Late last year, we investigated the high fuel and energy prices. The review suggested we were paying about 20% points more for our electricity than we ought. So, in this article we ask, are we still overpaying for electricity? How are the rates calculated? And what needs to be done if anything?
How are Electricity Prices Calculated?
The UK’s wholesale electricity is generated from a variety of sources. Be that gas, oil, coal, nuclear, and renewables, such as hydro and wind. Each of these have a different cost of manufacture and the wholesale electricity price is derived by each generating company saying what price they would be willing to accept for producing a unit of power. This then goes into a form of bidding process. Given current world markets gas generation is usually the most expensive. This is important because the wholesale price used for our bills, is set using the highest cost of generation used for that period.
So, in today’s market, if gas is not needed, the wholesale prices for energy drops considerably. However, if gas is used the bid price of the gas sets the wholesale energy price.
What is the UKs Power Generation Mix?
The non-gas elements of the UKs generation mix for December amounted to 62%. The same as our last review back in August 2022.
It doesn’t take a rocket scientist to understand that if a blended price was used based on the proportionate mix, our energy prices would have been much lower. Gas generation would have impacted our prices by 38%. Still a decent increase but nothing compared to the bills we are seeing. This view is backed-up by the Carbon Tracker Initiative, which found that in 2021-22 UK households had overpaid for their electricity by a whopping £7.2 billion. In our view this will be significantly higher for 2022-23, given how prices have moved.
Armed with this information, one may justifiably ask, why it takes the government a lengthy and costly review to amend something that appears to be common sense? Heaven only knows! But one could justifiably question whether we are being subjected to some form of stealth tax. Soaring prices also amplify the treasury’s take from the windfall tax.
If you have read our earlier piece on petrol forecourt prices, this all sounds strangely familiar,
Why is all this important given we get a rebate?
Firstly, the rebate doesn’t cover all the inflationary increases caused by the spiking energy costs. Energy doesn’t just impact our homes, it also impacts the costs of everyday consumable items, like food as well as capital goods.
Secondly, the financial support is capped and time-based. Should the generation costs run away with themselves we would feel the pain more acutely, as we will when the rebate is removed. This makes Simon Francis’s, co-ordinator of the End Fuel Poverty Coalition, words even more important. In a recent BBC article, he was reported to have said “injustice” in the electricity pricing system was at a “shocking scale.”
Thirdly, the issue of volatile input costs such as oil and gas will continue for some time, given the several geopolitical issues we face, especially that of Russia’s unprovoked invasion of Ukraine and their meddling in the Middle East and Africa.
Lastly, it is damaging growth in the economy. Yes, the very thing the government is supposed to be prioritising. Energy costs are driving businesses ever close to the brink of disaster, which in turn impacts livelihoods.
Given we are overpaying for electricity what should be done?
TheBoldAge’s view is that we are overpaying for our electricity prices, and policymakers should adopt a blended cost when setting the wholesale price. To our mind this is the fairest approach for the consumer and business and mirrors reality.
That said, it means that green energy generators won’t benefit from artificially derived, higher prices. Which may result in them slowing down their capital investment programmes. In our mind incentivising the green transition is where any review should concentrate. The government still has enough in the armoury to provide focused support, incentives and tax breaks to renewables. Including supporting households insulate and introduce micro power generation. Be that solar, wind or ground source heat.
Common-sense, decisive action needs to be taken. What remains to be seen is if the policymakers are bold enough to tackle the inequity of an unjustified electricity price.