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The writer is a green industrialist and founder of the Ecotricity energy company
At the heart of the UK’s cost of living crisis is our high energy costs. And at the heart of our energy market is a bizarre, very unbusinesslike mechanism that makes our bills higher than they need to be. We allow the global price of gas to set the price we pay for our own, domestically produced green energy.
The mechanism for this is the auction system in the electricity market. It does not pay the power generators, be they gas, nuclear, wind or solar, the price they actually bid to sell at. Instead, generators get paid the same price as the very highest bid in the auction — which is more often than not gas.
We can never benefit from the lower price and the price stability of green energy until we break this link with gas prices. Its impact on our energy bills is at times extreme. At the height of the energy crisis in 2022, the global price of fossil fuels rocketed — at times gas rose in price 10-fold, taking all other forms of electricity generation with it. Our annual energy bills quadrupled from 2020 and 2023; the UK government intervened, with around £50bn of public money spent on making bills more affordable.
Ministers saw the problem — Ecotricity flagged it to them at the time — and the government gave themselves “exceptional powers” to break the link through the energy prices bill. But they failed to use those powers, preferring to treat the symptom not the cause. And so we remain exposed to global market prices for gas. Every day we pay more for our energy bills than we need to and generating companies are paid more for their energy than they need — or ask for.
But it’s not just our energy bills that are affected by this inexplicable mechanism. Ecotricity asked the National Institute of Economic and Social Research to model the macroeconomic impact of breaking the link with gas prices. Their findings were stunning. In 2023, it would have knocked £43bn from the nation’s energy bills — £30bn to make our businesses more competitive and £13bn of savings for households.
That’s a lot of overpayment and a problem in itself. But the artificially inflated cost of energy had far-reaching impacts on the wider economy. The NIESR study found that in 2023 we could have had inflation lower by a whopping 1.5 percentage points. This would have led to BoE rates 0.7 points lower, growth up by 0.6 percentage points, and an extra £36bn on nominal GDP. Every Briton would have been £300 better off, not just for that year but for several to come.
There’s a chain of negative consequences — higher energy costs driving inflation, which is a key driver of lending rates, which set mortgage and other borrowing rates, pay bargaining to keep pace and our general cost of living. Even in a low gas price year like this one, there would be gains. We could knock 0.3 percentage points from inflation, chip 0.1 percentage points from lending rates and enjoy GDP worth an extra £9bn.
So why haven’t we broken the link yet? I don’t know.
I’ve been sharing the numbers and the analysis with Ed Miliband’s climate and energy department and with the Treasury — the economic case for doing this is compelling and unarguable, but still we don’t. Civil servants may say it will be too difficult. But that’s never a good reason for failing to do something as beneficial as this. And it’s not actually difficult — we could do it within the current market rules by changing the auction system to one where every power generator gets paid the price they bid, (rather than the highest, as now).
So there is another way — either use the exceptional powers that the previous, Conservative set of ministers gave themselves or enact new ones. Our cost of living crisis is certainly an emergency, levels of poverty in our country are an emergency, and the link between energy costs and gas prices is the unjustifiable cause of so much harm.
Read the full article here