Why are energy prices still so high?
Since our previous updates on the energy crisis, global energy markets have continued to be volatile with big price changes happening over short periods of time. Russia’s appalling invasion of Ukraine has further unsettled what was an already turbulent market, leading to more unpredictability around energy prices.
Countries across Europe and afar look to cut ties with Russian gas, which has created instability as they race to secure alternative supplies. Intense competition for these alternatives inevitably leads to prices going up.
Russia’s invasion has also had consequences for other sectors of the economy, which has impacted domestic UK renewable generation. Here we provide an update on the main factors that are continuing to drive high costs.
High wholesale prices
Wholesale prices have remained high, with spikes occurring during the beginning of Russia’s invasion of Ukraine. In March, average power prices increased by 51% compared to February – which was driven by a 59% increase in gas prices. Whilst short-term prices for buying gas a ‘day ahead’ have recently dipped, this is not having an impact on the price of supplying gas and electricity to consumers as responsible energy suppliers buy most of the energy months or even seasons in advance — otherwise known as hedging.
In a recent blog we detailed how the high prices of gas are driving high electricity prices. The UK relies on a ‘merit order’ system that ranks generation types on the cost of generating.
Renewables are selected first because they are the cheapest to run. But the prices are ultimately set by the ‘marginal’ cost of the last generating unit to be turned off to meet demand in every half hour period, which is often a gas power plant with high marginal costs.
Food and commodity supply shock
Farmers have been hit hard by the effects of Russia’s actions in Ukraine.
Russia and Ukraine collectively export a large percentage of wheat and grain across the globe, with Russia also a large exporter of fertilizer. The conflict has put huge pressures on prices and supply chains, which has impacted production at farms across the UK. Securing access to supplies has become more challenging, as UK production faces pressures across the supply chain to maintain yields.
The anaerobic digesters (AD) we buy power from take organic matter such as food waste and energy crops like wheat to create biomethane. Which means these generators are feeling the knock-on effects of the war in Ukraine, including less access to food waste and wheat used to generate electricity. Another knock-on effect of the Ukraine conflict is the high cost and scarcity of fertiliser, meaning manure farmers may usually put in their AD generators is now being used on their fields to grow crops.
All of this is ultimately reducing the amount of power AD generators, normally a reliable baseload generation source, have been able to generate versus what was forecast. And these lower forecasts leave us more exposed to the high wholesale electricity market prices.
Costs of failed suppliers
Ofgem have appointed new suppliers to take on the customers of the 29 suppliers who have exited the market since autumn last year (excluding Bulb).
This is done via the ‘Supplier of Last Resort’ process, and it is extremely costly. Newly appointed suppliers have to buy power for their new customers at the very high market prices and take on all the operational costs of setting up thousands of new accounts.
The costs are ultimately shared across the market, with the recovery of ‘Last Resort Supplier Payments’ added to the network charges that all suppliers are liable for.
Normally, suppliers are given at least 15-months’ notice, and so this extra cost would not be added to bills until 2023. However, on this occasion, Ofgem granted special permission for the payments to be collected under an accelerated timescale, with just two months’ notice for suppliers. This is why electricity standing charges have increased across the market recently.
The result leaves the average consumer paying in the region of £34 on electricity bills and £32 on gas bills, spread over 12 months, to recoup the costs of the failed suppliers for 2022-23, with further rises also likely.
Lower generation output
Wind speeds have remained lower than average over the last few months.
When the delivered volumes of wind, or any other generation, are lower than what has been forecast, it means the grid must revert to alternative generators to fill those missing gaps.
Long term, these gaps will be mitigated with an increase in storage capacity as well as a diverse mix of renewable generation sources – benefiting consumers and the climate.
Unfortunately for now, the present system relies heavily on gas fired plants to fill these gaps, which pushes costs high.
The events over the last few months have again served as a sharp reminder of the urgent need to accelerate away from volatile fossil fuel markets.
We need to end our reliance on gas, which drives price volatility, and invest further in a flexible, renewable-led energy system that harnesses cheap, clean power generated in the UK.
Good Energy remains committed to supporting our customers and renewable generators in this extremely challenging time.
If you are a Good Energy customer and are finding it difficult to afford your energy please do get in touch. You can also get free independent advice about your energy bills from organisations including Citizens Advice, National Debtline and National Energy Action.