UK Electricity Prices

Question for Short Debate

Asked by

To ask His Majesty’s Government what assessment they have made of why UK electricity prices are among the highest in the Organisation for Economic Co-operation and Development.

My Lords, it is a great privilege to open this debate, especially with the high calibre of people proposing to participate in it.

The basic science of global warming is rock solid, but we have been told fairy tales about its economics ever since the Climate Change Act 2008. We all love fairy stories. The essence of most of them is the same: the country faces enormous challenge that can be overcome only at huge cost and sacrifice. Then our hero, through determination, clear-sightedness and a magic wand, finds a way to defeat that challenge which, far from involving cost and sacrifice, makes everyone better off and they all live happily ever after. The climate change version of this fairy tale is that, to avoid human extinction, we must eliminate wicked fossil fuels. This looked as if it would involve daunting costs and sacrifices, but along came Prince Miliband who announced that his magic wand—renewables—would not merely banish emissions but give us cheaper, reliable energy and green growth so that we can all live happily ever after.

The United Kingdom has been one of the first countries to embark on the quest for renewables. We have gone further and faster than most other countries. Our emissions are back at the level they were at in 1879. Two decades on, we have the highest electricity prices in Europe, and Europe has the highest electricity prices in the developed world. Far from enjoying green growth, we have seen our energy-using industries decimated, a third of our refineries closed, chemicals and fertilisers thrashed, aluminium and steel shattered, ceramics, bricks and cement rendered uncompetitive.

We are all told that these high electricity costs are a temporary phenomenon, entirely caused by the wars in Ukraine and Iran and our reliance on gas. High gas prices have exacerbated our problems, but even in 2019, before those wars and the pandemic, when gas prices were at the fairly typical level of the previous two decades, our electricity prices were the third highest in the OECD. Why is this? Surely sun and wind are free. That is true but, unfortunately, they are intermittent and capital intensive. Solar is now a competitive source in sunny countries because the main variable demand there is for air conditioning, which is perfectly correlated with the sun shining. Alas, in the UK the sun does not shine when we need the power most: in winter, in the evenings and at night.

That leaves us with wind. In 2024 Prince Miliband, newly reinstated in his palace—I mean his office—as Secretary of State, assured us that new offshore wind was now cheaper than new gas. Unfortunately, that year’s offshore wind auction set the CfD price for wind at £80 per megawatt-hour in 2021 pounds. His own department’s estimate for the levelised cost of new gas was £55 per megawatt-hour, pre-tax.

There is a respectable case for imposing a tax on fossil fuels to pay for the external costs that global warming will impose on the world. Unfortunately, DESNZ has stopped estimating the social cost of carbon because the conventional estimate, used by the Americans and others, of $20 per megawatt-hour was insufficient to make gas appear uncompetitive. Now DESNZ, in assessing the relative costs of different modes of generation, imposes a theoretical policy cost on fossil fuels, which is calculated as the tax necessary to render fossil fuels less competitive than renewables. I kid you not—that is the methodology. Even then, it is on a levelised cost basis, which takes no account of intermittency. Since the wind often does not blow for quite long periods over the whole UK and much of Europe, we need back-up capacity roughly equal to the wind capacity. At present, that can be only gas. If we then have to eliminate emissions from that gas, we will need an equivalent capacity of carbon capture and storage. That is a threefold investment in capital expenditure for one lot of electricity.

My Lords, it is a pleasure to follow the noble Lord, Lord Lilley, but also a problem, as he has said almost everything that needs to be said on this subject already, and in a style that few of us can imitate.

In the time available, I want to critique one particular argument that we hear quite a lot nowadays: that we just need energy abundance. The argument runs: “We just need more of everything—nuclear, gas, wind and solar. Let’s just get building—it doesn’t really matter what. Let’s just get on with it”. In a way, it is a good thing that we hear this argument. I think it is put forward precisely because people sense that there is something awry with the arguments for renewables but do not want to follow the logic through to its conclusion. Indeed, the argument sounds superficially logical: let us maximise our ability to use everything—the wind is free, so let us use that when we can, and use other things when we cannot. It is said that building lots of everything makes sure we can do that.

There are two problems with this. The first is the best-known one: intermittency. You cannot control when the wind blows, so you have to have enough capacity to replace all your renewables capacity when there is zero wind and zero sun. The more renewables you have on the system, the more back-up you need and the bigger your problem is. Having more renewables requires even more capacity overall, and that brings more cost.

My Lords, industrial electricity prices are four times the level of the United States of America’s and more than three times the level of China’s. It is no wonder that we face a disaster of deindustrialisation accelerating under this Government with the closure of the oil refineries, ceramics plants and others that the noble Lord, Lord Lilley, rightly mentioned.

This is all avoidable damage. It is self-harm on a huge scale that the Government should be ashamed of. We have signed up for dearer electricity—it was not just this Government, but this Government have signed up to it, doubled the signature and worsened the terms, making it so much worse than even the position they inherited. It was always going to be the case that, if you put on more renewables, you would have dearer electricity. It is completely wrong to suggest otherwise, because you need to pay for two systems: you need the wind power as well as 100% back-up, because on some days, particularly cold, difficult days in winter, there is no wind power at all. So you are paying twice with the back-up.

It was always going to be the case that the more renewables you put on the system, the dearer your cheapest form of energy production, which is gas generation, becomes. When you switch from gas being on baseload to gas being interruptible and brought in only occasionally when there is no wind, it works much less efficiently. The efficiency of the power station drops from over 60% to around 40%, so there will be even more carbon dioxide per amount of energy produced. Of course your costs go up dramatically, because your overhead costs for the gas power station are defrayed by a limited number of days instead of being defrayed by operating every day of the year apart from occasional maintenance. It was baked into the system that this would be less efficient and work less well.

Governments, particularly this one, have then compounded the problem by saying that gas must incur very high carbon tax charges. Of course our electricity was going to get dearer, because customers had to pay additional taxes on the gas. Why are there additional taxes on the gas? It is mainly as the noble Lord, Lord Lilley, implied: the gas was too competitive and was still cheaper even on some of the interruptible runnings that they were proposing. So you needed a big carbon tax to say to people, “This really is the dearest part of the power system, which is why we are trying to get rid of it”.

My Lords, I declare an interest as chairman of Make UK, which represents 26,000 manufacturing businesses in the UK. I declare it not just because it is in the register; I am speaking in this debate because the unfair policy for pricing energy is affecting every one of those 26,000. Our members pay 25p per kilowatt hour. French and German companies in exactly the same field pay 12%.

It is 12p.

Sorry, I stand corrected: 12p. The noble Lord is right. In China, it is 3p. What does this really mean? Is it just a number? Having been on a presentation with the chief executive officer of Nissan, I can tell the Committee that that company pays more for electricity in Sunderland than in any of its other plants globally. Tinsley Bridge Ltd had to shut its automotive division in Sheffield because of energy prices—110 skilled jobs and £20 million of work went to France. That was because of energy prices. Another company, one of our members in Yorkshire, has seen its bills go up from £1.2 million to £2.4 million, not because of Iran or anything else recently but because of the cost of energy.

Why is this? International oil and gas prices are much the same everywhere. It is the price. This is the Government’s choice. Five different levies make the difference. That is policy; it is a choice that can be made. This is what makes the difference. Domestic prices are regulated, I assume for electoral reasons, but industrial prices are not and there are 150,000 small companies in this country that do manufacturing.

I had the pleasure of working with the Minister, the noble Lord, Lord Whitehead, when I was Energy Minister and he was my shadow. He is very smart and understands all these arguments, but I ask him not to respond to this debate by talking about the supercharger. That is an attempt to lower prices, very successfully, for 400 heavy users. I also ask him not to rely on BICS and its subsidies. This was announced after extensive lobbying by Make UK a year ago, when Jonathan Reynolds, then Secretary of State for Business and Trade, phoned up with glee to say that he had won a big argument around the Cabinet table and that there would be this scheme for manufacturing, affecting thousands of businesses and reducing their prices to the levels of those in France and Germany. A year later, what have we had? We have had consultations and arguments about who is included. Ed Miliband’s department tells us that it is the Treasury; the Treasury tells us that it is Ed Miliband’s department. Our members do not care: they get their bills, which are going up and up. Where is this?

My Lords, I put on record my registered interest as the director of the Global Warming Policy Foundation.

Let me restate what Labour’s manifesto said. It promised to get power bills down by £300. The latest price cap is £294 higher than in those lofty days of July 2024, and even that has been fiddled because the average has shrunk from the previous average, as households are using less because they simply cannot afford to use more. So, like for like, it would be even higher. We are now more than £600 adrift from that manifesto promise. I have always brought to politics the principle that a promise made is a promise to be kept, but that promise is simply not being kept.

I do not want to pre-empt what the Minister might say, but I guess it will be something along the lines of, “Gas is the problem”. The answer should be, “Thank heavens for gas, even better if it is domestically derived”. The price cap for gas is 5.74p. For electricity, it is 24.67p, so gas is just 20% of the price of electricity. As I attempt to heat my home, gas is infinitely preferable on price, as it is for many. Gas sets the price, which I am sure the Minister will say is an indication that the market no longer works. Gas is used as the last resort after renewables have failed to provide the required electricity and after interconnectors are at full tilt—and after the wood-burning fiasco that is the Drax formula of energy generation, using imported wood pellets that have come across the Atlantic. That is the sham of the net-zero fairy tale, as the noble Lord, Lord Lilley, said very clearly.

The nature of renewables is in their intermittencies. Some might say that I do not know very much, but I do know one thing: the sun does not shine at night, so solar does not work very well at night. At our latitude in the UK, somewhat north and with Atlantic-influenced weather, it is not particularly good even on the best of days. Wind is similarly unreliable. In every energy debate, I try to get in the wonderful German word Dunkelflaute, which refers to long periods, usually in the middle of winter, when there is an anticyclone, no wind and—obviously, in the winter—very little solar. As we bulk up on renewables, we simply bulk up on cost, as we are seeing on an annual basis. We have a choice: either create loads more renewables, then create storage systems so that we have enough energy to get us across those Dunkelflaute periods, or use batteries and elevated reservoirs for gravity hydro, or we consider hydrogen. All are abject failures on the thermodynamic pathway. They are all poor. They lose energy at every step and all are horribly expensive.

My Lords, I want to make some brief comments in relation to the situation in Northern Ireland.

As noble Lords may be aware, energy prices in Northern Ireland are not controlled by the energy price cap. We all remember that global prices of gas, electricity, oil and other fuels began to rise dramatically in the summer of 2021. Prices then shot through the roof after Putin’s illegal invasion of Ukraine in February 2022. Later that year, the Conservative Government provided support for customers in Northern Ireland, which resulted in the largest electricity supplier in the Province cutting prices in November to a rate below those in the rest of the United Kingdom. However, a reduction in that support from April 2023, and its removal from July 2023, led to price rises in Northern Ireland. Since September 2023, the cheapest prices from Northern Ireland’s largest supplier have been higher than prices under the cap in the rest of the UK.

All Northern Ireland households will shortly receive a £30 annual reduction on their electricity. On the face of it, this is welcome news, until you learn that households in Great Britain will receive £150 per year. I understand that the discrepancy is because one of the two environmental levies being removed from bills by the Chancellor of the Exchequer does not exist in Northern Ireland. However, given the higher price of electricity in the Province which I have just explained, surely that should be taken into account as a means of redressing the current cost imbalance between the two parts of the kingdom.

There is another problem. According to Northern Ireland statistics, approximately 61% to 68% of households in the Province use oil rather than gas as their primary method of central heating. This equates to roughly 500,000 homes, with the reliance on heating oil jumping to over 80% in rural areas. An analysis by the Consumer Council for Northern Ireland found that, in March, following the US-Israeli attack on Iran, heating oil prices in the Province rocketed by 92%, with 500 litres costing consumers an eye­watering £627. I ask the Minister to consider what further support His Majesty’s Government can make available.

My Lords, when I was a student at the London School of Economics, there was a thing called the London fog. When it descended, visibility went down to 10 to 20 yards. I must say, as I prepared reading for this debate, I felt that I was entering pure fog. It was confusion and darkness—you were frankly nervous about where you were going.

I will make just three points. The first has already been made, but I want to emphasise it. That is the cost of intermittency. You frequently hear, as the Secretary of State has said, that renewables are nine times cheaper than fossil fuels and gas. In a way, he is right. They are if you consider the price of fuel in connection with them as zero but, on the other hand, intermittency requires enormous investment. Dieter Helm suggests that, in the past, we needed about one-third more capacity to deal with peak demand. Now, he says, we have reached a position where we need twice the capacity to deal with peak demand. In the future, if we are to get the benefit from AI, greater electric vehicles and so on, we need a factor of three. This simply cannot be done from renewables. The enormity of the cost has simply not been recognised by the Government.

My second point is that we have a present grid that is totally out of date. The grid was built to deal with some very large generating companies. I do not know why there were so few. Whenever an economist looks at a few companies, you immediately think of restriction of competition. In the past, there was that small number. Today, you have wind farms and solar parks, and many more access points are needed. The grid is simply not compatible, and we do not have, like other countries, something to fall back on. China and Germany can fall back on coal. France can fall back on nuclear. The US can fall back on oil and gas. We fall back on wind, light and sun. It is really crazy.

My third point is on overregulation. Why should we have one price for power throughout the whole country? Why can we not have a regional pricing of power? If, in Scotland, offshore wind farms and so on are cheaper, why can Scotland not be allowed to attract to the area industries that depend heavily on power? We need much less regulation in this respect and much more flexibility. That is something only the Government can do.