9 min

Do electricity prices really need to go up‪?‬ Helm Talks Podcast

    • Business

Why are electricity prices going up? Why is the price cap being reported raised by Ofgem? Do prices really have to go up, or should they be coming down?

The answer given by Ofgem and the industry is that the price of gas is going up. That’s true. But gas is only one part of the generation of our electricity. In fact, our electricity is increasingly coming from renewables, with some contribution from nuclear. And the renewables costs are going down. We should all be benefiting from these lower costs. But because it is the marginal cost of the gas at the peaks that drives the wholesale price, and hence our bills, we don't see the benefits of the falling costs of other forms of generation. Since we will need some gas for a couple more decades at least, we face the prospect of it setting the peak price for a long time to come.

The right way to sort this out is to move to a capacity-based approach, and pay for the costs of the different technologies – their costs plus a reasonable return. We should have a strategic gas reserve, pay for that insurance, and for the gas – the actual gas used – when it is used. Put this together and we should see prices coming down, and sharply over the next decade. Decarbonising electricity, and ever-lower-cost renewables, should mean lower bills. It is urgent: even if many people might be willing to pay these ever-higher bills, many won’t be able to pay. Time to address the cost of energy properly, and implement the reforms set out in my 2017 "Cost of Energy Review".

Why are electricity prices going up? Why is the price cap being reported raised by Ofgem? Do prices really have to go up, or should they be coming down?

The answer given by Ofgem and the industry is that the price of gas is going up. That’s true. But gas is only one part of the generation of our electricity. In fact, our electricity is increasingly coming from renewables, with some contribution from nuclear. And the renewables costs are going down. We should all be benefiting from these lower costs. But because it is the marginal cost of the gas at the peaks that drives the wholesale price, and hence our bills, we don't see the benefits of the falling costs of other forms of generation. Since we will need some gas for a couple more decades at least, we face the prospect of it setting the peak price for a long time to come.

The right way to sort this out is to move to a capacity-based approach, and pay for the costs of the different technologies – their costs plus a reasonable return. We should have a strategic gas reserve, pay for that insurance, and for the gas – the actual gas used – when it is used. Put this together and we should see prices coming down, and sharply over the next decade. Decarbonising electricity, and ever-lower-cost renewables, should mean lower bills. It is urgent: even if many people might be willing to pay these ever-higher bills, many won’t be able to pay. Time to address the cost of energy properly, and implement the reforms set out in my 2017 "Cost of Energy Review".

9 min

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