Reducing the cost of energy
If UK growth is to be achieved, lower energy costs for business and industry could play a significant part in bringing that about. It would involve a reform of energy market structures.
The first and vital step would be to decouple electricity prices from gas. Wholesale electricity prices are set by the marginal generator, often a gas-fired plant, even when renewables supply most power. The solution is to reform the market to use locational marginal pricing (LMP) or split markets, one for renewables, one for dispatchable power that can be turned off and on according to demand. This would reduce electricity prices in regions rich in renewables (e.g. Scotland, and coastal England) and lower exposure to gas volatility
We should encourage long-term Power Purchase Agreements (PPAs), making it easier for businesses, especially SMEs, to enter into direct contracts with renewable generators. Government could remove legal and grid barriers, creating platforms that aggregate SME demand for pooled PPAs. The impact would be to stabilize prices and reduce exposure to wholesale market swings.
We should invest in grid and transmission efficiency. Delays and constraints cause congestion costs and balancing charges, passed on to consumers. Faster connection processes and investment in digital grid management would reduce system inefficiencies.
We could promote local energy markets and microgrids in industrial clusters such as Teesside and Humber. This would reduce transmission losses and network charges, a significant component of UK business energy bills.
Domestic generation capacity should be expanded to lower wholesale prices. This would involve lifting planning restrictions on onshore wind and solar (especially in England). This would reduce reliance on imported fuels.
Nuclear and long-duration storage would support stable baseload and flexibility to complement intermittent renewables, improving market reliability and reducing balancing costs.
We should invest in grid and transmission efficiency because delays and constraints cause congestion costs and balancing charges, passed on to consumers.
Most importantly of all, we should increase the supply of energy. As well as nuclear and renewables, this means more oil and gas to complete the transition from coal. Britain’s contribution to global emissions is about 1 percent (which nearly doubles if imports are included). Meanwhile China is adding 2 new coal powered plants per week.
The UK should be drilling more off-shore oil and gas, importing more US liquid natural gas, and allowing fracking to take place on shore. Instead of stopping it if it causes ‘tremors’ less than those a lorry makes going past, it should compensate those affected when tremors rise above an agreed practical and reasonable level.
While the other measures will help reduce UK energy costs, it is increasing the supply that will make the biggest contribution. Instead of having industrial electricity prices in the UK among the highest in the OECD, these measures could bring them down to a level competitive with other developed countries.
Madsen Pirie