How can we get back to cheap electricity?
Expensive electricity is usually caused by one or both of two things:
A high proportion of renewables in the grid
High gas prices
The graph below shows how renewables drove up electricity prices from 2007 to 2020, before the double whammy in 2021–22 – the gas price spike caused by the Ukraine war and outages of the French nuclear fleet – caused them to rocket. It is beyond doubt that if we continue on the Net Zero path we will return to the long-term upwards trend until the economy and/or society melt down entirely.
Both factors are controllable – the decision to deploy renewables or not is entirely in the government’s remit, and while gas prices are more subject to vagaries of geopolitics and markets, there is much that can be done to keep prices low. In short, to get back to cheap electricity, we need to reduce the proportion of renewables on the grid and (a subject for another day) to increase the supply of gas. As I pointed out in a previous post, the gains from doing away with renewables are significant – perhaps as much as £16 billion per year (gross). However, it is not necessarily simple. I’m no lawyer, but here’s my take.
Dealing with generators under the Renewables Obligation looks to be the more straightforward task. The legislation describes the operation of the system, but the wind and solar farms don’t seem to have any contractual right to the subsidy. If the legislation is repealed, they simply don’t receive it any longer. That may well make many of them close down. Most have made huge returns already, particularly during the energy price crisis, so they should be happy with what they have.
That’s £7.8 billion in annual savings.
Generators operating under the Contracts for Difference scheme are much harder to deal with because they have a contractual right to the subsidies. Moreover, it’s clear that the civil servants who negotiated the contracts did not have the public interest at heart. Any way you can think of that might lead to money being clawed back from the generators is expressly ruled out by the contract terms: if you make them pay their own intermittency costs, they get compensation; if you try to apply a windfall tax, they get compensation; if there is a change in applicable law that makes them lose out, they get compensation too.
(If any lawyers out there think there is any wriggle room in the contract terms, I’d love to hear from you.)
As far as I can see, there are two obvious ways out of this – reneging on the contracts (as was done in Spain) or wholesale nationalisation. Either would then potentially lead to problems with the Energy Charter Treaty, under which nations agreed not to wreck major investments in energy infrastructure. The UK has recently left the treaty – ministers seem to have thought it was stopping them from trashing the North Sea oil and gas sector – but existing investments are still protected (or at least those that are held by overseas investors – as I understand it, UK investors are not protected).
As a result, compensation would be due, and indeed, this is only fair to the investors. The last thing we want is to damage confidence in the UK. However, the cost could be spread over 25 years – the life of the assets – at which point the annual cost becomes manageable, and the huge gains to be made in the efficiency of the grid mean that everyone could still be a winner.