Energy prices have been making the news a lot lately. The regulator, Ofgem, has increased the level of the price cap (the maximum that suppliers can charge for a standard tariff) by £139 a year, and many suppliers are raising their own prices. This is because the cost to suppliers for buying the power and gas we supply has increased. There are many factors driving these high costs, but here is a brief explainer of some of the main themes.
Five nuclear reactors are currently offline, but only two of these were planned for.
High gas prices
First and foremost, the cost of gas has been rising. Summer is a time when most countries restock their gas storage, ready for use in the winter. In Europe, this relies in part on gas supply from Russia, which is currently providing far less than it would typically, because of competition from other markets in Asia. This impacts gas prices for consumers, but also electricity prices, as a large amount of UK power is currently generated by gas plants, which in turn impacts the whole market.
Low wind output
As has been widely reported, wind has been consistently low in September so far, which is radically different from the previous five years. National Grid plan for situations like this and so would usually have plenty of other generators to call on, but right now, it is not that simple.
At time of writing, over 17 gigawatts (GW) of energy generation is offline – this is 22% of the entire UK fleet. Some of this is because of planned maintenance, but many gas, coal and nuclear power plants are currently experiencing unplanned outages. Five nuclear reactors are currently offline, but only two of these were planned for. On Wednesday morning, a fire broke out at the facility managing an interconnector in Kent – this is a high voltage cable which transports power between the UK and France.
All this means margins are tighter, and nearly all available generation is required to meet demand. This will always mean that prices are higher, but the situation is being manipulated by some in order to maximise profits. Generators are required to declare their projected output to National Grid ahead of time, and some fossil fuel plants have been using this process to leverage significant premiums, demanding up to £4000 per MWh at times of the day when demand is highest. For context, typical consumption for one UK home is just under 3MWh per year.
What does it mean for customers?
All this means that if a supplier has not already purchased the power their customers are likely to use – a practice called hedging – they will have to pay these extraordinarily high prices, which are reaching up to ten times the average over the last decade. Riskier approaches to this have traditionally been used by suppliers to offer very cheap tariffs in order to grow quickly. However, if those customers are on a standard variable tariff restricted by Ofgem’s price cap, or a fixed deal, then suppliers will now be unable to recover those costs.
The consequences of this have been clear to see, with four energy companies going bust in the last two weeks, leaving more than half a million customers without a supplier. There will likely be more.
Last week Good Energy announced a strong set of financial results for the first half of the year. Many of the suppliers under threat have taken risks, pricing below cost, and don’t have the 20 years of experience Good Energy does in trading energy. We are well hedged and stable going into this turbulent time.
How do we change?
The next few months are likely to be a difficult time in the energy industry, but there are actions we can take forward now and into the future. In the short term, Good Energy has signed up with Ofgem to ensure that customers who are worried about paying bills over winter are given as much support as possible.
In the long term, however, wider system change is required. We need to address our reliance on volatile fossil fuel markets by accelerating our transition to renewably powered energy system.
Our recent report, Renewable Nation, shows that we don’t need polluting coal or gas, or nuclear power which might not be working when we need it the most. A backbone of wind and solar, supported by tidal, geothermal, and extensive electrical storage can help us cut carbon, while keeping the lights on and the radiators warm in even the most challenging weather conditions.