Removing barriers to mature renewables key to lowering industrial electricity prices

5th February 2018

Today, the Aldersgate Group publishes a new report written by University College London (UCL) [1], setting out what the government can do to support competitive industrial electricity prices as it delivers its Clean Growth and Industrial Strategies. The report recommends that the UK government improves investment conditions in low-cost renewable energy technologies such as onshore wind, co-ordinates investment in power generation and network infrastructure more efficiently and ensures that the UK leaves the EU in a way that supports increased interconnection with European power grids and cross-border electricity trading. 

This report, written by Professor Michael Grubb and Paul Drummond of UCL, will be launched at an event in London on Monday 5th February [2]. Professor Michael Grubb, Professor of International Energy and Climate Change Policy at UCL, is available for interview.

Coming shortly after the government has published a Clean Growth and an Industrial Strategy and is reviewing the findings of the Helm Review on energy costs, this report sets out six policy recommendations to provide competitive industrial electricity prices. These recommendations seek to capitalise on the technological revolution underway in the clean power sector to reduce system costs and better align the structure of the electricity market with the UK’s new Industrial Strategy. 

To deliver competitive industrial electricity prices and reduce the gap with prices prevailing in some continental countries, the government should consider:

  1. Removing barriers to investment in mature renewable energy projects, given that technologies like onshore wind no longer need subsidy provided the political risks are minimised. This should be coupled with a resumption of the carbon price escalator, taking effect as coal retires from the UK system in the early 2020s, so that investors have confidence that they will save on fuel and rising carbon costs (with an appropriate compensation mechanism for those electro-intensive businesses in need of support);
  2. Encouraging greater co-ordination between investments in network and generation infrastructure to avoid congestion and inefficient network development. This should be done in conjunction with a review considering how to support electro-intensive companies with network costs;
  3. Ensuring that the UK leaves the EU in a way that retains unrestricted access to the internal energy market and supports continued investment in interconnection with continental grids, which will be essential to maintain system security affordably as the UK electricity system decarbonises. Research suggests that for every 1 GW of additional interconnection, UK wholesale electricity prices could reduce by 1% to 2% [3];
  4. Facilitating cross-border industrial electricity purchases;
  5. Using the five-year review of the Electricity Market Reform and Capacity Market to help UK industrial electricity consumers benefit from providing system-related services to the electricity system, such as demand-shifting and frequency support;
  6. Establishing a long-term market of zero carbon and tradeable electricity contracts to facilitate industry access to low cost and unsubsidised sources of renewable electricity such as onshore wind. Industrial consumers holding these contracts would avoid paying the carbon price.

The fact that UK industrial electricity prices are higher compared to those in countries such as France and Germany has been well documented but this report goes further than previous analysis by considering the drivers behind the evolution of electricity prices and what policy measures can help mitigate unnecessary costs to businesses.

It finds that differences in industrial electricity prices have been driven by the fact that some of the UK’s key continental neighbours tend to be better interconnected and engage in more cross-border electricity trading, are more supportive of long-term contracts to reduce prices for electro-intensive companies, take a more strategic approach to supporting electro-intensive companies with network and policy costs and have historically integrated renewable energy on their system in a more co-ordinated – and therefore cost-effective – way than in the UK (although UK policy is now improving in this regard).

Professor Michael Grubb, UCL, said: “With costs tumbling, the clean energy revolution presents an opportunity for UK industry. But harnessing the benefits will require removing the obstacles to mature renewables including onshore wind, and helping business consumers profit from flexibility. It also means ensuring that both fossil fuels and renewables face their environmental and system costs along with developing smarter energy markets, through which industry can procure its energy efficiently with the most cost-effective renewables.”

Nick Molho, Executive Director, Aldersgate Group, said: “Electro-intensive companies have an important role to play in the UK’s transition to a low carbon economy. The government has a wide range of tools available to deliver competitively priced power to those businesses in the years ahead, such as taking a more strategic approach to network development and funding, improving industry access to low cost forms of clean energy and ensuring that Brexit does not get in the way of increased interconnection and cross-border trading with the European electricity market.”

Roz Bulleid, Head of Climate, Energy and Environment Policy, EEF – the manufacturers’ organisation, said: “UCL is to be commended on a thorough investigation of the many complex and interconnected factors driving electricity prices in the UK and on the continent. Energy intensive manufacturers have been concerned for some time about the disparities between UK prices and those paid by their direct competitors. They will be pleased at the recognition of the challenges they face even if the scale of disparity for individual companies may vary beyond the averages necessarily set out here.

As a starting point, government should commission regular assessments of this type, as already happens in some competitor countries, and launch a wider conversation about the impact a more activist approach to electricity prices could have on UK industrial competitiveness.”

Martin Casey, Director of Public Affairs and Communications, CEMEX, said: “This report provides welcomed clarity on some of the challenges facing the cement industry and also puts forward some interesting options to improve the competitiveness of electricity prices which are fundamental to the future success of cement manufacturing in Britain, and consequently to the delivery of the Government's ambitious infrastructure and house building programmes.”

Dr Robert Gross, Co-director, UK Energy Research Centre, said: “This report provides a proper explanation of why UK power prices differ from those in near neighbours. Industrial power prices are not high because Britain is overambitious on green energy but because the way the costs and benefits of clean energy are shared have tended to disadvantage heavy industry.

The report rightly recommends that the UK should push ahead with subsidy-free long term contracts for low cost renewables and encourage large customers to contract directly with generators. The report also shows that prices here are higher because we are less interconnected than our continental neighbours. Interconnection is threatened by Brexit and it is a policy priority to keep the UK in the European energy market.”

Mary Thorogood, Stakeholder Relations Adviser, Vattenfall UK, said: “The UK has a great opportunity to take advantage of its investment in home grown, clean power to deliver competitive prices for consumers and businesses. Vattenfall agrees that, as the cheapest form of generation, UK Government should look at providing a viable path to investment in onshore wind. This will enable decarbonisation at least cost whilst improving the global competitiveness of British businesses of all sizes.” 

Angus MacRae, Head of Electricity Economics, SSE, said: “SSE welcomes this new analysis of how to achieve competitive GB electricity prices whilst delivering the Government’s Clean Growth Strategy at lowest cost. Many of the report’s recommendations will benefit customers by minimising overall costs, in particular, restoring access to the CfD mechanism for the cheapest renewable technologies, ensuring that carbon is properly accounted for in electricity imports, and providing a long-term investable carbon price signal.”

Dr Richard Leese, Director - MPA Cement and Director - Industrial Policy, Energy and Climate Change, Mineral Products Association said: “This report draws attention to an important issue for mineral products producers. Energy costs remain a significant issue for small, medium and large companies alike. Some cost compensations and exemptions exist for the few and are only partial where they apply. The Government’s clear support for renewable subsidies has brought down the cost of their installation and operation, but paradoxically, delivered electricity costs continue to rise. The Government needs to delve deeper into the energy system to understand the impacts and costs of low carbon electricity delivery on the system as a whole. In doing so it needs to take action on the rising costs associated with the network and its capacity constraints.”

[1] The Aldersgate Group published today a new report from Professor Michael Grubb and Paul Drummond at University College London, UK industrial electricity prices: competitiveness in a low carbon world.

[2] Delivering competitive industrial electricity prices in a low carbon world. This event will be held from 10.00am-11.30am on Monday 5th February at RELX Group, 1-3 Strand, London, WC2N 1JR. Chaired by Aldersgate Group Executive Director Nick Molho, the event will feature keynote speaker Michael Grubb, Professor of Energy and Climate Change, at the UCL Institute for Sustainable Resources. Panellists include Roz Bulleid, Head of Climate, Energy and Environment Policy, EEF - the manufacturers’ organisation, Dr Richard Leese, Director - MPA Cement and Director - Industrial Policy, Energy and Climate Change, Mineral Products Association, Matthew Knight, Director of Energy Strategy and Government Affairs, Siemens Plc, and Mary Thorogood, Stakeholder Relations Adviser, Vattenfall UK. 

[3] National Grid (March 2014) Getting more connected: the opportunity from greater electricity interconnection

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