Why Is the Cost of Electricity Fixed to the Price of Gas?
 Topic: electricity in the UK |  Read Time: 4 mins |
 Landowner type: All |  Energy: Renewable Energy |
7th August 2024Watching the current energy prices moving upwards is enough to make anyone feel nervous. But have you wondered why Britain ties the cost of renewable energy to the price of gas despite it being far cheaper to produce?
So, if you’re:
- Struggling to make sense of the UK energy market’s structure
- Want to learn why energy prices are so high
- Want to pick up some premium knowledge about current affairs
We suggest you keep reading for an in-depth look at why the price of gas directly impacts the cost of renewables.
Why Electricity Is Linked to the Cost of Gas
To answer the question “why is the cost of electricity fixed to the price of gas”, we need to look at the UK’s energy market.
The UK uses a lot of energy. And to meet the energy needs of everyone, we need to pull from gas, renewables, nuclear, coal, and oil.
Since 2005, the UK has run its energy market as one large market that covers Scotland, England and Wales. So there’s just one market price for the whole of Great Britain. As a result, we fix the price to the most expensive form of energy, which is currently gas.
This means that we link the price of electricity to the price of gas. As gas is extremely expensive, this commodity heavily drives up the market price of energy.
If we’re running low on wind energy during certain months, we’ll have to make up the shortfall somewhere. And if gas is always the first port of call during shortages, it will continue to dominate the market price for energy and drive up the overall cost of electricity.
So, regardless of whether wind energy is cheaper to produce, it continues to match the price of gas and explains why the overall cost of energy is so high.
Where on Earth Are The Profits Going?
The excess money that renewable energy companies are making essentially allows wind farm developers to break even.
Although this isn’t the case for older wind farms that were heavily subsidised before 2015, the majority of projects will be focused on recouping their initial investments.
Wind farms take approximately 15 years to become profitable. So, these excess profits will be funnelled through to repay a developer’s initial costs of production instead of being maliciously pocketed.
What Can We Do About This?
If we want to drive down the overall cost of energy, there are a couple of approaches we could take.
Offer incentives to producers
To drive down prices and reduce energy companies’ profits, the government could offer incentives to encourage developers to sell their energy at pre-2022 prices.
Unfortunately, this removes the all-important incentive of profit that encourages renewable energy project developers to risk their capital in the first place.
Without the promise of government subsidies, choosing to build new projects is now riskier than ever.
Split the country up further
The alternative option would be to divide the country into smaller regions.
In theory, this would make the entire market more responsive to regional demand and drive down prices in certain areas.
For example, Scotland can easily meet its overall energy demands with renewables alone thanks to its surplus of wind farms and lower population count.
Although England would still be left paying a higher price based on their access to renewables, the government could effectively subsidise the areas paying the higher cost of energy.
It’s tricky to see how this would work in practice. But it’s a viable alternative to the current single market price that we’re currently dealing with.
Should We Be Frustrated By This?
Well, yes and no.
To achieve net zero and make the UK energy independent, we cannot avoid investing in more renewable energy projects. These are fully necessary to provide the country with clean and reliable energy for the future.
And to do this, we need to provide developers with an incentive to invest their capital and pursue planning permission for wind farms. This process can be time-consuming, risky and extremely arduous at the best of times. So, allowing them to recoup their wind farm investments a few years early seems a small price to pay.
This is easier said than done (as these projects require significant forethought, cash injections and planning permission to succeed). But it should gradually reduce the country’s reliance on foreign gas.The Energy Price Guarantee announced by the UK government will reduce the cost of electricity for the average household. But until the overall cost of gas decreases, there’s only so much of a buffer the government can provide.
Final Thoughts
While the excess profits reaped by the energy industry can be difficult to swallow, profitable wind farms aren’t something that we necessarily want to knock.
Instead, we should focus on reducing our overall consumption by building more UK power plants. This step forward will make the country energy-independent. Along with amenable negotiations with Russia that will bring the Ukrainian conflict to an end, these steps should secure lower overall energy prices.
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