By Paul Homewood
While some of the recent energy price rises have been due to international market factors, part is the direct result of government policy.
I mentioned the role of carbon pricing a few months ago in pushing up the cost of electricity. Since then carbon prices have jumped even higher to £84.50 per tonne. Two years ago they were trading at below £15/tonne (via the EU scheme):
This increase has been deliberately engineered by government, in order to push up the cost of fossil fuel generation so as to make expensive renewables competitive.
The policy is also to track EU carbon prices, which have also rocketed in the last two years.
A typical CCGT plant emits about 374kg of carbon dioxide for every KWh generated, assuming 53% efficiency. A carbon tax of £84.50/tonne would therefore add about £32/MWh to the cost of gas generation.
Given that the wholesale cost of electricity is currently £208/MWh, this represents a sizeable chunk. Because of the way the electricity market works, this extra cost gets passed on to all sources of generation, not just gas, because CCGT plants tend to set the market price as they are the marginal generators. The report below explains:
So consumers end up paying this £32/MWh on all of their electricity, which provides a windfall profit to all low carbon generators.
When the UK Emissions Trading Scheme was introduced last year, provision was included to contain costs and prevent market instability in emergencies. Actions allowed include flooding the market with extra permits.
Given the severe energy crisis now upon us, this provision should be triggered immediately.