The Future of Power Generation in Great Britain

[Gary C]

Trouble is with markets for essential, immobile and long term commodities is that it cannot be left to the market alone to govern.

A market is poor at looking at the very long term and doesn't 'care'. Combine that with a captive consumer it needs more than light touch regulation.

That then leads to distortion and political manipulation.

Mind you, not as much political manipulation as when nationalised but then, at least the money spent circulated mainly within the UK.

The market let free would have totally killed nuclear generation in this country, now everyone wants it. If it wasn't for EDF's unique fixation with nuclear generation, we wouldn't have one in construction. It certainly wasn't the market.

Not sure there is a perfect model, but both have serious issues.

We could have a central energy board that sets the energy policy for the UK and then commissions private companies to build and run the assets, but then again, the contracts would end up costing stupid amounts just to attract investors who would want a guaranteed return.

One things for certain, we would not be here if we still had the CEGB...

We might be really broke

[wombleh]

Seen a few articles recently talking about wholesale price being set using marginal cost pricing so you pay the price of the most expensive generation in a period. I thought it was more bid/ask, which seems to be what you're saying above Condi?

e.g. https://www.goodenergy.co.uk/why-does-the-price-of...

[Condi]

wombleh said:

Seen a few articles recently talking about wholesale price being set using marginal cost pricing so you pay the price of the most expensive generation in a period. I thought it was more bid/ask, which seems to be what you're saying above Condi?

e.g. https://www.goodenergy.co.uk/why-does-the-price-of...

Marginal pricing and a bid/ask market are not exclusive, you can have a bid/ask market but still price from the marginal unit. If you think the marginal unit is going to be £200/MWh but your cost of production is only £100/MWh, you'd still try and sell for £200/MWh because that is what you think it's worth.

The day ahead auction is usually "the price of electricity" because it is the best reliable marker of supply and demand, although in reality that electric for any given day could have traded at a whole range of prices at any point over the last 3 years.

That said, any commodity is priced at marginal cost - we don't pay less for Saudi crude oil because it costs $20/bbl to pump and pay more for Canadian oil sands oil which costs $60/bbl. We don't pay less for American wheat grown on the prairies compared with UK wheat grown inside the M25. We don't pay less for gold mined by Nigerian children on $1/day compared with gold extracted from used mobile phones.

Hope that makes sense. It is confusing.

[Talksteer]

Condi said:

hidetheelephants said:

I'd regard a system that is producing electricity price forecasts that most consumers cannot pay as fairly dysfunctional, YMMV.

You clearly don't understand how markets work then.

Say there are 10 people in the world, and 10 oranges. Everyone wants 1 orange, and is prepared to pay £1 for their orange. Everyone pays £1 and gets 1 orange. Next year the orange harvest is very good, and there are 12 oranges produced, but still only 10 people wanting 1 orange. The price of oranges comes down because 2 people have to be encouraged to buy 2 oranges. So 8 people buy 1 orange, and 2 people buy 2 oranges, but will only pay 75p each, and so the price of oranges are 75p each. The following year the orange harvest is very poor and there are only 6 oranges produced. There are still 10 people wanting 10 oranges, but only 6 to go round. 6 people are prepared to pay £2 for their oranges, but the remaining 4 people are poor and can only pay £1.50. The price of oranges is then £2, and the poorest people have to go without an orange.


The market doesn't care how much you can pay, in fact, the market is actively pricing out some people to reduce demand, and to encourage more supply onto the system. Subsiding prices here just means someone elsewhere goes without. Pakistan have had blackouts for months simply because they can't afford fuel. If the government pays our bills here, and we use the same as what we always did, that just means that other countries who can't afford to pay as much will have less. The market is working exactly as it should, it is trying to balance a limited supply of gas and electricity with the demands of people who want to use it.

Fun fact, in the 1990's the average heating temperature in Europe was 19 degrees, today it's 22 degrees. If we turned the heating back down to 19 degrees it would save a huge amount of gas and bring down costs for everyone.


It's why I (and most other economists/traders) disagree with the idea of a flat price cap across all electricity prices. There are people who need help, but there are also people who will still be heating their swimming pools and hot tubs who should be exposed to the full price of supplying them with power. The price cap doesn't save money, it will actually cost us a lot more money, because not only do we have the cost of gas and power to pay for, but also the interest bill to borrow the money for 10/20 years until it gets paid back.

A much better policy response would be to offer a loan to people at the interest rate of government borrowing for an amount that would bring actual amount paid per unit down to the level of the price cap. This could be done via the energy providers so nobody need to apply.

You could then layer some kind of relief on the debt for lower incomes and maybe make the payment terms more akin to a student loan.

That way you would still get the price signal but also protect people from hardships.

[Talksteer]

Gary C said:

Trouble is with markets for essential, immobile and long term commodities is that it cannot be left to the market alone to govern.

A market is poor at looking at the very long term and doesn't 'care'. Combine that with a captive consumer it needs more than light touch regulation.

That then leads to distortion and political manipulation.

Mind you, not as much political manipulation as when nationalised but then, at least the money spent circulated mainly within the UK.

The market let free would have totally killed nuclear generation in this country, now everyone wants it. If it wasn't for EDF's unique fixation with nuclear generation, we wouldn't have one in construction. It certainly wasn't the market.

Not sure there is a perfect model, but both have serious issues.

We could have a central energy board that sets the energy policy for the UK and then commissions private companies to build and run the assets, but then again, the contracts would end up costing stupid amounts just to attract investors who would want a guaranteed return.

One things for certain, we would not be here if we still had the CEGB...

We might be really broke

This:

A free market is not necessarily the most efficient in the long term because it will essentially drive you to pick the power-plant with the lowest capital cost/risk. A CCGT plant is relatively cheap, if you have sustained low demand you can mothball it and all you are left paying for is a relatively cheap loan and some light maintenance (most maintenance is related to hours running). The price of gas is high so is the price of electricity so you make a decent profit.

In the case of a nuclear plant the plant's capital cost is high so if there is sustained low demand your costs are basically fixed and you end up going bankrupt and lose a lot of money, or more specifically aren't built in the first place. You thus aren't around when the electricity price rockets up.

I suspect that the best option is likely to move to one where we essentially move all generators to a incentivised cost plus model (the lower the cost the more profit you can make) and force everyone to bid as a fixed firm power source so renewables have to pair with storage or fossil.

[Zumbruk]

dickymint said:

Finally some common sense on fracking - Rees Mogg on Newsnight coming up

Common sense? Rees-Mogg???

The man's a buffoon.

[skwdenyer]

Condi said:

hidetheelephants said:

Any reason the UK couldn't do what the aussies just did and abolish a dysfunctional electricity market? The gas price is another matter but the govt's proposed system leaves something to be desired.

Why do you think its dysfunctional? If you abolish the market how do generators get paid, and what effect will that have on future investment in new generation?

The market is functioning as intended, even if politicians don't like the outcome. The more you intervene the larger the unintended consequences.

Intended by whom?

The market is not functioning in the best interests of consumers of energy. In an effort to prop it up, the Government is now transferring vast amounts of public money to private companies for unjustifiable windfall profits during a time of war.

[Borghetto]

Zumbruk said:

Common sense? Rees-Mogg???

The man's a buffoon.

They do say it takes one to know one.

[skwdenyer]

Condi said:

You clearly don't understand how markets work then.

Say there are 10 people in the world, and 10 oranges. Everyone wants 1 orange, and is prepared to pay £1 for their orange. Everyone pays £1 and gets 1 orange. Next year the orange harvest is very good, and there are 12 oranges produced, but still only 10 people wanting 1 orange. The price of oranges comes down because 2 people have to be encouraged to buy 2 oranges. So 8 people buy 1 orange, and 2 people buy 2 oranges, but will only pay 75p each, and so the price of oranges are 75p each. The following year the orange harvest is very poor and there are only 6 oranges produced. There are still 10 people wanting 10 oranges, but only 6 to go round. 6 people are prepared to pay £2 for their oranges, but the remaining 4 people are poor and can only pay £1.50. The price of oranges is then £2, and the poorest people have to go without an orange.


The market doesn't care how much you can pay, in fact, the market is actively pricing out some people to reduce demand, and to encourage more supply onto the system. Subsiding prices here just means someone elsewhere goes without. Pakistan have had blackouts for months simply because they can't afford fuel. If the government pays our bills here, and we use the same as what we always did, that just means that other countries who can't afford to pay as much will have less. The market is working exactly as it should, it is trying to balance a limited supply of gas and electricity with the demands of people who want to use it.

Fun fact, in the 1990's the average heating temperature in Europe was 19 degrees, today it's 22 degrees. If we turned the heating back down to 19 degrees it would save a huge amount of gas and bring down costs for everyone.


It's why I (and most other economists/traders) disagree with the idea of a flat price cap across all electricity prices. There are people who need help, but there are also people who will still be heating their swimming pools and hot tubs who should be exposed to the full price of suppling them with power. The price cap doesn't save money, it will actually cost us a lot more money, because not only do we have the cost of gas and power to pay for, but also the interest bill to borrow the money for 10/20 years until it gets paid back.

Your assessment of the "cap" approach assumes that the current market will continue as it does. I and many others disagree. Providing electricity in the UK market is as close to a sure thing as you can get - it is tightly-regulated, there will seldom to be huge excess capacity, the risks are very low.

I believe the market should be regulated still further, to deliver a capped return on investment in return for being allowed to participate. Government should mandate an appropriate energy mix to ensure resilience and self-sufficiency, and stop commercially-driven "dash for gas" scenarios.

That will then result in a mixed generation estate each producing power at different marginal costs. The wholesale price will then be the blended result of all of the different generators.

If that requires state ownership (of some / all), then so be it. There are few sources of capital that will complain at an essentially-fixed return of, say, 10% pa. And, as I say, since the state can (usually) borrow at a much lower rate than the built-in return, the state will profit nicely from the investment if needs-be.

Why not a "free" market? Well, because there really isn't a place for massively-speculative risk-taking investment in this space. Power stations aren't built on a hunch they'll pan out.

To return to your market analogy, it is a poor one for the electricity market IMHO. First, because the global demand for oranges is variable (people can opt to eat an alternate fruit if the price goes up) - the UK energy market doesn't provide the same pressures to minimise cost, nor anything like the risk-reward profile (because, in essence, consumers are always required by law to pay whatever you need to charge). Second, because there's no compulsion to buy oranges from a single global commodity market - individual buyers are free to secure long-term deals at preferential rates - again, that doesn't map across to the UK electricity market.

I realise there is, of course, quite a lot of nuance in all of this. But the design of a national electricity market must start from the position of asking "what is in the best interests of the consumer and the country, all things considered?", not "what is in the best interests of the generators"?

Right now, we allow "commercial rates of return" without the attendant commercial risks. That's clearly unacceptable, and has resulted in the situation we have now - certain generators making massive windfall profits because of the underlying costs of certain other generators who are prevented from taking a substantial bath.

[glazbagun]

Talksteer said:

dickymint said:

Finally some common sense on fracking - Rees Mogg on Newsnight coming up

Edit: bit of a damp squib as it turned out soz

I think it is reasonable to point out that the concerns around earthquakes are utterly trivial as are the issues around water consumption.

The more obvious stuff is that any UK fracked gas is going to be very late to the party and have negligible impacts on the cost of energy. You could of course draft some taxes that basically hand the profits back to the state to offset the costs of buying expensive gas on the international market but they aren't going to do that because Tory.

Instead they appear to have come up with mechanisms to transfer money from the national debt to natural gas suppliers and wind farms owners.

It's like the PPI farce turned up to 11. State borrowing to give to companies so we can literally burn money.

[Condi]

skwdenyer said:

Intended by whom?

The market is not functioning in the best interests of consumers of energy. In an effort to prop it up, the Government is now transferring vast amounts of public money to private companies for unjustifiable windfall profits during a time of war.

Why are the profits unjustified? Were the losses unjustified why gas traded at very low prices during Covid? When gas trades negative and when power trades negative I don't see the same concerns that the market is unsustainable. The market isn't designed to work in the best interest of consumers, no markets are. It is designed to supply consumers as efficiently as possible while maximising profits for producers and generators. Same as oil, wheat, toilet roll, or any other product.

The market is doing exactly what it should be doing - trying to reduce demand for a product in limited supply. You can't burn gas which doesn't exist, so someone, somewhere has to use less than last year because Europe has lost about 35% of it's gas supply almost overnight. "The market" isn't to blame for that - blame Putin, blame the EU sanctions, blame whatever, but the market hasn't restricted the supply, politics and geopolitics have. We are going through a huge period of change, during which there will be winners and losers - the winners are those with gas reserves and abundant gas supply, the losers are companies such as Uniper who had a large amount of Russian gas bought and are now buying from elsewhere. The losers are also those companies who saved costs by doing no risk management and not hedging their needs.

The drive for the lowest cost solution has been political, ever since privatisation the benefits to consumers have been sold as lower costs. There was a huge campaign against Hinkley Point C, partly because the cost of power was double what gas generation was costing at the time. We could have had an entire fleet of new nuclear plants but selling that to customers when you could buy gas powered generation at half the price would have been political suicide, and derided as a waste of money.

Political intervention in markets is never a good thing. Politicians are terrible at planning for, or foreseeing, unintended consequences. Intervention now to change the way the market works based on a short term change of circumstances, the likes of which nobody has seen before, will affect investment and prices for years to come. It could be done, but if the Government do change the way it works some of the same people complaining today will be complaining in 10 years time we have higher prices than other countries due to political decisions made now.

[skwdenyer]

Condi said:

The drive for the lowest cost solution has been political, ever since privatisation the benefits to consumers have been sold as lower costs. There was a huge campaign against Hinkley Point C, partly because the cost of power was double what gas generation was costing at the time. We could have had an entire fleet of new nuclear plants but selling that to customers when you could buy gas powered generation at half the price would have been political suicide, and derided as a waste of money.

The campaign against HPC was in large part because the Govt set up the deal in such a way as to bend the taxpayer over a barrel deliberately. There was no need to finance it so expensively - EDF's cost of capital is/was close to 10%, more or less doubling the costs compared to a proper state-financed model.

So the new fleet of plants would have been entirely affordable if financed properly as state assets. It is largely dogma that forced the price up so much, not some sort of economic inevitability. And let's not forget this was at least the second time such political nonsense had got in the way - don't forget the original planning consent for HPC was 1990!!

Condi said:

Political intervention in markets is never a good thing. Politicians are terrible at planning for, or foreseeing, unintended consequences. Intervention now to change the way the market works based on a short term change of circumstances, the likes of which nobody has seen before, will affect investment and prices for years to come. It could be done, but if the Government do change the way it works some of the same people complaining today will be complaining in 10 years time we have higher prices than other countries due to political decisions made now.

So, the markets have been so great at planning for, or foreseeing, unintended consequences, and acting so as to mitigate them in the national interest? Of course not - as you rightly say elsewhere, there was just a dash for gas. The failure of so many energy suppliers is further evidence of the total failure of the market - suppliers deregulated to the point of being able to sell entirely non-existent energy at wholly unsustainable prices, yet with the losses and costs picked up entirely by the taxpayer. The provision of long-term risk-management and stability is precisely the sort of thing that is the domain of regulators, no speculators.

Without political interference, as you put it, time and again the markets have been shown to be incapable of meeting strategic national objectives (because, frankly, those objectives are not common with the market participants). In a similar - albeit smaller-scale - way, the appalling feed-in tariff rates offered to those with local generation capability are a further sign of market failure to meet national needs - logically, the meter should just "turn backwards" when the solar panels are generating, but instead we dramatically penalise local generation.

[Condi]

You're right, markets are terrible at planning for unexpected events, especially on a global scale with 3 or 4 almost unprecedented challenges happening at once (Covid, Ukraine war, French nuke outages, etc), but what they are very good at is reacting logically and quickly and coming up with the best (cheapest) solution the problem in the shortest amount of time.

There are potential unintended consequences of any choice, and no market or regulator or government can plan for anything. The French were probably feeling very smug until 50% of their nuclear fleet had to come off line for checks, turning French power from the cheapest to the most expensive in Europe. It's currently worth over double what GB power is. If we build/had built 10 new reactors and have to take them off line we are once again in the st, just for different reasons.

As for HPC financing, the government didn't want, and doesn't want, the debt on it's own books. The same will be true of the new reactors, it will all be privately financed. Again, a political choice, but you can't have the efficiencies and competition of a private industry and the borrowing power of the government. Previous UK owned power companies have not been exemplary models of how to run an industry, although the staff certainly miss the generous pensions!

skwdenyer said:

In a similar - albeit smaller-scale - way, the appalling feed-in tariff rates offered to those with local generation capability are a further sign of market failure to meet national needs - logically, the meter should just "turn backwards" when the solar panels are generating, but instead we dramatically penalise local generation.

It's only logical to someone who doesn't understand the costs involved. The price you pay is not just the wholesale cost of power, it's the cost of maintaining the infrastructure, the cost of balancing the system, the cost of administrating all the billing and paperwork, the cost of the social and renewable obligations, etc. If all local generation did was just turn the meter back how would any of these costs be paid? I agree that the offering from most suppliers is quite poor, but Octopus have a tariff which reflects wholesale prices and will pay up to 75/80p for exports at times. You can't expect to buy power at 6pm on a December evening when it is worth £1/kwh, and then sell it back at the same price at 3pm in July when every solar panel in the country is doing maximum output, demand is low, and wholesale price is 10p/kwh! Time of use and variable pricing is the way the market is going, and it will get there, but part of the problem is that a section of consumers don't want smart meters, and they don't want time of use tariffs.

[Talksteer]

Condi said:

The French were probably feeling very smug until 50% of their nuclear fleet had to come off line for checks, turning French power from the cheapest to the most expensive in Europe. It's currently worth over double what GB power is. If we build/had built 10 new reactors and have to take them off line we are once again in the st, just for different reasons.

The French put a nuclear power reduction act into practice 10 years ago, placed anti nuclear types in charge of the "ministry for energy transition" and then set up biazare "free market mechanisms" that essentially added intermediaries between EDF and the customer that near bankrupted them.

Condi said:

HPC financing, the government didn't want, and doesn't want, the debt on it's own books. The same will be true of the new reactors, it will all be privately financed. Again, a political choice, but you can't have the efficiencies and competition of a private industry and the borrowing power of the government. Previous UK owned power companies have not been exemplary models of how to run an industry, although the staff certainly miss the generous pensions!

This is why they have gone for Regulated Asset Base in that model the consumer essentially pays for the plant up front. The developer only has to fund each phase of the build with commercial loans for a year or two.

The bizarre thing with RAB is that for official statistics purposes the interest rate used to calculate the levelised cost of electricity is the Treasury project rate of 3.5%. However a good argument could be made that the actual interest rate varies per person as all consumers are effectively giving the utility a loan at their own personal marginal interest rate. In exchange later on you get cheap electricity at cost plus a % return for the next 60-80 years or so.

There is actually a way to get private sector management and government borrowing rates. You could do a public private partnership. In this the government funds 90% of the plant the developer funds the other 10% commercially. The developer is still motivated to keep the costs down but the financing costs are brought down to near government rates.

[Condi]

Talksteer said:

The French put a nuclear power reduction act into practice 10 years ago, placed anti nuclear types in charge of the "ministry for energy transition" and then set up biazare "free market mechanisms" that essentially added intermediaries between EDF and the customer that near bankrupted them.

Non of that has any bearing on the simple supply/demand dynamic if you take 1/3rd of your generation offline. The reactors which are offline are not the oldest ones from memory, but the ones built 25 years ago.

No regulator, market or government can account for every eventuality and redundancy costs money which consumers have to pay for. If Ukraine had never happened then the UK consumer would be looking very smugly at the French, if Ukraine had happened but the French outages had not, France would be looking smugly at us. My point is that there is no single reason for the current high prices, and no single easy answer which is robust and future proof in all conceivable eventualities. You would have got very very long odds on Covid recovery, French nukes and Ukraine invasion all happening within 18 months.

FWIW it's not the free market mechanisms which have caused EDF big problems, it's the French government ordering them to sell power so far below what the free market said it was worth in order to subsidise consumers. Had they been able to sell at market prices then they'd be in considerably better financial shape! In the end the easiest way for the French government to solve the problem was nationalising the company.

[Cobnapint]

Relax folks, Starmer has it covered. We're going to go nuts with renewables by 2030 to become totally carbon free, and his answer to LK about what happens when it isn't windy/sunny he said there'll always be a transition period.

Sorted.

(Lolz)

[Evanivitch]

Cobnapint said:

Relax folks, Starmer has it covered. We're going to go nuts with renewables by 2030 to become totally carbon free, and his answer to LK about what happens when it isn't windy/sunny he said there'll always be a transition period.

Sorted.

(Lolz)

You mean the Starmer policy that was also Boris and Conservative policy until 4 weeks ago?

[Gary C]

Condi said:

Why are the profits unjustified? Were the losses unjustified why gas traded at very low prices during Covid? When gas trades negative and when power trades negative I don't see the same concerns that the market is unsustainable. The market isn't designed to work in the best interest of consumers, no markets are. It is designed to supply consumers as efficiently as possible while maximising profits for producers and generators. Same as oil, wheat, toilet roll, or any other product.

The market is doing exactly what it should be doing - trying to reduce demand for a product in limited supply. You can't burn gas which doesn't exist, so someone, somewhere has to use less than last year because Europe has lost about 35% of it's gas supply almost overnight. "The market" isn't to blame for that - blame Putin, blame the EU sanctions, blame whatever, but the market hasn't restricted the supply, politics and geopolitics have. We are going through a huge period of change, during which there will be winners and losers - the winners are those with gas reserves and abundant gas supply, the losers are companies such as Uniper who had a large amount of Russian gas bought and are now buying from elsewhere. The losers are also those companies who saved costs by doing no risk management and not hedging their needs.

The drive for the lowest cost solution has been political, ever since privatisation the benefits to consumers have been sold as lower costs. There was a huge campaign against Hinkley Point C, partly because the cost of power was double what gas generation was costing at the time. We could have had an entire fleet of new nuclear plants but selling that to customers when you could buy gas powered generation at half the price would have been political suicide, and derided as a waste of money.

Political intervention in markets is never a good thing. Politicians are terrible at planning for, or foreseeing, unintended consequences. Intervention now to change the way the market works based on a short term change of circumstances, the likes of which nobody has seen before, will affect investment and prices for years to come. It could be done, but if the Government do change the way it works some of the same people complaining today will be complaining in 10 years time we have higher prices than other countries due to political decisions made now.

We were much better at planning with a nationalised industry than we are with a 'free' market.

The drive for a lowest cost solution is political ? dont get that at all. Surely the market was the driver pushing against new nuclear and it was political market interference that has allowed HPC to be built.

When privatisation happened, nuclear was withdrawn from it and the market was then manipulated to allow us to generate. With a free market, every single reactor in the UK would have been shutdown in the 90's and none would be under construction.

[hidetheelephants]

Gary C said:

We were much better at planning with a nationalised industry than we are with a 'free' market.

The drive for a lowest cost solution is political ? dont get that at all. Surely the market was the driver pushing against new nuclear and it was political market interference that has allowed HPC to be built.

When privatisation happened, nuclear was withdrawn from it and the market was then manipulated to allow us to generate. With a free market, every single reactor in the UK would have been shutdown in the 90's and none would be under construction.

I wouldn't say better but at least there was a plan; CEGB seesawed between wanting 60% of power to be nuclear and not buying any at all several times due to politics and had there not been chronic delays in delivery/commissioning of turbines and alternators and completion of AGRs would have had a ridiculous overprovision of capacity in the 1970s.

[Gary C]

hidetheelephants said:

I wouldn't say better but at least there was a plan; CEGB seesawed between wanting 60% of power to be nuclear and not buying any at all several times due to politics and had there not been chronic delays in delivery/commissioning of turbines and alternators and completion of AGRs would have had a ridiculous overprovision of capacity in the 1970s.

Oh, yes, 'better; maybe a bridge to far but we did have multiyear plans to ensure there was always a margin to meet the obligation to supply.

The biggest problem was the engineers getting bored and designing new things every 5 years rather than developing things. Corner fired tilting burners then ooh, front fired with oil overburn, then supercritical boilers. Lets make a big AGR, hum thats too big, lets completely redesign to a smaller footprint, err that didnt work, lets try again

Wish it could still be that way but I recognise its not that world anymore.