by Dr Iain Staffell – Imperial College London

Power prices have risen by 50% in the last year due to the rising cost of gas and carbon emissions, and uncertainty around Brexit weakening the pound. Electricity on the day-ahead market averaged £60/MWh over the quarter, up from £42/MWh this time last year. Rather than seeing extreme price spikes as in previous years or during specific events such as the Beast from the East, day-in day-out baseload prices have been creeping up as the year progresses. Consumers may see price rises going into the winter, giving the opportunity to switch to a cheaper, and greener, tariff.

Electricity generators are facing sustained pressure on three fronts: the cost of natural gas has been climbing since August, the price paid for emitting CO2 emissions has risen throughout the year, and the pound remains weak against foreign currencies.

Gas prices have risen 50% since June. The growth of liquified natural gas (now 9% of Britain’s gas supply) has globalised the gas market, and so soaring demand from China pushes up gas prices at home. This is especially important as gas power stations exert six times more influence in setting the price of power than any other technology in Britain. Gas stations are more dominant in Britain than in other European markets, and more dominant now than ever before, as they are the primary source of flexible capacity.

Secondly, the price of emitting CO2 on the European Emissions Trading Scheme (ETS) has quadrupled in the past 12 months. This comes after many years of hovering around €5 per tonne as many governments had issued so many permits to pollute that the market was flooded.

Thirdly, energy is an international commodity. Gas prices are linked to oil (traded in US dollars), carbon permits are priced in Euros, and even domestically produced fuels (now just 44% of the UK’s gas) can be exported easily, so their value is determined internationally. This matters because the pound fell against the Euro and Dollar since the EU referendum. Analysis for Ofgem shows that the Brexit vote caused an 18% increase in electricity prices, primarily because of the currency devaluation.

Little can be done about international fuel prices. Weakening Britain’s carbon price support could make electricity cheaper, especially from coal-fired stations. But the six remaining coal stations have little ability to set power prices, so price reductions would be muted while the cost of gas remains high. A longer-term strategy would be to further diversify into other energy sources, particularly renewables which can lock-in long term fixed prices and break free from the volatility of fossil-fuel markets.

Average wholesale electricity price each quarter since the electricity spot market was created in 2001 alt

Authors: Dr Iain StaffellProfessor Richard GreenDr Rob GrossDr Malte Jansen, and Professor Tim Green.