Liz Truss’ energy plan is a “sticking plaster”, an expert has said, with more focus needed to decouple gas from electricity generation prices.
The new prime minister unveiled a package of support for homes and businesses last week in light of spiralling costs, including a cap on bills at £2,500 from October.
However, Mark Stewart, partner, and head of energy at business advisory Johnston Carmichael, said it doesn’t address the root cause of the problem.
“As a short term fix for helping the most vulnerable this winter, this plan is reasonably sound.
“However, it doesn’t address the fundamental issue of energy market reform and the decoupling of the price of gas and the price of electricity which is what the country really needs.”
Marginal plant
Under the current system, wholesale prices are set by the variable cost of the “marginal plant”; a system that can react quickly to electricity demand, such as a gas turbine.
The grid takes what it can from sources like offshore wind, but this cannot act in the same way as gas because you cannot command wind to produce more electricity when it isn’t blowing.
Therefore gas prices often end up setting the wholesale electricity price because it is often the last source of supply to fully meet demand.
However, the ever-increasing participation of renewables in the system means over time, cheaper electricity produced by renewables energy will determine the price more often.
Mr Stewart added: “At the moment, the marginal plant is expensive gas, driven by the Ukrainian conflict, which means that electricity prices from all sources, including renewables, are raised to the highest cost.
“Decoupling would allow electricity generated from cheaper renewable energy and nuclear, for example, to flow straight to customers.
“Whilst most consumers will welcome this plan, it is effectively just a sticking plaster that pushes the burden back in time. It does not address the root cause of the problem.
“Ultimately we need to remove the dependency on imported gas – we need the rapid proliferation of renewable energy and nuclear to reduce the volatility and take control of the energy mix.”
Discussions
Last week Liz Truss told the Commons that discussions are taking place between Westminster and renewables generators with a view to moving them on to Contracts for Difference (CfD).
Currently, only a portion of offshore wind developers are on a CFD scheme, which guarantees a floor price for electricity, with developers giving back any excess.
Liz Truss said last week that nuclear and renewable generators will “move on to Contracts for Difference to end the situation where electricity prices are set by the marginal price of gas.
“This will mean that generators are receiving a fair price reflecting their cost of production. Further bringing down the cost of this intervention.”
The UK Government announced a consultation into this type of reform in July, which is open until October 10.
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