Future of the UK electricity "market"
BTL on the last thread, Clive triggered some comments with: Renewables are rocking da house. And negative prices! So, while hydrocarbons will linger around for a while yet, they’re obviously not indispensable and are, arguably, definitely in run off; followed by Anon: Interesting points being raised by @Clive on negative electricity prices due to generation imbalance. Perhaps another thread on suggestions on how to use up all the surplus power when its available e.g. pumped storage.
So here we are. Nobody quite knows the future evolution of the UK power fleet, seeing that the government is willing to throw really quite serious money these days – plus various threats of compulsion – into a range of energy-related options (nukes of various sorts, CCUS, hydrogen, EVs, HPs), some of which frankly look like backing several horses in case one or more turns out to be totally lame. You can pretty much suspend the laws of physics for as long as you’re willing to throw enough money at it – and certainly the laws of economics. Also, they’ve allowed themselves some very prudent opt-out language in case this isn’t working: for example, there’s a ‘security of supply’ override on the 2035 ‘net zero carbon electricity system’ deadline (which means it’s just a target / aspiration). And there’s no date on ending sale of gas boilers.
But some things we can say for sure.
- there is absolutely no end in sight for dependency on natural gas
- the cost of generating electricity to meet demand securely will rise
- global anthropogenic CO2 emissions haven’t peaked, and won’t peak for a very long time (if at all)
There’s no point that I can see in banging on about 3, in the context of dealing with what’s before us. Anyone who thinks the global “drive to net zero carbon” (qua western-governmental policy) can be halted by blog discussions hasn’t understood the force of politics behind it (as a policy). As I first wrote in 2019, it’s 100% mainstream now, including the entire banking sector, and most of industry, which expects to benefit from a whole new era of state handouts under various headings, always the source of revenue requiring the least effort. Nothing to do with Greta, BTW, and everything to do with Business.
But that means maintaining a lot of expensive stuff on standby, specifically, gas-fired electricity generating capacity AND the entire infrastructure, physical and commercial, to ensure gas will be available when needed. That’s easy enough** when (a) it all exists anyway; and (b) there’s strong reason to believe that residential gas demand will continue for a long time at roughly the present level, even as UK industry slowly transitions towards electrification, hydrogen, or an early grave, a.k.a. further offshoring. Keeping stuff hanging around mostly idle doesn’t cost nothing. Just like paying windfarms to stop generating; bringing ever more sophisticated batteries into the fleet; building vast new infrastructure to accommodate new windfarms; etc etc.
But what of negative (wholesale) prices, increasingly a feature of most electricity markets? Easy. They are negative for just a few hours, just as they go wildly high for just a few hours (or longer …). It’s volatility, that’s all – and tells you nothing about the average price which, as I’ve asserted, will rise and rise. And what do we know about volatility? It’s like a heartbeat: too low and it signifies death – but too high, and it’s a Very Bad (and costly) Thing. Or (to switch useful analogies) like friction: too low, and you’ll slide all over the place. Too high, and you’re seriously (and expensively) inconvenienced.
We hear endless chatter, mostly from the EU (though Will Hutton is egregiously stupid misinformed on this also) where ignorance about markets is a dominant strand in public life, about “decoupling” the price of electricity from the price of gas. What do they mean? Well, initially they “meant” nothing more than “we’ve heard renewable electricity is cheap, nay free – so why has the retail price gone up?” – an expression of pure ignorance. More recently, they’ve been gently steered towards something meaningful, indeed, logical – i.e. thinking about a more widespread deployment of longer-term financial hedging against electricity price volatility. There’s nothing remotely new about this: any party that feels uncomfortable being exposed to price fluctuations should go for a fixed price! If this is to be achieved via extending the market for ‘renewable PPAs’, i.e. fixed priced electricity sales contracts (or more likely CfDs) offered by renewables developers – compulsorily?? brokered by regulators?? – then so be it. I’m not sure many industrial companies will enjoy the fixed prices on offer: that’s another matter entirely.
But it does bring us back rather neatly to point 2 above. Whether it’s the average of volatile wholesale prices, or fixed-price PPAs, the price of electricity will carry on rising – long after Putin has been put back in his box. That’s what happens when you move to an intrinsically more complex and basically entirely new way of running an entire, very large, industry. All at once++. Across a very large part of the world economy.
Doesn’t mean it can’t be done. Does mean it’s gonna be expensive.
ND
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** It‘ll be a lot more difficult without a base level of residential gas demand
++ People who pretend otherwise – and there are many – are like those who said Brexit would boost the UK economy. I write as someone who voted for Brexit. But I never thought it would be anything other than costly.
Source: http://www.cityunslicker.co.uk/2023/03/future-of-uk-electricity-market.html
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