The UK has some of the highest electricity prices in Europe — and it's not because energy is scarce.
In this video, I explain how electricity pricing actually works, why gas prices set the cost for everything, and how a flawed system is forcing households and businesses to pay far more than necessary.
This is not an accident. It is a policy choice — and it could be changed.
(And note that I was delighted to hear Zack Polanski talk about this issue in his recent speech to the Green Party)
This is the audio version:
This is the transcript:
We have an electricity price crisis in the UK right now, and what we know is it's going to get much worse. The war in the Middle East guarantees that.
We have a problem, that we pay the highest prices for electricity in Europe in this country, and that's crippling our households, it's damaging our industry, it's holding us back, and it's ridiculous because the government could change the rules on electricity pricing, and it won't, and that is their fault, and no one's talking about it, so I will.
Let's talk about how electricity prices in this country are set. This is a difficult subject. Let's be clear about it. Nothing that follows from this is going to be immediately obvious, so please bear with me.
What we have are a range of producers of electricity in the UK: wind power, solar power, nuclear power, we used to have coal power, but we don't anymore. We do have hydropower and we do, of course, have gas-fired power stations.
Now, at any point in time, our regulators require that electricity be bought from all these producers to ensure that the supply to you and me, industry, and everyone else is going to be met. So what do they do? They go out into the market, and they look at who is offering them electricity at a price at a point of time. That price does vary almost by the minute, by the way, because it depends upon how much is being produced from which source, whether the sun is shining, whether the wind is blowing, and so on.
So they have to make a decision as to what they're going to buy, and they do. They buy the cheapest power first. They go into the market and say, “Let's buy some wind. Let's buy some solar. Let's buy some hydro. Let's buy some nuclear, because the government wants them to, let's buy some gas-fired electricity as well.” The point is that it's almost invariably that last supply, which is the most expensive. Gas-fired electricity is really expensive to produce in the UK right now because we're importing most of the gas, we pay international prices for it, and as we know, international prices have been very high.
So what we know is the regulator buys electricity at lots of different prices, and each of those prices is enough for the generators of electricity to make a profit. If it wasn't, they wouldn't be trying to sell it. So you would then expect that the regulator would put all this electricity, bought at different prices, into a pot, mix together the sources, and come up with an average price across the whole range, which they would charge to us for the electricity that they are making available. That would make sense, wouldn't it? Every single generator would get a profit. We would get the lowest price possible.
That is not what happens. I could go into the theory that explains all of this, but it is a bit tedious. It's all based upon the microeconomic theory of the firm, and it assumes that every single firm in a market is the same, even though, as I've just explained, in electricity, that is not the case at all. But because the regulator assumes that all firms in the market are the same, and they assume that the last person they buy electricity from is the person who sets the price, they charge us the price for the most expensive electricity they buy.
In other words, we have to suffer the cost of gas-generated electricity, even though most of what we use comes from solar power, wind power, hydropower, or nuclear power.
Now, the point is we therefore pay the maximum price and not the minimum price we could pay for electricity, and the government has chosen to do this.
What's more, it's chosen to do this even though the government has already guaranteed the price to solar power operators, to wind power operators and to nuclear power operators, because all of those generators require a guaranteed price to encourage them to come into the market in the first place.
Therefore, the lower prices that they charge than gas are the ones that are known to be available. That price could be passed on, and it would be fair. But no, that's not what happens. The regulator charges us the price of gas-powered electricity production, and that makes no sense at all. We are literally being taken to the cleaners for the sake of a failed regulatory system here, which charges the maximum price and not the minimum price possible.
Why are our politicians not talking about this? That is a really important question. They assume that there is this competitive market. All our politicians for the last 45 years have been neoliberals. All of them assume there are competitive markets, but in this case, the facts fly in the face of that. Let's be honest, there is no competitive market in electricity at all. The electricity system doesn't in any way resemble the assumptions of the model on which the pricing is based. We should instead be looking at what's actually going on, including these guaranteed government prices paid for electricity from solar, wind, and nuclear, and the fact that we don't need to price electricity at the price of gas-fired power station-generated power because that is only a small part of the market. On average, less than a third most of the time.
So what could we do?
The point is this: we could be doing something very different.
We could have the government change the regulations. Yet again, what we're suffering is failed regulation here.
They could decide that we should be in the situation where electricity prices will be based upon the average cost of generating the electricity used at a moment, rather than the maximum cost of electricity generation at a moment. In that way, we would get the gains instead of electricity companies getting the gains.
The whole system is rigged in favour of either the government or the electricity companies in this case, and the result is that public trust in the energy system is falling, and public trust in the green transition, which is an essential part of this process, is also falling, and we're all facing household and business costs, which are far too high.
It's time to throw out this stupid microeconomic theory that is imposing this cost upon us.
It's time to have an effective regulator.
It's time for the government to get off its butt and do something about this.
It's time for electricity prices to fall.
How much could they fall by? Oh, 20% to 25% would be easily possible. In this case, there would be no net cost in most cases because the government would simply not make the difference between the excess price that we are being charged and the price they guaranteed to the producers of solar, of wind and nuclear. All of it would give rise to a public benefit, and the government would be winning in popularity, but it won't.
This makes no sense at all.
We are suffering from a bad policy choice. Changing that policy choice would allow us to have cheap, renewable electricity now at lower prices.
This is, to me, the core decision the government has got to take with regard to energy policy at present.
It isn't what makes power that matters at the moment. It's the pricing system that is imposing the whole penalty upon us. We have to have a new pricing system for electricity that reflects the reality of the world we live in.
Why won't our ministers see that? I don't know. Write to them. Tell them you are angry. Tell them to charge the average price of electricity production to us, the consumer, because we get a better deal as a result. Do it and let us know what you think in the comments below. Tell us what you think about this video. Please share it. Please subscribe to this channel. Get the debate going. Tell ministers it's time for a change.
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I didn’t know the auctions are done by the minute. The mainstream analysis of electric prices suggests that they are done by the half hour, and that system costs and guaranteed prices are key parts of the overall mix.
Have you seen the waiting times on ordering inverters lately? Years.
I did not say that the auctions were done by the minute. I said the price has changed by the minute. The auctions, as note are every 30 minutes.
Cui bono?
I mean, who at government/regulatory level reaps the benefit at a level sufficient for this scandal to have continued unchecked for so long?
Who gains? Marginal-market fanatics. The same question could be asked wrt the 16th century and the ptolemaic system (sun rotates around the earth). Who gains? clerics in the case of the 16th cent. Who gains now? neolibtards who know (just like the clerics) that marignal-markets are perfect in every way. The “gain” being in the form of “we are right, our religion (neo-libtardism) is the only & only possible religion” etc. In the background the banks gain via prop-desks due to elec voltaility – a core feature of elec marginal markets (& it is a feature – NOT a flaw)..
Does any other country price electricity like we do? The purported justification for this “pay-as-clear” system is that it sends “price signals” – pushing consumers to cut consumption, and encouraging suppliers to increase generation capacity if they can produce electricity at prices below the strike price. But are suppliers and consumers really able to respond to such price signals in the way the economic theory suggests?
That is a question for Mike Parr
Does any other country price electricity like we do?
See Mike Parr’s comments
EU is broadly similar (= marginal market). As for “sending signals” & cutting consumption – neo-libtard fantasy (= the rational economic man with full info). In the case of households, dishwashers, clothes washing machines and dryers can provide demand response (DR) – i.e. delay start. Elec vehicle charging – also. Heat pumps far less so. I’ve done papers on this stuff. DR needs to be automated if it is to work. Most people don’t have the time or inclination to be bothered looking at the meter (or home display). All the statements can be backed up empirically.
…how electricity prices in this country are set. This is a difficult subject.
Very true, and it is almost like it has been deliberately set up to be difficult, and the average person hasn’t got the time or inclination to look into it. So, they get away with a system that overcharges and works against the interests of ordinary people.
It’s what people don’t know, or what they are not told, that is the problem.
The same is true of standing charges for electricity and gas, another big rip off. Most people don’t know that it was the regulator that separated them — which gave power to monopoly private companies like the National Grid, and National Gas. Standing charges are up 160% since 2019. Who regulates these companies?
The CEO of Octopus Energy admits it in this video (he also says that the private energy suppliers warned the regulator not to do this).
https://www.youtube.com/watch?v=DU3f7wB7rVQ
And of course, there is the myth that green energy is too expensive. Farage and co are still peddling their lies that the future for Britain is gas, oil and fracking, when it is international markets, and the private companies that would do all the work, and dictate the price. It is sold to us that it is British gas and oil, for our use,when it isn’t. It will be up to the companies who extract it, as to whom they sell it. They will want the highest price possible. We will still be subject to shocks like now.
We need the truth to be out there, because when it comes to energy, current policy, and potential future policy of the extreme right, is based on lies.
In the renewable mix, mention should also be made of tidal stream turbines. I’m not talking about wave power which, like wind and solar, would depend on weather conditions. I’m talking about the entirely predictable flow of seawater, particularly strong where there are straits. Potentially, there is probably enough renewable energy for gas fired power stations to be unable to compete on price most of the time. If the “market” was working as it is claimed to, would these power stations not be forced to close down because their product is uncompetitive?
I am quite sure that we have so far underplayed the significance of tidal power when it comes to energy. If we had not, your logic would be right.
You seem to have forgotten that Drax burns Cat Litter, sourced from South America and Canada deemed to be Renewable.
Drax is now, and always has been, an ecological disaster. To pretend that at present it is part of the renewable generation process is utterly absurd.
I came to Somerset as they were completing Hinkley B and many of my then neighbours worked for the Central Electricity Generating Board. That was privatised and broken up under the Conservatives though the CEGB was finally ended under Labour.
The main generator companies are now foreign owned and I presume, profits flow abroad in many cases.
Hinkley C over due and costing more than estimated is owned by EDF.
IMHO privatisation was the triumph of ideology over common sense and the interests of most of the population.
You are right
The elec pricing system is based on marginal markets. For those interested in elegant demolitions “Late Soviet Britain” A. Innes does the job nicely. Marginal markets +/- work when you are dealing with broadly similar systems. But a gas generator is not broadly similar to a e.g. wind turbine. The othe problem is the “keep the lights on problem”. In the 1980s & 1990s easy, not many generators, make a list and have then generate on the basis of least cost 1st, highest cost last. This fails when generators are in their hundreds (if not thousands) and the TSO has no “visibilty” of much of the generator fleet (the stuff in the distribution network). I agree mostly with what was written. pay the renewables what they bid at auction (& offer fixed prices for nukes & hydro), make the TX connected generation take part in the day-ahead and intra-day “market” – but just in terms of volume (so at least the TSO knows partly what’s coming down the track). Leave the gas mob in the marginal market & then develop a blended price for the fixed price and marginal. Yes it will reduce prices, but it will also stabilise prices & that is hateful for traders. All those prop-desks out there in banks etc – they’d be out of business. If this ever came to pass, the banksters would be lining up to lobby against it. One last thing: all the wind turbine farms (& PV farms) I’d legislate for them to installed small amounts of batt storage. In the case of wind, 25kWh of storage per MW. This is enough to smooth output over any given hour. In turn this makes balancing the system easier.
Much to agree with
The difficulty is that this policy can’t be turned into a 3 word slogan….. and in the meanwhile it is blamed on “Net Zero” which is silly.
I have (long) question. I understand (and correct if wrong) most renewable projects have a “locked in” price for the electricity they generate (via a contract for difference). This is usually required in order to raise finance…. ie. ensure that what is produced can be sold at a steady profit to meet interest payments on loans. This means that the renewable generators are not necessarily the ones reaping the benefits of higher electricity prices. Instead it is the counterparty on the Contract For Difference (CFD). So, finally I get to the question “Who is taking the other side of this CFD? Is it government? Or someone else?”
The government takes the upside, but it never talks about it
…………….and that is unacceptable given the powers that they have and are not using – unless of course you look at the CBRA and the line of credit they have created for the rich – plus interest.
It was my understanding that the government funds payments on the CFDs when the contract price is above the market price – that is, tops up generators to the agreed fixed price – and gets back payments the other way when the contract price is below the market price – that is, the generators do not keep the upside.
This note from the House of Commons Library – Contracts for Difference Scheme – House of Commons Library – suggests that the CFDs are made by a government-owned company – the Low Carbon Contracts Company (its original name in 2013 was “CFD Counterparty Company Limited”). It suggests that the payments made by LCCC are funded by the suppliers (and ultimately by customers) through the Supplier Obligation Levy, and that payments back the other way from generators and passed back to the suppliers. So that, to quote “The cost, or benefit, is passed on to consumers through their bills.” Is that right?
I wonder if Mike could confirm.
That is my understanding too
Reading what Clive Parry says and your reply it appears to me that when suppliers with a contract for difference gets paid the higher gas price the amount above their contract price goes to the government. This is an extra tax. Where has my reasoning gone wrong?
I do not think it has
CfDs “assume” (this word does a lot of work in what follows) that upsides and downsides cancel out, i.e. wholesale prices wobble around the CfD strike price.
But, in a marginal market world, with more & more renewables coming on the system, wholesale prices will tend to head in one direction – down. This is occuring in Spain.
Thus CfDs (absent elec market reform) are in fact an open ended financial commitment by governments. Furthermore, given retail prices as seen by UK serfs tend not to be connected to wholesale prices then low whoelsale prices makee money for the retailers – whilst Uk serfs pay three times: once for the CfD diff, once for the windfall profits (retailer) and once for the overpriced elec.
All because marginal market fanatics (= traders) don’t want elec market reform.
Baffling beyond belief that LINO haven’t grasped the nettle of reform of the electricity “market”, even before the start of the USRael illegal war with Iran.
An easy and popular win all round I would have thought.
Come on Milliband, sort this out!
There was an article on this in the Guardian yesterday: Stopping gas dictating UK energy price could cut bills by £200, thinktank says | Energy | The Guardian
And so it begins.
Household energy bills could rise by £332 on average in July.
https://www.bbc.co.uk/news/articles/cede1nn8wp5o
I think Starmer could be heading for his Liz Truss moment on energy bills — assuming he survives the May elections.
I might be wrong, i often am, but before privatisation energy generators and energy providers were one and the same in many cases. Would the nationalisation of energy under a single organisation be one way to reduce costs as the sector as a whole would be able to sell all energy at the average cost, in turn giving an incentive to produce more of the cheapest electricity to reduce costs in the sector?
This is what GB Energy should be setting out to do.
That is what we need. Any surplus would then be state owned as well
Don’t forget the millions of independent individual operators known as householders, roof owners, and domestic battery storage users. We mostly generate solar, some of us use domestic batteries, almost none have wind turbines (not yet technically viable at domestic scale). We use a chaotic set of tarrifs, some off-peak, some (too little) variable demand-led pricing, and a mish-mash of illogical domestic export tarrifs. The potential of smart metering to influence domestic import and export is almost totally ignored.
We have a chaotic import/export pricing scheme, and no controls on consumption and export, and a brief Nat Grid experiment on controlling consumption during peak hours lasted about 1 hour per evening on a couple of days and was suddenly terminated (with no feedback) almost before it started. (I was unable to reduce my consumption below the pre-experiment level of zero, so did not get payments.
We have no say in where our exports go to (I would like them to reduce my neighbours bills).
I know its complicated, but there are 5,000 roofs in my deprived hilltop south-facing neighbourhood and it gets windy too.
Since June 2020 I have participated in a chaotic unfair system with no assistance, no planning, and no useful incentives. My investment shows an ROI of over 5% pa, with zero gov subsidy and no standing charge for me to pay for my solar panels, batteries and inverter infrastructure – yet the standing gas & electric charge I pay per day adds a sum equal to about 1/3 again on top of the amount I spend on my annual energy consumption costs (£389 elec, £592 Gas)
I represent a neglected national renewable energy asset.
I will have a full battery (>8kWh) during peak demand time this evening and right through till October. I can’t export then, although I could spare at least 4-5kWh from my battery, between 5-9pm and if it went to my neighbours I would sell it very cheap indeed.
I am beginning to understand my own system. My renewable supplier is beginning to experimeny with its consumer offering. I don’t begin to understand national energy pricing.
But we have wasted 10-20 years, when we could have been doing so much more as psrt of s politics of care.
I agree
This was the Green New Deal plan in 2008. We were failed
Conventional Thermal stations are 30% efficient, that means 70% of the energy from the fuel, nuclear or oil based is dumped into the atmosphere.
When are we going to move todistrict heating?