Rob, if what you say is true, then how do the French arrive at a much lower cost for their energy?
“Suppose that … all producers … were instead paid their own fair marginal cost of production, including a reasonable profit margin”.
That is a question I, and I am sure many others, have been asking. The next question is how do we get there from here, given the government we have, and quickly?
We won’t with this government, I fear
‘The electricity we actually get delivered to our houses is from a mix of all these sources. It is total nonsense, for example, that anyone supplies pure renewable electricity’
– However, you can ensure that if you buy your electricity from someone like ‘Good Energy’ they only source from renewables – they don’t greenwash by mixing it with electricity created from fossil fuel burning.
In other words, if I use 5000kwh of electricity per year, this is matched by my supplier buying the equivalent amount from renewables sources only.
So while Richard is correct, the electricity I actually receive into my house may be a mix of sources, I can at least ensure that any money I spend is used to supply renewables energy only.
That is greenwash
This just sounds like the Carbon Offset purchasing schemes to salve your use of fossil fuels.
The electrons are not labelled with your address.
I detect that there are a lot of people employed to balance the books between where you actually live, connect to the grid and who you pay the bill to. Who is your energy trader and who actually generates the energy?
Around 20% of the grid demand is met from the DC cables from France, Belgium, Norway and Netherlands.
The Hunterston DC cables send One GW to Cheshire every day that the wind blows, derived from a huge onshore farm that runs from Renfrewshire to Lothian from hundreds of windmills.
I had a 100% renewable contract for a couple of years and took it for granted that it was greenwashed. I do think, however, that promotion of these contracts is a bit misleading in today’s circumstances – if I was still on that deal I might reasonably expect not to see my prices increase now.
@dave stewart. It doesn’t really matter that the electrons don’t have your name on them as they don’t carry the energy, the electric field does. If they did then things like contactless chargers or connectionless electrical meters wouldn’t work and it wouldn’t be necessary to carry high tension power lines high up on pylons. In any case there are physical breaks between the energy source and the consumer so an electron can’t get from one to the other.
And your comment is hogwash for reasons i’ve explained some weeks ago. But I am fed up with the way you gratuitously insult anyone with the temerity to disagree with the “world expert” on just about everything. Some might call it bullying.
I’ve followed you on here for quite a few years now, with a few “sabbaticals” when I tire of your tantrums, but this is the last time.
Odd how so many experts in the EU and elsewhere are suddenly agreeing with me and demanding reform of this sort – as the press is evidencing
But feel free to go – that’s your choice
And after 500 plus comments which must suggest overall agreement with what this blog is about, your loss too.
And as for bullying, try running a well read blog to know what that feels like from the receiving end
‘For gas, simply mix internationally priced gas with UK-produced gas at its fair price of production. That’s all that is required.’
Yeah, exactly, it’s easy to tell which is which, and as Gas is the predominant fuel used in UK households, it would surely have the most impact helping consumers out.
As an aside here in Scotland there is a court case, Greenpeace are suing the UK Government over an approval for Shell to start the new Jackdaw field over climate concerns but the argument from the Govt. is that is will increase domestic supplies.
With this in mind, I can see the energy companies and lobbyists now pushing hard for increased fossil fuel extraction including fracking all in the name of National Security.
When what is needed is total divestment into renewables, we find through Ch4 News last week that the big energy companies are only investing as little as 5% into renewables, the vast majority remaining in developing fossil fuel extraction, despite the rise of ‘green advertising’.
Got to say in the larger picture of energy creation and use I’m getting very depressed at our willingness or ability to keep focused on climate issues.
It takes staggering inability to not know which gas is sourced where
I think you might have come to the wrong website
Dieter Helm says much the same thing. https://www.independent.co.uk/news/uk/politics/energy-bills-privatisation-sewage-ukraine-b2154883.html
I have now seen that
Great piece, thanks Richard. Very informative – I learned more from this than pretty much every news item I’ve read in the last month.
I was curious on a few things…..
– Is the wholesale floor applied independent of the total share produced? e.g. if gas is the most expensive, then does this set the same floor whether it comprises 1%, 10% or 50% of the energy produced?
– The profit margin – post application of the wholesale floor – looks massive for renewable producers, if they don’t hedge via the government e.g. on per MWh basis, produce at £60 and sell at around £600. I’m surprised there aren’t hedge funds building wind and solar farms!
– Why does the floor exist in the first place? I can see an argument to protect producers from going bust – reasonable given energy is an essential asset, …..but given that non-gas sources cannot consistently deliver 100% of the UK’s energy requirements, surely the market/suppliers have no choice but to pay what the producers ask for? Is it that, otherwise, gas producers wouldn’t be able to sell at the volume they need? If that’s the case, then would a more targeted subsidy/guarantee work just as well? i.e. in terms of safeguarding those energy firms, while not adding an unnecessary blanket levy to consumers
– What’s happens if the wholesale floor is removed, in terms of where investment goes (i.e. impact aside from price decreases flowing through)? I’d guess it really disincentivises energy production via gas, seeing as nobody is going to buy it while expensive, except as a last resort
Quests for Mike, I think
Richard S: thank you for the questions
No 1:”Is the wholesale floor applied independent of the total share produced”. First: there is no “floor price”. Second, price setting all depends on how much gas is in the system and how much renewables. Example, Netherlands Sunday @ 1400hrs, 4% gas, 96% renewables (PV and wind) day-ahead price: minusEuro10/MWh. The “depends” with respect to the Uk is also a function of where the surplus elec goes and what is happening in those other countries e.g. Netherlands, France, Belgium, Norway. Welcome to the Hotel California – you can check out anytime but you can never leave (Brexit ref).
No 2: profit margin: this only applies to renewables built under renewable obligation scheme – which has now finished. Anything now built in the UK is symmetric CfDs. Who makes the windfall profits in this case? The …. UK government, naturally!
No 3: there is no floor. Marginal pricing is not a “floor price” it is a price that ensures that in any circumstance generation = load. The proposal is not to change this system, but to move generation that has prices based on capital costs (nuclear, hydro and renewables) into a different market segment. Gas etc sits where it is in the marginal pricing segment – thus “keeping the lights on”.
No 4: there is no proposal to remove the wholesale floor. As noted, the marginal pricing for fossil generation would continue as before. You need to think in terms of the Uk & other countries being in transition from fossil to renewables plus green hydrogen. In the case of gas generators, over time they will convert to green H2 (a straightforward action focused on gas trains and burner cans for gas tubrines).
Hi Mike, thanks for the detailed answers. Much appreciated and very insightful, I need to go back and do some reading. Not sure I can rationalise a negative energy price anymore than negative interest rates. Whole system seems a little Kafkaesque
We could massively reduce the price of energy in the UK – by changing the way we regulate energy prices Posted on August 29 2022
‘Calamity’ doesn’t begin to describe the Pakistan floods – after all the fires, droughts and other huge climate impacts.
WE KNOW that CARBON DIOXIDE IS THE MAJOR CAUSE.
CO2 needs to be CUT and CUT, then CUT again. The aim for emissions must be REAL ZERO FOR ALMOST EVERYTHING starting NOW! Most talk of ‘2050’ is a callous/careless/ignorant/greedy irrelevance. (Prof Kevin Anderson University of Manchester has said something like this.)
Your heading ‘We could massively reduce the price of energy in the UK …’ is true but misses the over-riding priority: THERE IS TOO MUCH CO2 IN THE ATMOSPHERE ALREADY and lower prices we need to discourage energy consumption.
A start could be made by implementing your proposals in the section headed ‘energy standing charge and prepaid metres’ (in your brilliant ‘Surviving 2023’). You say quite rightly that standing charges must be scrapped and that tariff reform is essential:
‘the tariff must be progressive depending on the level of consumption. So, the first units used must be charged at a lower price than later units, with the scale becoming increasingly upward as consumption exceeds average levels. Not only is this fair, but it will also encourage energy saving, which is essential. For that reason, the progressivity needs to be significant.’
In terms of extinctions, perhaps the situation is worse than in the last ice age. In terms of deaths, it is much worse that in the World Wars. We could learn from history:
Petrol was rationed from day 14 of WW2. Food, clothing, soap, furniture, paper were all rationed or restricted
No lights were allowed at night because of bombing. Any light not essential for safety or security could now be forbidden … and the public (and newspaper owners) might realise what a hell of a mess we are in. THE PUBLIC MOOD NEEDS TO KNOW SOME ALARM!
In the 1970’s and oil crisis resulted in a “maximum speed limit 50 mph on all roads FROM MIDNIGHT TONIGHT”.
The government could ban all forms of fossil fuel-powered racing and restrict inessential travel – especially by air … and I haven’t done more than start.
Extreme? Not if one reads the news and loves some young people.
Sorry Joe – but a failed economy will also never be green unless you kill billions
What about the Pakistani economy?
I recognise that – and all the issues – but I also know what can be achieved – and try to fast and we get fascism
For me there is no longer any sort of market for energy.
I base this view upon simple things – like what was promised by Right wing politicians when the utilities were privatised:
There would be lower prices due to competition.
There would be more choice.
There would be more investment.
Yet we have seen none of this come to pass have we as things stand at the moment?
And as for ‘investment’, we’ve seen items like gas storage not invested in, too little investment in green – solar farms apparently refused planning permission a well as wind farms.
And what has that actually led to?
Insecure supplies and natural monopolisation of carbon by the private sector and price gouging.
It’s all very well people coming here like Rob prattling on about the inner workings of markets, but the end objectives this society was sold about privatisation have not been met at all.
By the ‘market’! Congratulations ‘market’- nice job! The customers of this market even seem to be paying the debts off of the failed private companies who never supplied them!! What sort of perverse logic is that? A win/win for the industry – a transfer of risk onto the end user. As designed.
Watching ‘Enron – The Smartest Guys in the Room’ and the story of how the over- marketised Californian electricity market got screwed up by greed was bad enough but this is the last straw.
We have suppliers of carbon who have basically declared war on their users and are going to squeeze every last drop of profitability out of the system before it goes down (BTW – over their dead bodies) – using the sovereignty of course of investors who don’t want green and who just want profits to keep rolling in.
This is tantamount to me at least of a war declared on ordinary people. If this was a classic, traditional war threat, even this poxy Government and the craven we-learnt-to-love-markets-too Labour party would be writing cheques for all sort of new toys to deal out death in the name of self defence, no problem.
But putting their hands in their pockets to defend energy consumers from being cold or going out of business or dying just seems to be beyond them.
Why? Well, because the Tories made it didn’t they and bailing us out is an admission of failure so they seek to normalise it. And markets don’t fail do they? And all Labour seem to want to do is…………………….well what exactly do they want to do – you tell me?
Markets? Yeah right – my arse!
Thanks
This is what gives Casino Capatalism a bad name, spivs and thieves have decided they are never allowed to lose
Forget ‘Creative Destruction ‘ and ‘Moral Hazard’ its the Taxpayers duty to let me Rob you blind
Banks to big to fail, twas Obama and Brown who saved them, now we face the consequences
We cannot print (QE) our way out of this, that’s never the answer to anything
The solution economically and environmentally would be to force their failure through the regulator
Anything else that holds the earth to ransom we should nationalise during a state of emergency
You clearly do not understand money creation
MAGIC MONEY TREE
Before the collapse of every empire, the kleptocrats debase the currency
Read John Hudson on the history of money
What we need is debt forgiveness a Jubilee for the people
No one is debasing our currency
Except Brexit and those debasing productivity
You are wrong
Sorry
Michael Hudson
Where is ‘Moral Hazard’ and ‘Creative Destruction ‘ if you just print your way out of trouble
The problem with money creation is who you do it for
At best you think you can invest your way to a happy end, it takes no account of competing interests, greed and corruption
Fossil fuels v The Planet
For the MAGIC MONEY TREE to work you would need a benevolent Dictator to be elected King of the World
I have one response, which is that this is pure drivel
I wish people would engage their brains before writing nonsense here
You might have a leg to stand on if there was a clear historical example of the MAGIC MONEY TREE ever working and that’s because it doesn’t exist in reality, it’s not a thing
It’s the economic equivalent of Santa Clause and the Tooth Fairy
So how do you explain £900bn of new money creation since 2008?
Did that not happen?
Or was the money just made up (trick question, just to give you a warning)?
Excellent article Richard. Clearly reform of the energy markets is urgently required to protect life and sanity. While we’re about it, a couple of as yet unstated priorities need to be taken into account too:
1. Transmission charges: When I last saw the figures, transmission charges for the North of Scotland were £7.36/MWh and those for Southern Scotland were £4.70/MWh, while the average rate for England & Wales was £0.49, with some areas in Southern England actually being paid to transmit power to the “centres of demand” (i.e. London & the Southeast). These charges on electricity produced in Scotland are, by some margin, the highest in Europe. Most countries within the EU don’t levy transmission charges at all and the few others who do are measured in coppers. The result in Scotland, the largest producer of renewables in the UK, is that we pay more for our electricity than anywhere else in the UK, especially in Northern Scotland where wind generated power is more reliable. How is that equitable?
2. Tidal power: It’s obviously the only renewable source which is 100% reliable 24/7/365 yet the UK Gov withdrew funding for R&D, thereby slowing the process of developing prototype solutions. One floating turbine ship which was developed and tested in the Pentland Firth went to the Bay of Fundy in Canada for stress testing in the biggest tidal flow on the planet. It was so successful that it’s still there and selling its electricity to the Nova Scotia grid. There is a clear and obvious need to take tidal and wave power more seriously, yet it seems to have disappeared completely from general discussion and, more importantly, from the plans of the UK Gov.
Agreed, to both
Don`t wish to be dweeby but tidal and wave are quite different – tidal IS predictable and, as such is a good answer to the `renewables are unreliable` brigade.
However wave is not predictable and conflating the two can give the anti`s room for manoevre.
I brought up the issue of tidal power with my mp some time ago and never heard anything back. As you say, it is inherently reliable. Why this source is being seemingly ignored is I inexplicable to me. But maybe Mike or Richard have an idea about why this might be so.
As a P.S. to my post, the V&A in Dundee has a large gallery devoted to Scottish design across the centuries and covering a wide range of topics. Among them is a 5 minute film about tidal and wave energy developments undertaken in recent years by a joint initiative of the Scottish Gov, the EU and a number of engineering companies. This was an effort to keep tidal & wave technology alive after the Tories stopped investment. The film (which was made by Stroma Films in a private commission by V&A Dundee so the only way to see it is to visit the V&A if you’re in the Dundee area – sorry no link is available) makes a very convincing case for these technologies and is well worth watching.
Regarding Brian Faux’s comment, I’m well aware that wave power is not 100% dependable, but flat-calm days on Scottish seas are very rare, especially on the Atlantic coasts and the Pentland Firth, so it should be a very reliable source of renewable energy with only a few days of down-time per year. Early wave energy experiments failed due to designs being insufficiently robust to stand up to Atlantic storms, but designs have moved on and the examples shown in the V&A’S film are a vast improvement on early experiments.
The success of the Scottish-built tidal turbine in the Bay of Fundy is unlikely to create many jobs in Scotland: the Canadians will build their own locally if they opt to expand their tidal energy capture. It’s a familiar song in Britain: develop an idea then flog it to the world for them to exploit and take the downstream tax benefits. However, with an established (if currently inadequately funded) tidal & wave energy industry already active in Scotland, it’s in an excellent position to be a world leader in dependable renewable energy, although that’s only likely to happen if Scotland becomes an independent state.
Did I not read as well that Scotland gives something like £35M to be on the national grid? https://www.bbc.co.uk/news/uk-scotland-scotland-politics-29509021 So the article is saying that because we are further from the south? Since the energy comes from here (I live in North Aberdeenshire), and we were hammered by the storms, those in the country had no power for sometimes over a week and the government wants us to run electric cars? no good if there are going to be fierce storms? What I don’t get is that gas from the north sea is being pumped into St Fergus near Peterhead which is about a 45-minute drive from me and we get charged for it. I can see windmills outside my window and the local council (Aberdeenshire) has got solar panels for their owned housing. We are hydroelectric mainly here too.
If we make more than we use and have to pay large amounts of money for effectively the southeast and the rest of the UK to be supplied by us. Why are we the ones who should be paying when it comes from us? We pay extra for our supplies and postage as it is with fuel costs. Everything is more southern-based, isn’t it time that politicians take heed of all of us in the north of Scotland who also through the location get long winter nights and yet Norway is better placed? Isn’t it more of a case of WestMonster completely spaffing its money and having everything based in the southeast where it is warmer and has a much better rail infrastructure than it is up here?
If they want to charge ridiculous prices for electricity now, how is it going to work when they want everyone to run electric cars?
All good questions a Scottish government needs to work hard to address
Janine, the charges you’re referring to are transmission charges and indeed, the north of Scotland pays the highest transmission charges, not just in the UK, but in the whole of Europe. I followed the link you provided, which dates from 2014 and, while much has changed since then (e.g. Longannet has been demolished), the information it contains remains largely unchanged today. The link explains that these charges are to recover the costs of putting up pylons, the maintenance of cabling and other infrastructure. However, in a UK whose government is London-centric, the underlying “logic” is that the costs of pylons, cables etc should be borne in the region where the energy is produced and fed into the grid; and the further that region is from London the higher the charges will be. It’s also worth pointing out all powers relating to energy (whether oil, gas, nuclear, coal or renewables) are reserved to Westminster and the Scottish Gov can do nothing to change current practices on its own.
I agree this is nonsensical and unjust, particularly as so much energy is produced in areas where average incomes are substantially lower than in London. As I understand it, Orkney has the highest transmission charges in the UK as explained in a paper published by the Orkney Council:
https://www.orkney.gov.uk/Files/Strategic_Projects/Orkney_%20Transmission_Link_Report_May_2021.pdf
Orkney’s problems start with the connector cable to the mainland being too small for the amount of energy being produced and are compounded by Orkney lying outside UK’s Transmission Charging Zones. This results in generators in Orkney (and the Hebrides) being surcharged for a connection to a designated charging zone on the mainland and over 700 miles from London, so they are being surcharged on top of the highest transmission charges in the UK & Europe. In addition, if energy has to be sent through the connector to Orkney, it is subject to additional “spur charges”, since Orkney is supposedly outwith the grid. This results in green energy not getting to the grid because the connectors don’t have enough capacity and, when that energy is used in Orkney, they get charged for being so far away from London; this is a Kafkaesque rip-off pure and simple.
Clearly the existing charging structure is unfit for purpose: its methodologies and regulations are built around the false logic of energy supply being a functioning, competitive market (which it clearly isn’t when corporate failures are numerous and the costs are passed on to consumers). Why aren’t transmission charges levied at a uniform rate across the whole UK? Why can’t connector cables be upgraded so that the massive amounts of green electricity produced on Orkney and the islands can be fed into the UK Grid and reduce reliance on fossil fuels? Why can’t the whole energy regulation scenario be radically altered to act on behalf of the users?
Its been many years since it was possible to sail down the Bristol Channel on a passenger ship and see it, but there used to be (perhaps still is?) a prototype ‘tidal stream’ generator near Lynmouth.
“The cost of generating electricity using these various methods varies greatly. ….” This is what I have been thinking for many weeks. If it is obvious to me, for a government that has been prepared to break International law, touting the benefits of Brexit this should be easy and with a quick legal fix.
Yet more proof that the Tories care not about the citizens and ordinary businesses of this country. I wish I could reincarnate in a hundred years to see what eventually happened and read those future histories of the current times. Hopefully they are in the process of self-destruction.
[…] By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK […]
Interesting article on the Daily Sceptic today Richard, highly supportive of your stance.
https://dailysceptic.org/2022/08/29/the-fantasy-world-of-renewable-energy/
I think everything in that article deeply speculative
The article cherry picks data (gas prices) and also quotes data out of context (CfDs for off-shore) to build a wholly misleading picture – which appears to be the intention. The BTL seems to confirm that this is a go-to site for climate deniers and similar headbangers all as mad as bag full of rabid ferrets.
I might not have put it like that, but it was decidedly hard to see its value
Hope you’ve all signed up to this.
https://weownit.org.uk/act-now/nationalise-bulb
… and what about the massive subsidies being paid out to FF companies- Drax for example? Presumably the tax payers will continue to have to pay these as well as enormous fuel bills?
The taxpayer does not as such pay for any government spending
I get the MMT point that as a taxpayer, I dont ‘pay’ for anything BUT given that there is a limit to the amount of money the Government can create and the amount it needs to cancel through taxation to prevent inflation, if as The Treasury I have to hand over money for a particular good or service then there is less available for something else?
As Eisenhower said
Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed. This world in arms is not spending money alone.
Your point is fair
Tax remains key within MMT
What follows is a response to Rob who posted at 0827 on the 29th. his last post was internally contradictory and I feel readers deserve an explanation. His comments are in “..”
“All electricity……. there is only the bid and offer price. …the only drivers for the price of electricity are supply and demand. If there was abundant supply from cheap sources that would drive prices down, but there isn’t so”
Concerning “but there isn’t so” statement ……….wholesale electricity prices in the Netherlands on Sunday 28th August @ 1400hrs were minus€10/MWh because most generation was from PV or wind and only 4% from gas. Less extreme events occur in the UK and renewables do drive prices down.
“a) day ahead prices are high for various reasons……. Renewables are cheap (ish) but need to be backed by steady state production, which in the UK means gas, because they are unreliable……..”
There is a high level of correlation (0.95) between changes in day-ahead electricity prices and changes in gas prices. High gas prices cause high elec prices under the current market design. “steady-state production” is nuclear (in those countries that have it). Gas modulates its output to match variations in renwable output thus making it anything but “steady-state”.
“b) retail prices are driven by supply and demand. When the bulk of generation and backup generation is gas, that is going to have the biggest effect on those retail prices. …….there are different output prices for different types of electricity. There aren’t – once it hits the grid it is all the same. “
The statements made are contradicted by the existence of CfDs (mostly for off-shore wind) where the wind farms sell to the wholesale market at the market price and the gov’ recovers the difference between the CfD auction price (i.e. the output price) and the wholesale price at the time of supply. The CfD IS the output price for a given off-shore wind project. Thus it follows that the wholesale price is set by…..the marginal price – which is mostly defined by gas generators. If off-shore were obliged to sell into the market @ the CfD price then you would most definitely see substantive changes to wholesale prices.
“As I mention above – Richard Murphy’s “marginal pricing” where generators get cost + profit doesn’t exist. As you surely should know (if you know **anything** about the energy industry), both the UK and Europe have a pay to clear energy system, where all energy for a given time slot is cleared at the same price, regardless of the supplier”
Marginal pricing has very little to do with “cost + profit”. Helpfully, Rob then goes on to describe rather well marginal pricing……..“both the UK and Europe have a pay to clear energy system, where all energy for a given time slot is cleared at the same price, regardless of the supplier” – that is the definition of marginal pricing, where the last MWh from a given generation unit that balances supply and demand defines the overall system price at that point in time. That’s marginal pricing. Thus doe Rob rather contradict his previous statements about marginal pricing does not exist.
“b) Supply and demand. Suppliers put their bids in, then those bids are met via the standard market mechanism. Highest bids are met first, leaving the overall price discovery being akin to a Dutch auction”
This is what Rob said earlier: “both the UK and Europe have a pay to clear energy system, where all energy for a given time slot is cleared at the same price, regardless of the supplier” which as already noted is marginal pricing – and perhaps is Rob’s “standard market mechanism”.
Friendly suggestion to Rob: read carefully what you write before publishing – particularly check for internal consistency.
I strongly suspect Rob does not known what marginal costing and pricing is
@ Mike Parr
“wholesale electricity prices in the Netherlands on Sunday 28th August @ 1400hrs were minus€10/MWh because most generation was from PV or wind and only 4% from gas. Less extreme events occur in the UK and renewables do drive prices down.”
This does happen, but it is rare. And because renewables are inherently unreliable, and generators are contractually obliged to supply given amounts, they will have purchased or produced backup supply from gas. Sold through the BM.
All this means that you rarely if ever get anywhere close to the cost of pure renewables.
If anything you often get a case of massively perverse incentives. When renewables are working at capacity grids can get overloaded and thanks to their fixed cost, often subsidized by government and generators have to pay to shut down or distribute power, driving wholesale prices to very low or even negative levels. What you don’t see in the wholesale price is the renewable subsidy.
a) Your point? Given gas in the UK either directly or acts as backup for about 80% of demand, is it that suprising that forward prices are highly correlated to gas prices?
b) What you are calling CfDs are futures. And what you are basically saying is that lower cost producers should sell their energy at a different price…because thy are lower cost. Given that all energy is the same once produced, why would they do this? Or are you going to simply force them to?
At which point you destroy the incentive for more low cost production, by removing the profit motive.
What we have at the moment is a lack of supply, which is keeping prices high. Markets will eventually solve this by creating more low cost energy generation, which will drive down prices till supply and demand are more balanced.
Reading between the lines, your solution is to force lower cost suppliers to sell for less, destroying this mechanism and basically forcing government to do all the investing. So instead of paying through bills, we pay through taxes, almost certainly in a less efficient manner as governments are not known for their efficiency, especially when profit motive is not a concern.
“Marginal pricing has very little to do with “cost + profit”
I’m simply using Murphy’s own (incorrect) terminology. I quote:
“The wholesale price of electricity in the UK is set on what is called a ‘marginal costing’ basis.”
“What it means is that the wholesale energy price is set so that the most expensive producer can make a profit from the sales they make into the wholesale energy market.”
Which of course is mind-wobbling nonsense.
Doesn’t help that his definition of marginal pricing in the first place is wrong – showing once again how little he understands.
For clarity, let us call the Murphy method marginal pricing and the real method pay to clear, which is often known as marginal.
We have pay to clear marginal, we DO NOT have Murphy marginal pricing. Pay to clear marginal pricing does NOT mean that every generator sells at a profit, counter to Murphy’s main claim, from which all his other claims lead.
You clearly have no idea about the CfDs being referred to
Nor, come to that do you seem to note many agree marginal costing is a problem across Europe
This is your last comment. Repetition is contrary to the comments policy
I was not going to comment anymore, but still read the Blog, and just I can’t pass on Rob’s persistence in a superficially plausible defence of an absolutely catastrophic, hevaily manipulated UK domestic energy “market”.
On CfDs, here is the LCCC explanation, and they run the show; but you wouldn’t know this if you read only “Rob”: “The essence of a CfD is that the generator will be paid the difference between the ‘strike price’ and the ‘reference price’. The strike price is a price for electricity reflecting the cost of investing in a particular low carbon technology. The reference price is the average market price for electricity at the relevant point in time. If the generator sells its electricity at less than the strike price, LCCC will pay it the difference. If the generator sells its electricity for more than the strike price, the generator will pay LCCC the difference”.
CfDs are a managed pricing system, not by a “market”, but effectively by Government. Instead of anyone wasting their time reading Rob on the energy market, they should read Sir Dieter Helm on the market system set up by Government. It is a complex, dysfunctional, total mess, which Helm exposed when he wrote the ‘Cost of Energy Review’ FOR THE GOVERNMENT in 2017. He was their chosen advisor. Read it, and his fierce rebuttal of Johnson’s waffle about the Ukraine war in ‘The Independent’ (29th August, 2022), ‘Energy bills soaring because of government failure not Ukraine’ .
Why is Rob peddling a failed system? Why is he commenting without his full name? Does he have a dog in the fight? If he wishes to persuade anyone that he is a credible and independent source without any interest, I suggest it dawn on him that if you decline to use your full name, and openly stand behind your opinion you will persuade few, however hard you bluster.
Unfortunately Richard has cut him out of the Blog, and we can’t now see his response; Richard’s call, his Blog of course.
I shall now retire to silence; everyone can breathe a sigh of relief.
Rob has not been blocked but has only offered one more comment and it repeated what h had said before so I deleted it
Good to see you here
I actually think the discussion between Richard & Mike and Rob is a good, insightful and productive.
Much respect to each other’s angles of analysis, merit to all for your passion to discuss openly!
If I understand Rob, he is saying we have a functioning market; gas is determining pricing due to its position as instant energy source. In the long term market forces will balance things out. (Nothing to worry about?)
If I understand Richard & Marks position, the energy market’s design is failing real businesses and for this reason the design needs to be altered. End prices are too sensitive to gas prices. (Pricing forces needs to change?)
A question for all three of you: Would a (eu) price cap on gas for electricity solve the problem of the electricity prices hitting new highs? And what alternatives can replace the role of gas in the energy mix?
I have already answered how to address the question
Responding to Eddie:
“A question for all three of you: Would a (eu) price cap on gas for electricity solve the problem of the electricity prices hitting new highs? And what alternatives can replace the role of gas in the energy mix?”
I have contact with people in the European Commission (DG Competition) involved with the negotiations with Spain on their “gas price cap”. It is highly problematical and as predicted causes a continuous flow of elec from Spain (lower cost elec) to France (high cost elec). I did some rough calcs and a very similar result could have been obtained (with no gov subsidies – because that is what a price cap involves) by a market split. The situation in the Uk is a bit different – it has its own gas – Spain does not. Thus the UK could declare that all home produced gas will be sold at e.g. £20/MWh. This would substantially reduce gas & elec prices.
As of now, there are no alternatives to gas in the elec mix in any country. However, if renewables are built out at speed, and given the fact that, for example, the UKs off-shore wind resource is estimated at between 650GW through to 1200GW the prospects for a) low cost green elec and b)low cost green hydrogen are good. For this to happen in a reasonable time frame would require +/- a build out of 10 – 20GW of off-shore wind for 10 years. This is doable – if there is political will. Sadly, significant tory party doners include the oil&gas mafia.
Rob wrote this:
‘Reading between the lines, your solution is to force lower cost suppliers to sell for less, destroying this mechanism and basically forcing government to do all the investing.’
Clearly Rob does not seem to also know that this blog advocates courageous states who intervene in market failure – market failure being another thing that Rob also does not seem to realise is happening in the energy industry.
And what sort of ‘investment’ have we had? ‘Not enough’ would be a fair answer.
You mention taxing the energy companies, but it is also noted that the government is making the windfall profits through contracts.
So taxing does not seem like a solution.
There are multiple ways of dealing with this
I am not in the business of providing single solutions
It is justified that gas prices should not effect electricity prices as much as seen. Gas is a minority percentage of the energy mix, so it’s price should have a minority influence.
You might think that economical actors are making unjust windfall profits. But it seems to me this is not the main force in current price creation.
Everyone is simply playing the game by its rules.
So government should not focus its solutions/ regulations at energy brokers/ companies.
Gas has the unique physical property of being able to supply electricity at moments when demand spikes.
Due to this property and the way the market has been modeled, these spikes in demand are causing unjust price increases and we have no mechanism to correct this.
If this is the case, the governments should focus efforts to stabilize pricing for demand spikes.
Australia’s had a similar problem of unjust pricing caused by demand spikes and solved it, I think we can learn from their examples.
It is not justified that gas prices should effect electricity prices as much as seen. Gas is a minority percentage of the energy mix, so it’s price should have a minority influence.
You might think that economical actors are making unjust windfall profits. But everyone is simply playing the game by its rules.
The problem is that gas has the unique physical property of being able to supply electricity at moments when demand spikes.
Gas has a monopoly in this property.
It is similar to Australia’s grid mess some years back, maybe our solutions should follow theirs?
https://leftfootforward.org/2022/08/good-law-project-plans-to-sue-ofgem-over-energy-price-cap-rise/
I was hoping somebody would be able to.
I don’t understand the electricity market in this country. If I want a loaf of bread I can chose one from Asda for £1.50 or one from Lidl for £1.00. Why don’t I have the choice of electricity made from gas for 50p or electricity made from wind for 25p? EDF say their electricity is made from wind, but they still chatge me 50p.
Because that would require two central grids
Why would it? In morrirons I can buy fletchers bread, or warbutons bread, or morrirons bread, or hovis bread, all in one shop. When they run out og hovis bread I have to chose to not buy bread or buy warburtons or fletchers or morrirsons. You can do the same with one “shop” electic grid. If the “shop” runs out of wind-powered electricity I have to chose to not buy electricity from the “shop” or buy gas electricity or coal electricyty.
They are all the same the moment they get to the grid
Go and read about how electricity distribution works before commenting again
An interesting article here about renewables.
https://bylinetimes.com/2022/08/31/solar-and-wind-power-now-deliver-more-than-double-the-energy-produced-by-oil-new-study-finds/
Haven’t seen anything similar in the MSM.