With millions of Brits set to see their bills soar by £1,578 a year on average by October, a campaigner explains why energy costs so much, and how price fixing works against users.
Ofgem in August announced that its price cap will rise to £3,549 for those on default tariffs paying by direct debit - up from the current figure of £1,971 and an 80% increase.
The rise in the price cap will inevitably add more pressure on to families already struggling with the cost of living crisis.
And to make matters worse, Professor Richard Murphy claims that those producing electricity from gas can still make a profit and so stay in business.
With this in mind, and businesses thriving, the question stands at what customers who can no longer afford UK energy prices do. And, if the government needs to declare the energy crisis as a national emergency.
Here, Richard Murphy, a chartered accountant and political economist who campaigns on issues of tax avoidance and tax evasion, explains all...
There are lots of ways to generate electricity in the UK. Renewables, nuclear, coal, hydro and gas all play a part. Most are used, except coal, which is now only in emergency use.
The cost of generating electricity using these various methods varies greatly. For example, using gas at current spot market prices costs about £611 per megawatt hour (MWh) right now.
Other sources cost about £60/MWh for nuclear, £50/MWh hydro and in the range £50 to £140/MWh for on and offshore wind and solar. Those are big differences.
The electricity we actually get delivered to our houses is from a mix of all these sources. It is total nonsense, for example, that anyone supplies pure renewable electricity. All electricity from all generating sources is mixed together when it goes down the wires to our houses.
Bizarrely, however, that’s not how the price is set. The wholesale price of electricity in the UK is set on what is called a ‘marginal costing’ basis. This is much beloved of economists, but is working against the interests of all consumers of fuel right now.
What it means is that the wholesale energy price is set so that the most expensive producer can make a profit from the sales they make into the wholesale energy market.
So, since gas produced electricity is the most expensive to produce right now (and is likely to be so for a long time to come) its cost of manufacture plus a fair profit margin sets the wholesale price for all electricity, however it is generated.
What that means is those producing electricity from gas can still make a profit and so stay in business at present. But it also means nuclear, hydro and renewables producers are being paid the price that the gas generators get. This makes no sense at all.
The result is obvious: the profit in the nuclear and renewable producing companies, who usually make more than half of UK electricity, increase dramatically, and wholly unnecessarily when a marginal costing price setting model is used to suit gas generators of electricity.
I should, however, add a twist. Many renewable energy producers are already subject to contracts that essentially fix their prices, with the government already taking the risk on price variation.
Where these contracts exist, and where fixed price contracts guaranteed by the government exist with nuclear producers, the excess electricity profits arising because prices are based on the cost of gas production already flow to the government... a little-known fact.
There is also a pricing problem in the gas market. The UK produces about half its gas needs, the rest it has to buy internationally. We can’t control that international price.
But the energy regulation system lets UK produced gas be sold at the international price for onward supply to UK consumers, again massively increasing the profits of UK gas producing companies wholly unnecessarily, and solely because of the pricing model used.
The talk is that a windfall tax could correct for this. That, however, is to ignore the fact that many of the problems we face have been created by dire regulation, and changing that regulation is also within the scope of government.
Suppose that regulation was changed - as the EU is said to be considering. Instead of all producers, whether of gas or electricity, being paid the price of the highest cost supplier in their market they were instead paid their own fair marginal cost of production, including a reasonable profit margin.
Then presume that the energy regulator priced the onward supply of wholesale gas and electricity to the energy distribution companies on the basis of the actual cost to produce (including fair profit) of the gas and electricity actually sold into the market each day.
I stress, that for much of the renewables sector and for nuclear this will not be hard to do because of the nature of the government price guarantees that are already in place.
For gas, simply mix internationally priced gas with UK produced gas at its fair price of production. That’s all that is required.
This would, though, require a change in the law. There would be yelling, screaming and shouting from some energy companies and legal threats galore.
These will need to be ignored because customers can no longer afford UK energy prices.
If in doubt, the UK needs to declare this a national emergency with existing laws suspended since, as it IS a national emergency. And if we could do this sort of thing for Covid we could certainly do it now.
What would the impact be? Obviously it’s not precisely possible to say, but broadly speaking the price of gas might reduce by 40% whilst the price of electricity could fall by maybe 65%.
I stress these are estimates and that this move would not solve all the energy problem overnight: the remaining prices are still problematic and massive reforms to the market would still be required. But we would win three things.
The first would be instant reductions in energy costs. Households and businesses, let alone many lives, might be saved as a result.
Second, inflation would be reduced, although not eliminated. Massive pressure would be taken out of the UK economy.
Third, the pressure for state interventions to save households, pubic services and businesses would reduce - although by no means entirely go away.
Those are three massive wins that almost no other reform that could so simply be put in place could deliver.
So why won’t this happen? First, because no one in politics seems to know about this. Second, because politics (of most sorts right now) is terrified of upsetting ‘the markets’, even if those markets crush consumers.
Third, as a result politicians who lack the courage to hold the positions to which they have been elected will not do what is required to protect us from harm.
We need courageous politicians right now who might be willing to act in the public interest to change the rules of the energy price game to save us all from harm. I can live in hope that this might still happen. I am not holding my breath.
