by TFor his summer, the wind farm, dubbed Britain’s most productive, sat idle in the windiest area of the country. The Viking wind farm in the Shetland Islands is expected to harness Britain’s most abundant wind energy resources to generate enough electricity to power almost half a million homes. But in August the wind farm shut down on most days.
The problem is the British energy market. Although the wind speeds in the Shetland Islands are ideal for the spinning blades of a wind farm, they are less attractive as a base for homes and businesses, meaning energy demand in the area is low.
The cables used to transmit the electricity generated there to the electricity grids on the Scottish mainland can help to some extent. But on clear, windy summer days there is still a risk of the local grid being overloaded with more power than can be transported to the south of the country. When this is the case, the wind farm is paid to turn off.
These “mitigation payments” amount to billions each year as renewable energy projects across the country are paid to switch off, at the expense of customers’ energy bills. Investing in a ramp-up of new poles and power lines to move electricity to areas of high demand will help, but these come with their own costs.
The answer? Government officials hope to correct the apparent inefficiencies in the market by overhauling the market itself.
Under plans put forward as part of a consultation launched by the previous government, the existing market for electricity could be replaced by seven market zones, each with their own market price. Areas in Scotland with high levels of clean electricity generation and low demand could expect lower prices, while urban areas in the south of England with high demand but limited renewable energy projects could see higher prices.
The plans amount to a revival of the British energy market as it has existed for decades. Those in favor of the change argue that a complete overhaul of the electricity system is urgently needed to accommodate the revolution ushered in by the UK’s switch from fossil fuels to clean energy, by reducing the cost of coercive payments and electricity grid upgrades .
Greg Jackson, the founder of Octopus Energy, told the Guardian: “It is grotesque that energy costs are rising again this winter when we are literally paying wind farms these exorbitant prices not to generate them. Location-based pricing would instead mean local people get cheap power when it’s windy. Scotland would have the cheapest electricity in Europe, instead of one of the most expensive, and every region would be cheaper than it is today. Companies would invest in infrastructure where we need it – not where they get the highest subsidies.”
The changes could catalyze an economic osmosis from major energy users – such as data centers and factories – to areas of the country with low energy prices, creating new employment opportunities outside the South East.
It could also stimulate the development of new energy projects – especially rooftop solar – in buildings in urban areas where energy demand is high. This rebalancing of the energy market could save the UK almost £49 billion in total network costs by 2040, according to research commissioned by energy regulator FTI Consulting.
But others fear the changes could have a bigger impact on the UK’s climate targets – and on bill payers. The clean energy companies preparing to spend billions on building new wind and solar farms are concerned that a redrawing of market boundaries could radically change the economics of new renewable energy projects – ultimately raising the costs that would be passed on to the consumers. or see the projects being demolished altogether.
Nick Hibberd, policy analyst at Renewable UK, the industry trade group, said: “This uncertainty has huge cost implications. A one percentage point increase in capital costs for low carbon generation would add £45 billion to the cost of achieving net zero emissions by 2050, and analysis suggests the impact of zonal pricing could be as much as 2 to 3 percentage points. In short, the additional costs of zonal pricing could be around £90-135 billion, exceeding any theoretical benefits of introducing it.”
With fierce competition in international markets for clean energy investment, Renewable UK fears that companies and their investors will simply choose to build new clean energy projects elsewhere.
“We need to mobilize billions of pounds of private investment in new renewable energy and network infrastructure over the next decade and beyond if we are to build a clean energy system at the lowest cost to bill payers and move towards becoming a net energy exporter. electricity. We therefore ask the government to take a careful approach to energy market reform, developing the current system further, as opposed to more revolutionary reforms such as zonal pricing, which risk jeopardizing investment by increase capital costs for all technologies,” Hibberd said.
The debate has created deep divisions in the sector, between modernists who believe the new price signals would lead to a new, rational market, and those who fear the changes will unravel the UK’s low-carbon agenda.
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“This is the most painful debate that has taken place in the energy sector in the last fifteen years. I’ve had arguments with people; there have been some very nasty arguments,” said an industry source.
The government has commissioned analysts from LCP Delta and Grant Thornton to produce an independent analysis of the benefits of replacing the decades-old UK market with a series of market zones that reflect the different price dynamics within each area.
The analysts found that the market needs efficient location signals to minimize system costs. But what’s less clear is how the unintended consequences could impact bill payers and clean energy developers. These can have enormous consequences for the way in which the government wants to implement changes in the market.
George Martin, a senior consultant at LCP Delta, told the Guardian that depending on how location pricing is implemented, benefits for bill payers across the country would vary.
If consumers are fully exposed to these plans, those in higher price zones in southern England may pay more for their energy than those in lower price zones in Scotland, he said. Even taking into account the broader benefits of a more efficient system, there is no guarantee that consumers in the south of the country will not pay slightly more overall under this proposal, he said.
“The government will have to decide whether households should be fully included in location prices. One route forward could be for households to be protected from the zonal price, but for total savings to be averaged across bill payers in all parts of the country – this would mean that savings would not be as great for those living in Scotland, for example , but it would protect those living in the high-demand areas of the south,” he said.
This strategy would still expose non-domestic energy consumers – such as businesses and factories – to electricity prices that depend on their location. UK Steel, which represents the sector, fears that steelmakers switching from fossil fuels to electricity could be hit by higher prices if they fail to move to zones with lower price signals.
Gareth Stace, the director general of UK Steel, said: “The government’s own analysis shows that zonal pricing will increase electricity prices for the steel industry, damaging competitiveness and preventing the sector from flourishing.”
“It is bizarre that some are suggesting that zonal pricing would lower prices for all consumers when they do not have the evidence to support this,” he added.
The government is expected to decide on a further approach in the coming months, but the fierce debate between warring parties in the energy industry is likely to continue for much longer.
