Fixing Britain’s broken energy market is a Brexit dividend we could all enjoy

The new PM will be under pressure to combine Britain’s quest for net zero with cheaper bills for millions

Aug 25, 2022 6:39 p.m(Updated 7:01 p.m.)

Among all the worrying predictions ahead of Friday’s energy price cap announcement, one of the most striking came from environmental expert Dr. Simon Evans.

A “truly chilling” analysis by its Carbon Brief website warned that UK bills could soar to £5,000 next year, pushing two-thirds of households into energy poverty. Home energy costs would exceed £193 billion, more than the government spends on education and defence.

But while the next Prime Minister will be under intense pressure to make Covid-style emergency payments to avoid the worst, the bigger picture is just what they can do in the medium and long term to support the UK’s pursuit of net zero with cheaper ones to combine bills in the millions.

And a new statistic that underscores the need for urgent reform is this: gas electricity in the UK now costs an amazing nine times more than new renewable energy. The average wholesale price for electricity last week was £446/MWh. In July, the government secured a new renewable energy pipeline for just £48/MWh.

Even more extraordinary is that because of the way the UK electricity market works, the average price of electricity is almost always linked to the cost of gas and not wind or solar power. As Octopus Energy’s chief executive recently put it, “Even if cheap renewables are used, it’s not penetrating through to consumers, which is crazy.”

The market mechanism stems in part from the ‘gas run’ in the UK in the 1990s when it moved away from coal. However, given the rapid rise of renewable energy in recent years, it looks extremely dated.

Boris Johnson was so taken with the anomaly that even in his 1922 all-or-nothing speech to the Tory backbench committee in June (when he was fighting not to be ousted from office) he stressed the need for a ” UK decoupling highlighted electricity market price from global gas prices.

Johnson couldn’t survive the onslaught of his backbenchers in the end, but his energy secretary, Kwasi Kwarteng, launched a consultation this summer to break the link between gas prices and all prices, admitting the market rules were “largely designed for fossil fuels. based power system”.

For all the healthy and often scathing anger of the Tory ruling race, reform is one of the few areas where Rishi Sunak and Liz Truss seem to agree. Sunak said at a husting last week: “We need to reform our market to break this link. If we can do that, wholesale electricity prices will drop significantly for everyone.”

More of opinion

Curiously, Sunak added: “This is a reform we are behind on… Europe has already achieved that”. In fact, the EU has not taken the long-overdue step, granting only Spain and Portugal a 12-month waiver. So this could really be a “Brexit Dividend” if the UK made a permanent change.

As the former chancellor’s hopes of replacing Johnson dwindle by the day, Truss’ views matter more. And just as there is uncertainty about what kind of new support she will unveil on energy bills, there is separate (but related) uncertainty about how green her government will truly be.

Most environmentalists were cheered by the presence of Kwarteng and Simon Clarke as key figures on Truss’ team. Kwarteng led policies such as phasing out gas-fired boilers and switching to wind power. Clarke has been a leading advocate of net zero, particularly the green jobs it can bring to areas like the North East. Zac Goldsmith has also helped guide their politics regarding nature.

But green groups have also been spooked by speculation that Truss could give key positions to the likes of Lord Frost, John Redwood and Steve Baker. Frost recently likened the Tories who pushed the Net Zero agenda to “the culprits” who appeased Hitler in the 1930s.

Activists fear EU-like environmental standards could be watered down, the statutory climate protection board downgraded, or net-zero legislation even repealed. “She could do quite a bit of damage in just a few years if she goes ‘full freeze,'” one environmentalist told me.

Truss’s own tenure as environment secretary has also failed to inspire confidence, as some in the industry believe she has “a deep-seated dislike” for green groups. Some former officials add that they showed little interest in the climate change agenda at the time.

However, it may be that Truss is simply playing a clever game. Though her attacks on solar farms and her support for resuming fracking have courted some climate skeptics, she has tacitly stuck to Johnson’s key green commitments.

In a little-noticed blog for the Conservative Environment Network, she even pledged to “double our drive to reach net-zero by 2050,” albeit “in a conservative way that helps homes and businesses.”

Both politics (polls show the public is far more interested in onshore wind energy than Tory members) and business (those crass numbers about green energy being so much cheaper than fossil fuels) could force their hand.

California on Thursday night will approve plans to ban the sale of new gasoline and diesel cars by 2035, a hugely significant move that several other U.S. states are sure to follow. The UK ban comes into effect from 2030 and offers a chance to show that London is leading global change.

A quick decision to decouple gas from electricity prices could show the bold leadership promised by Truss. As Goldsmith is a key ally, she might also seek to seize the initiative by tightening regulation and legislation to crack down on water companies that dump wastewater. Although she has campaigned against windfall taxes, she is unlikely to scrap Johnson’s plans.

There will be several more tests of their green agenda in the coming weeks. Her choice of chancellor and energy secretary (typing Kwarteng and Clarke respectively) will be key signposts, as will her speeches to the UN General Assembly and the Tory conference.

Some allies hope she can defy her critics and reframe net-zero as an energy security issue, with renewable energy as much a weapon against Vladimir Putin as sanctions and rocket launchers. And how she manages her climate-skeptical ministers and MPs, particularly strong-willed and vocal characters like Frost and Redwood, could be a template for how she manages the Tory party as a whole.

Leave a Comment