UK Looks To Cap Renewable Energy Prices
By Paul Homewood
This is what I have been campaigning for all year!
Finally we look like getting some action:
Via Net Zero Watch:
The UK government is pressing ahead with plans to cap revenues that renewable electricity generators are making from sky-high wholesale power prices following Russia’s invasion of Ukraine.
Companies generating power from wind and solar fear the plans, similar to proposals already announced by the European Union, will effectively amount to a windfall tax on renewable energy.
The businesses involved in renewable power generation that could be affected include EDF Energy, RWE, ScottishPower and SSE.
The government had been hoping to persuade electricity generators to agree voluntarily to 15-year fixed-price contracts well below current wholesale rates for their output.
But talks with the companies have collapsed and government legislation, which could be unveiled as early as next week, will be used to underpin a revenue cap on the generators, said people familiar with the plans.
With UK households contending with soaring energy bills, the government indicated to generators at a private meeting last week that it would pursue a cap, said people briefed on the discussions.
People briefed on last week’s meeting said prices of about £50 to £60 per megawatt hour were mentioned as a starting point for the cap, well below current prices of about £490/MWh, although no final decisions have been taken.
Ministers have been alarmed at profits being made by some electricity generators that are still benefiting from a government subsidy scheme that dates back to 2002, when the renewable industry was in its infancy.
The government has been examining potential levels for the revenue cap using evidence such as wholesale prices prior to the energy crisis.
A “high percentage” or all of the revenues above the cap set by the government would be paid to the Treasury, added one of these people.
The EU has announced a similar cap as part of plans to raise €140bn in windfall taxes.
Electricity generators fear the UK government’s plans will be more damaging to the sector than a 25 per cent windfall tax imposed on oil and gas companies in May by the then chancellor Rishi Sunak.
His 25 per cent “energy profits levy” was accompanied by a new investment allowance that energy companies can use to offset their tax bills if they press ahead with projects to boost UK production of fossil fuels.
“The major issue is not that the government is doing a windfall tax in some shape or form,” said one industry person who attended last week’s meeting between the government and electricity generators.
This person objected to how oil and gas companies affected by the recent windfall tax benefited from an investment allowance, and accused the government of effectively endorsing fossil fuel investment over renewable technologies.
The government is committed to the UK reaching net zero carbon emissions by 2050.
Another industry person briefed on the talks between ministers and the electricity generators said: “You’re disincentivising technologies you can build quickly to lower [energy] bills.”
The Department for Business, Energy and Industrial Strategy declined to comment on the plans.
https://netzerowatch.us4.list-manage.com/track/click
Unsurprisingly the renewable lobby is up in arms, complaining how this is all so unfair, and will disincentivise new investment.
Both arguments are nonsense:
1) Renewable energy is already heavily subsidised, unlike North Sea oil and gas, which already pay billions in tax
2) New investments will continue to be subsidised via CfDs, so the price cap will not apply to them.
I will be interested to see if this cap applies to all renewable generators, and not just the large energy companies.
Comments are closed.
NOT A LOT OF PEOPLE KNOW THAT 
‘This is what I have been campaigning for all year!’
I wouldn’t say that, Paul, if you actually want it to happen.
Why would someone want a scheme that doesn’t lower their prices but, instead, increases governmental revenue?
It lowers your prices indirectly. The companies pay the Govt the excess, which the Govt then uses to pay for the consumer elec and gas price caps.
Once you start Govt socialist intervention in markets you end up with silly money-go-rounds as they intervene more to support their previous interventions.
Bring it on and about time and ive been highly disappointed that the opposition parties kept on banging on about oil and gas companies needing to be taxed more heavily whilst completely ignoring the blatant windfalls being earnt by renewable generators that you have been shining a light on. All the parties employ endless advisers who quite frankly have shown to have been clueless.
Clueless, maybe.
More probably venal and malicious.
Oh yes.
And mendacious
Corrupt is the word you were looking for.
Why not cap prices instead of taxing off what they consider to be in excess?
Because if you tax it off you can then give it to people to make you look benevolent and generous? Its worked for the Labour Party for decades after all.
NOT before time!! I look forward to the Ads for Octopus and OVO etc reflecting the change.
Im with Octupus and challenged them over why if they were all renewable supplied why was i paying so much. A: not out fault its the way system is designed that the price is set by most expensive generation. My 2nd question thats not correct you could have a PPA with your renewable generators (of which they own plenty through another arm of the investment company) to at least neutralise part of the high cost. A: still waiting.
can’t see nothing short of full renationalisation and CEGB MkII is going to ever get this sorted. Labours GB Energy won’t be anywhere near enough
Clearly you cannot remember the CEGB.Reincarnating that monster is going to do only one thing. Raise pricing even higher as the politicians take over . It will be filled with cronies, diversity co-ordinators, woke directors, and various other layabouts all sucking on the giant government teat.
What we really need is contracts that prevent abuse, something the clowns that drew up the contracts were incapable of doing.
” What we really need is contracts that prevent abuse, ”
Performance contracts and a legalised buyers’ cartel. A very big buyers’ cartel.
There will be no change in pricing from your retail suppliers. They will still be charging you the current inflated prices. The government will simply be skimming off a percentage of the price they currently and in the future will still pay wholesale generators.
“The UK government is pressing ahead with plans to cap revenues that renewable electricity generators are making from sky-high wholesale power prices following Russia’s invasion of Ukraine.” implies to the normal reader that they won’t continue to be paying those excess prices. However, “cap revenues” actually means taxing off what they consider to be excessively high wholesale power prices. Consumers are still paying for those excessively high wholesale power prices!
Your government in action. Lies, damned lies and government. FJB and F Leftists.
Since Ruinables are SO MUCH CHEAPER, I’d cap them at £30 / MWh, which is around what plentiful and reliable coal used to get. Allow ’em another 50p for inflation.
And, oh yes. Scrap the system where the grid has to take their weather-dependent ‘energy’ first.
Martin, there is some misunderstanding as to what “cap” means. To your Leftist government it means taxing off what they consider to be the cap.
Yes please! Every time I turn on the TV its all about how much subsidies fossil fuels are getting. They receive a tax allowance like nearly all companies receive for development. Renewables receive money for not supplying electricity.
Nice money if you can get it. I must remember to apply but I can only apply if it’s too windy and I’m well down the list. I could turn off the oven😃
Last published accounts, BP paid $6.7 BILLION in tax to UK treasury. Compare that to what Drax Power gets in subsidy for one year (close to £1 BILLION).
Couldn’t happen soon enough.
Absolute, effing stupidity! Don’t you people realize these are just governmental revenue-increasing schemes at the expense of the ratepayers: A new tax in essence. And such a “tax” falls on those in the lower income brackets and on pensions.
Why can’t people understand the simple results of the crap governments are feeding them. It seems here the scheme is grand because it is sticking it to the green profiteers. Its the same thinking of those that want to stick it to greedy FF profiteers.
Just open the chutes and herd us all into the abattoir. We have become nothing but sheep to be herded by government.
Well Dave, I think you are shouting at the wrong people on here. Paul and most of us I believe are just pleased to see Renewables treated the same way as FF. It is bad enough that they are heavily subsidised without allowing them to rip us off even more. The whole thing is a corrupt scam. If renewables are so good and so cheap, then stop subsidising them and treat them like all other means of generation. At least the government’s proposal moves a little towards a levelled playing field. As the country yokel said in the old joke, “you wouldn’t start from here if you wanted to get to Edinburgh”
As a small government libertarian, I feel your pain. We all know that the country is screwed.
You should also be “shouting” to your fellow countrymen and feckless government about increasing taxes under the subterfuge of “capping” prices. The government is virtue signaling while shafting the people. Nothing new, but there is some BIG money involved here.
Dave. It is a silly money-go-round. They take the excess off energy companies and then spend it to fund the consumer energy price caps.
So the tax does benefit the consumer by being used to subsidize consumer prices and fund the caps.
A clumsy way of doing things but that what happens when govt intervene with caps and subsidies.
Just open the chutes to the abattoir.
Perfidious Albion.
Special taxes/”caps” on a business tends to reduce investment in that business.
Government has said that there will be no more fossil fuel generated electricity. It will be replaced with renewables. And now, they are going to disincentivize the renewables, too!
It’s worse than we thought! The replacement is being killed, too.
Gamecock,
you said “And now, they are going to disincentivize the renewables, too!”
I certainly hope so, they are a parasite on our grid and we need much less of them. I won’t go into why as I have said ot all before many times.
Sort of. Plenty of businesses like fixed prices, particularly those with large capex. Much infrastructure investment is done via fixed prices – Toll roads and bridges, many airports, tunnels etc. Renewables are little different from classic infrastructure and have the same investors. A fixed return is attractive to many investors, including pension funds. What those investors take is volume risk. Renewables should get a fixed price and they should take the risk that the wind doesn’t blow or it blows too much. They can price that better than the idiots in the Civil Service.
Wouldn’t a smarter move simply to remove the massive subsidies that the unreliables industry is getting – including the secret subsidy, the renewable energy target.
Probably can’t under existing contracts, so tax them to take it away.
Stop the subsidies as well and cancel Net-Zero before this fabricated con bankrupts’ our country whilst other countries only pay lip service or ignores.
the renewable lobby is up in arms
Of course, just a negotiating posture. They know they’re going to have to cough up some of the unearned excess profits arising from the gas price explosion.
BBC says they’re meeting the government today.
https://www.bbc.co.uk/news/uk-63183946
And that’s the problem – the renewables investors aren’t taking any form of price risk. When there’s low wind, their price goes up, when there’s too much wind, they get paid not to generate. But those are the risks they should take, not consumers. We have no way whatsoever of either judging or mitigating those risks, nor have we chosen to take them. They should get a fixed price for the electricity they dispatch. They take the risk they’ve over or underestimated wind. You could guarantee some level of off take via take or pay and then take the lowest priced preferentially as demand/capacity shifts at the margin. You’d have a simple, transparent system for investment and could auction off new capacity, as with CfDs, but with real fixed prices for consumers. I’m all in favour of markets, but rigged, opaque subsidised pseudo-markets are worse that no markets, and sophisticated investors in such markets always get one over on governments.
One problem with CfDs is the unreliable supplier can delay taking them which is what new windfarms have been doing ever since electricity prices started rising over a year ago.
The Moray East wind farm, for example, recently reached full operational capacity earlier this year and delayed taking up its CfD till 2023. It could have delayed for up to 3 years but is still going to earn an extra £500m in its first year of operation.
The problem in the UK is that the high price of gas is causing the price of electricity to shoot up. It’s how the system works. Renewables operators just trouser the extra cash.
Yes but there’s no need for that. Infrastructure investors look for stable cash flows. They don’t need upside and definitely not this sort of vast upside. And businesses need stable prices – they don’t need low prices nearly so much as stable. We have commodity type pricing – price is set by the marginal cost – where we should have fixed pricing across a good proportion of the supply. Of we off take from cheapest provider for the rest, we can put pressure on costs too.
The sector is a complete mess – but then it seems to have been designed by civil servants who think they are much cleverer than they are. Just give renewables a fixed price and let them price volume risk. Consumers shouldn’t take the risk the wind doesn’t blow nor that it blows too much. Do away with all the subsidies, CfDs, constraint payments, and have a simple, easy to understand system. Investors build toll roads and bridges with fixed prices but take volume risk. They invest in water with a fixed return based on a RAB. There’s no reason why renewables – the same infrastructure investors – wouldn’t accept a fixed return that they price to invest. Of they get it wrong (too little wind say), they are the ones to lose, not consumers.
I’m sure it’s been said (many times), but I’d also like to see wind and solar pay for grid connections and balancing.
I think that is largely the point It Doesn’t Add Up is making below and really makes perfect sense
Last week we actually had some wind, and day ahead prices got down to zero overnight with actual balancing prices going negative, so we were doubtless exporting at negative prices again. Capping wind prices isn’t going to solve the problems of rising revenue cannibalisation as wind capacity grows. Nor does it solve the problems of massive market distortions.
I suspect these plans won’t really work, and will just leave another set of problems to be solved. The government should have moved to remove the subsidies given to renewables via ROCs and UKA carbon taxes, and then forced them to team up with dispatchable generation to provide a guaranteed supply. We end a proper competitive market to work towards a much lower cost system, and it needs to recognise that current market prices are temporary.
“forced them to team up with dispatchable generation to provide a guaranteed supply”
No. We need to wean ourselves off this kind of thinking.
Forcing investors to do stuff because somebody thinks it’s right has been demonstrated to fail time and again. The industry has stumbled from one clumsy intervention after another since privatisation.
A main function of the market should be to reward efficient new entry, best satisfying consumer choices. Another is to incentivise market exit. The NETA arrangements (going back to yr 2000) were designed with these points in mind. The Energy Accounting and aggregation of generation and supply should support this through forward market transactions.
Nowadays, most people seem to have well developed views of the rights and wrongs of different technology choices for power generation. I’d prefer a softer approach of using what we already have to encourage more consumer involvement.
Long-term retail tariffs could be developed and made available, linked to the full costs of the generating technology of choice. It could be a 15 year nuclear tariff (for fans of nuclear) or 15 year renewables tariffs (surely plenty of takers for this). For me- I’d like a tariff at the full costs of modern coal-fired generation. No reason why not tariffs linked to a basket of assets for portfolio players. Developers who could sign-up enough customers would have their business case for investment. They just need to find (and sign up) the customers, and they would not go cap-in-hand for subsidy that nobody in particular wants to pay.
NETA supports this through Energy Accounts and meter aggregation. Individual generating assets, or a portfolio of generating assets, can be transacted into an Energy Account. Customers who seek the tariffs I mentioned can be similarly aggregated, which gives the basics for building a business case for investment from customer choice. That was the idea at the time of NETA … there is no reason to assume it could not be used today. Smart metering helps too as meter volumes can then be linked to how the assets perform. Energy Account Imbalance charges were intended to deal with balancing and rewarding assets that perform well (produce what they sell), or to transact to balance the Energy Account when they don’t. So there isn’t really any new need for something to handle intermittency of renewables – we just need to use what we already have.
If developers find that a portfolio of renewables needs extra balancing actions, this feature of their technology offering would need to be priced-into the full cost of the “green” tariffs put to the market.
Right now, the Government chooses winners and losers in power generation, and seems to believe it is best to choose winners and losers in the customer contest (that is, competition means freedom to switch). This is proving to be a complete failure. We need to get away from this, otherwise the next clumsy intervention will be CEGB MkII (AKA “The Great British Nuclear Vehicle”), solely the choice of civil servants.
I think we agree more than you assume, but I can see difficulties too with your proposals. It’s a really tough nut to cracking effectively, and frankly at the moment the danger is with the government opting for schemes that have highly undesirable consequences. BEIS has a consultation running where they indicate that they favour a move to locational marginal pricing, which is guaranteed to provoke chaos and lots of profit for NG.
Not sure that it is appropriate to try to thrash out all the wrinkles through Paul’s pages though. It will soon get far too technical and lengthy, boring the readership.
I know there will be plenty we agree on. People come here to learn and to express their views. NZW and PaulH certainly don’t hold back on giving their recipes on how to address market failures. Don’t you think your comment about this being too technical and boring for the readership seems to underestimate the readership?
I wanted to hear whether people would argue against me. Especially from some of the real free marketeers who visit the site.
I appreciate there will be challenges and complexities. If anybody thinks “it’s a really tough nut to cracking effectively” (your words), I’d like to hear views on why this should be. What is it about power supply that the long fingers of Adam Smith’s invisible hand cannot reach?
I don’t think there was ever a Hinkley Point C customer tariff available at anything like £92.50 (generation part). And I don’t think retail customers would ever get near those supposedly “cheap” offshore wind tariffs. These illusions come from subsidy-carpetbaggers to persuade civil servants to back their inefficient projects. They mislead governments and the public on the true cost of ruinous NZ policy.
I would venture that my suggestion could do a better job than what we are doing today. But I still don’t think it would be adequate for the security of supply needed to support a modern economy. So I agree “its a really tough nut to cracking effectively” and there are difficulties.
I wanted to hear what peoples arguments would be if they think it is still not good enough to attract private sector investment. To suggest this is (in effect) to concede that only the government will invest in the power sector. Which would indicate an acceptance that the power industry can only operate effectively under state control and we might as well rid ourselves of the subsidy carpetbaggers.
We know that energy only markets fail because renewables cannibalise revenues, especially once they have a large enough toehold thanks to subsidies. That is the failed ERCOT model. The government capacity market failed because the government decided how much it was going to procure and also limited what it would pay. Designing a proper capacity market requires consumers to understand its importance and value, or providing them with experts who do that for them.
We know have a screwed up system headed for being more screwed up through lack of dispatchable capacity and foolish reliance on unpredictable intermittent sources that is growing. It is probably not very difficult to design a low cost reliable system founded on a nuclear baseload with gas and available hydro providing most of the short term flex, with an element of coal to provide fuel switching capability and seasonal flex, much as we had before renewables. However we have to get there without bankrupting the system in the process. It would have the merit of needing much less investment in grid transmission, probably stranding grid assets designed for renewables.
An attempt at an instantaneous transition would likely create a raft of immediate problems as well as storing up a concentration of plant decommissioning for the future. A robust system has regular ongoing replacement of assets that are retired, so the construction business has a regular profile. It also allows for tuning the mix in the light of trends in markets and technology.
The existing tortuous structure not only contains all sorts of perverse incentives but is also a legal minefield of government promises to compensate renewables should it impose taxes on them or materially change the market conditions.
These are just some of the factors that have to be dealt with, even if the end destination is reasonably clear. If you want to see the seeds of confusion, look at the BEIS consultation on future market systems where they favour locational marginal pricing. Hidden is a struggle to try to subsidise hydrogen. They have of course made the mistake of decreeing what the system should look like and then trying to fit a price system around that. They should go the other way, by ensuring that the destination is a proper free market including for capacity and security of supply, and then helping it to evolve from its current regulated mess, and let free technology investment decisions paint the canvas.
Did you respond to this?
https://www.gov.uk/government/consultations/review-of-electricity-market-arrangements
Thanks for the interesting comments IDAU.
To answer your question: no, I didn’t respond to the consultation, but I know “a person” who did.
But energy markets can only be “competitive” at the margins. We need sufficient capacity for peak with some margin for error (maintenance etc) which creates spare capacity at troughs. But we won’t have a market with significant oversupply at peak – even if new investment drove out older more expensive plant, we’d simply be back at balance. As with most markets therefore, we’d settle at equilibrium until we get innovation. What we shouldn’t do is solve for what may be a temporary price spike in one fuel. If gas stays where it is for the next 10 years, CCGT are simply unaffordable. The difference between offering renewables a fixed price/return and a free market is therefore not great as far as consumers are concerned, if we properly auction capacity and make them price intermittancy. Currently consumers are taking virtually all risks but floor prices, constraint payments etc prevent them getting lower prices.
Forward markets show gas prices returning to some sort of normality in about 3 -4 years. It would be faster of more were being done to increase supply.
https://www.barchart.com/futures/quotes/TGx22/futures-prices?page=1
Phoenix. You are confusing short-term market clearing with long term investment. Think about structured contracts like fixed price CfDs wrapped around clearing markets. It’s similar to fixed rate mortgages which sit alongside short-term lending rates.
Developers need to cover their total costs over the long term (e.g. a 15 year investment period). I suggest they can get this by attracting customers willing to pay the total cost of their technology or basket of generating assets. Customer contracts fixed enough to complete the business case for investment.
Today, you and I have no chance to express preferences. We end up paying for things we don’t particularly want to buy.
You might want freedom to take a 30kW contract linked to (say) Hinkley Point C, with the generating price of £92.50/MWh (2012 money and indexed to CPI).
The greenies have made it clear they want power from wind turbines and it is claimed that the full cost of wind. My preference is to let them have a go at that, and we’ll get a chance to see how it works out for them.
I’d like a supply contract linked to the cost of modern coal-fired generation, but I have no chance of that whatsoever.
Like IDAU suggests above, it should be for the generator and its customers to decide what to do about matching production of assets to demand consumption patterns through balancing the Energy Account. That’s already in the NETA arrangements, we just need to let it happen. Balancing can be achieved through short term clearing or NETA imbalance charges … similarly, everything should be there to let it happen.
You say “if we properly auction capacity”. I don’t know which “we” are you referring to. If you are referring to civil servants, we should be looking to move away from that type of approach. The Government could step out of the market, and if they want a part to play in it, they should promote (not mandate) more bilateral type arrangements as described.
Double bubble?
https://www.netzerowatch.com/how-windfarms-charge-you-twice-for-the-same-electricity/
How far could this get stretched? Could a windfarm get constraint payment from the UK but sell the power via the grid interconnectors to Europe?
Apparently they are selling to a giant flywheel which makes its money by stabilizing the grid frequency, which is unstabilized by wind farms. It’s a sort of money go round.
Hi Mr GM, thanks for that article extremely interesting. Whilst I think it would be difficult to route a wind farms output to an interconnector, I can’t see that it would be impossible.
Zoom in on to the Richborough (Sandwich, Kent) converter station for the NemoLink from Belgium on this map.
https://openinframap.org/#14.53/51.31019/1.34642
The Thanet offshore windfarm connects at 132kV there as well and it is all alongside the Richborough energy park which is stuffed full of “troughers” with solar farms, biogas plants et alia.
The article has made me rather suspicious of what may be going on there.
It’s all so complicated, needs a criminal investigation by a hybrid forensic financial auditor come electrical engineer!
Change is coming…
Government unveils new powers to cut link between electricity and gas prices
This is part of the new Energy Prices Bill introduced in Parliament today[11 Oct.]
The new bill also introduces new powers to stop high gas prices from dictating the cost of electricity produced by renewables.
This will be done through a temporary “Cost-Plus Revenue Limit” in England and Wales – a revenue limit will be introduced to curb the amount generators can make.
The government has said the details of how this is going to work would be subject to a consultation that will be launched soon.
https://www.energylivenews.com/2022/10/11/government-unveils-new-powers-to-cut-link-between-electricity-and-gas-prices/
The Greens WANT very high energy prices. Obama said this outright. High energy prices are supposed to be a demand side disincentive to drive, fly, heat, cool, have energy hog technology (saunas, pools, electronic equipment except needed for social media) for the masses. Not only will a 25% (say) reduction in all the above drop consumption CO2 by 15%, production CO2 will drop (perhaps) 10% as products are not purchased and those purchased, last longer.
High energy prices are a feature not an unfortunate side effect of moving to Renewables.
Note that the above reductions will not necessitate a lowering of consumption/CO2 travel production of the elite ruling classcas a) they can afford the costs, b) offset the CO2 with scam carbon offsets and c) at perhaps 2% of the population, a 20% total reduction in their current CO2 production is, as John Kerry intimidated, meaningless on a planetary scale. Plus the Green Leaders a) need to travel to coordinate with each other rules for the Planet and, b) they work tirelessly on behalf of the Planet and so have earned a bit of slack regarding their lifestyles.