Call to remove green levies on bills as energy prices rocket

The energy industry has responded to surging wholesale energy prices by firing up little-used or mothballed coal units – and by repeating calls for policy costs to be funded from taxation.

Drax's coal units are providing power to the grid for the first time in six months. Photograph: Drax Group Drax's coal units are providing power to the grid for the first time in six months. Photograph: Drax Group

The wholesale cost of natural gas has hit a record, having knock-on impacts to the cost of producing electricity due to the grid’s dependence on the fuel. Industries have been forced to shut down, energy suppliers have gone broke and coal generation has returned to being an important part of the UK’s energy mix – despite the forthcoming ban on the sector from October 2024.

“As the system has become tighter, a number of coal power stations have been required to run by National Grid ESO this week, including Drax Power Station’s coal units,” said a spokesperson for the firm. They had been shut down since March, leaving the firm reliant entirely on biomass.

“Under the terms of our generation licence our coal units have to remain connected to the grid and available in the balancing mechanism, and we have to have that licence in order for us to fulfil our Capacity Market obligations – under which our coal units must remain available until September 2022,” he added.

The average carbon intensity of the national grid across 2020 was 181g of CO2 per kilowatt-hour. As of 4.30pm on Friday, the current intensity was 264g, having peaked at 326g over the previous 24 hours.

With available supplies coming uncomfortably close to demand, an associated jump in energy prices has fuelled concerns about inflation, as the increase may be passed to household consumers. The government’s annual energy price cap will rise by £139 next month to accommodate the increase in wholesale prices.

There are also worries about the potential impact on business, just as the country's economy starts to recover from the worst effects of the pandemic. Four household energy suppliers have gone out of business this month as they were unable to tolerate the rising costs.

The situation has also led to steelmakers halting production. UK Steel director general Gareth Stace described the power prices as “extortionate”, causing operations to be suspended as the cost of energy can lurch into the thousands of pounds per megawatt-hour at times. A price of £50/MWh would be more normal.

“Even with the global steel market as buoyant as it is, these eye-watering prices are making it impossible to profitably make steel at certain times of the day and night. While prices have risen across Europe, wholesale prices have quadrupled in the UK and merely tripled in Germany, when accounting for carbon costs. This exacerbates the already grossly unequal electricity price disparity between UK steelmakers and our European competitors,” he said.

At the same time, the cost of gas is such that two UK fertiliser plants owned by US firm CF Industries have halted production. Natural gas is vital for the production of hydrogen, used to produce ammonia, on which nitrogenous fertilisers are based.

Speaking to the Financial Times, E.On boss Michael Lewis called on the government to respond to the crisis by removing policy costs, which form about 15% of typical household dual fuel bills, according to Ofgem. These support fund renewables subsidies and other climate measures.

“Then we can also start to apply something like a carbon tax on gas on a 'polluter pays' principle,” which he said would be a more equitable way to pay for such policies.

There are several root causes of the problem, one of which is alleged market manipulation by Russian energy giant Gazprom, according to European parliamentarians. The price of gas in Europe has more than tripled this year, which MEPs see as an attempt to strong-arm the EU into approving the use of the controversial and politically sensitive Nord Stream 2 pipeline across the Baltic, which bypasses Ukraine to connect to north-east Germany. Its construction was just completed.

The supply crunch has been exacerbated by Norwegian supplies being limited due to maintenance activities, and deliveries of liquefied natural gas from the US having been curtailed while repairs to hurricane damage are completed. Covid-19 has also had an impact.

Making things worse for the UK is a period of slow winds, limiting wind power generation, and a fire in Kent that knocked out a gigawatt interconnector with France. It is not expected to be back online until the end of March. A parallel gigawatt link is also out of use until next week, due to a planned outage.

To illustrate the situation, at 4.30pm (around peak electricity demand) on 16 September last year, coal supplied 14.6% of UK power needs – up to an uncommonly high 18% the same time on Thursday, after prolonged periods of supplying nothing at all to the grid. Wind met 17% of demand a year ago, whereas it fell to only 5% on Thursday. Gas generation itself was little affected, continuing to supply about half of the country’s power.

A spokesperson for the Department for Business, Energy and Industrial Strategy said: “The UK benefits from having access to highly diverse sources of gas supply to ensure households, businesses and heavy industry get the energy they need at a fair price. Our exposure to volatile global gas prices underscores the importance of our plan to build a strong, home-grown renewable energy sector to further reduce our reliance on fossil fuels.”

In a report issued earlier this month, energy think tank Ember said that phasing out gas from the power sector is possible by 2035 – or even earlier. “A gas phase-out also gives the UK the opportunity to swiftly move away from expensive imported gas, and instead build cheap domestic renewables,” it stated. “Such a phase-out could help accelerate the green industrial revolution in the UK, as well as forge new international partnerships united in the transition to clean electricity,” Ember added.

In its recommendations for the Sixth Carbon Budget, the Climate Change Committee stated ending gas-fired generation by 2035 is possible, in a step towards building a 75-90% renewable grid by 2050.

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