Sunday 26 March 2023

Future of the UK electricity "market"

BTL on the last thread, Clive triggered some comments with: Renewables are rocking da house. And negative prices! So, while hydrocarbons will linger around for a while yet, they’re obviously not indispensable and are, arguably, definitely in run off;  followed by Anon: Interesting points being raised by @Clive on negative electricity prices due to generation imbalance. Perhaps another thread on suggestions on how to use up all the surplus power when its available e.g. pumped storage

So here we are.  Nobody quite knows the future evolution of the UK power fleet, seeing that the government is willing to throw really quite serious money these days - plus various threats of compulsion - into a range of energy-related options (nukes of various sorts, CCUS, hydrogen, EVs, HPs), some of which frankly look like backing several horses in case one or more turns out to be totally lame.  You can pretty much suspend the laws of physics for as long as you're willing to throw enough money at it - and certainly the laws of economics.  Also, they've allowed themselves some very prudent opt-out language in case this isn't working: for example, there's a 'security of supply' override on the 2035 'net zero carbon electricity system' deadline (which means it's just a target / aspiration).  And there's no date on ending sale of gas boilers. 

But some things we can say for sure.

  1. there is absolutely no end in sight for dependency on natural gas
  2. the cost of generating electricity to meet demand securely will rise
  3. global anthropogenic CO2 emissions haven't peaked, and won't peak for a very long time (if at all) 
There's no point that I can see in banging on about 3, in the context of dealing with what's before us.  Anyone who thinks the global "drive to net zero carbon" (qua western-governmental policy) can be halted by blog discussions hasn't understood the force of politics behind it (as a policy).  As I first wrote in 2019, it's 100% mainstream now, including the entire banking sector, and most of industry, which expects to benefit from a whole new era of state handouts under various headings, always the source of revenue requiring the least effort.  Nothing to do with Greta, BTW, and everything to do with Business.  

So: back to 1 & 2.  It's entirely likely that the annual average amount of gas actually burned will remain on a decreasing trend, with total "renewable" electricity generated rising.  The final demise of coal will extend current levels of gas burn a while longer, simply by displacement of said coal.  But that's not the point.  Mention of pump storage - including SSE's new project - is fine and dandy but, like batteries of the present technologies, UK pump storage supplies minutes-worth, or maybe hours-worth of standby electricity capacity: important for micro-balancing of grid operations (for frequency stabilisation etc) but broadly irrelevant in terms of dealing with long periods of no wind.

But that means maintaining a lot of expensive stuff on standby, specifically, gas-fired electricity generating capacity AND the entire infrastructure, physical and commercial, to ensure gas will be available when needed.  That's easy enough** when (a) it all exists anyway; and (b) there's strong reason to believe that residential gas demand will continue for a long time at roughly the present level, even as UK industry slowly transitions towards electrification, hydrogen, or an early grave, a.k.a. further offshoring.   Keeping stuff hanging around mostly idle doesn't cost nothing.  Just like paying windfarms to stop generating; bringing ever more sophisticated batteries into the fleet; building vast new infrastructure to accommodate new windfarms; etc etc.  

But what of negative (wholesale) prices, increasingly a feature of most electricity markets?  Easy.  They are negative for just a few hours, just as they go wildly high for just a few hours (or longer ...).  It's volatility, that's all - and tells you nothing about the average price which, as I've asserted, will rise and rise.  And what do we know about volatility?  It's like a heartbeat: too low and it signifies death - but too high, and it's a Very Bad (and costly) Thing.  Or (to switch useful analogies) like friction:  too low, and you'll slide all over the place.  Too high, and you're seriously (and expensively) inconvenienced.

We hear endless chatter, mostly from the EU (though Will Hutton is egregiously stupid misinformed on this also) where ignorance about markets is a dominant strand in public life, about "decoupling" the price of electricity from the price of gas.  What do they mean?  Well, initially they "meant" nothing more than "we've heard renewable electricity is cheap, nay free - so why has the retail price gone up?" - an expression of pure ignorance.  More recently, they've been gently steered towards something meaningful, indeed, logical - i.e. thinking about a more widespread deployment of longer-term financial hedging against electricity price volatility.  There's nothing remotely new about this: any party that feels uncomfortable being exposed to price fluctuations should go for a fixed price!  If this is to be achieved via extending the market for 'renewable PPAs', i.e. fixed priced electricity sales contracts (or more likely CfDs) offered by renewables developers - compulsorily?? brokered by regulators?? - then so be it.  I'm not sure many industrial companies will enjoy the fixed prices on offer: that's another matter entirely.

But it does bring us back rather neatly to point 2 above.  Whether it's the average of volatile wholesale prices, or fixed-price PPAs, the price of electricity will carry on rising - long after Putin has been put back in his box.  That's what happens when you move to an intrinsically more complex and basically entirely new way of running an entire, very large, industry.  All at once++.  Across a very large part of the world economy.

Doesn't mean it can't be done.  Does mean it's gonna be expensive.



** It'll be a lot more difficult without a base level of residential gas demand  

++ People who pretend otherwise  - and there are many - are like those who said Brexit would boost the UK economy.  I write as someone who voted for Brexit.  But I never thought it would be anything other than costly.  


Clive said...

Agree with pretty much everything there.

Electricity (and I’d argue all energy) has been underpriced for at least a decade, possibly more. Change in the supply mix is inevitable (we can kvetch all we like about how it isn’t inevitable and hydrocarbons have a lot of potential left in them and CO2 and it’s supposed harms are way overstated — both of which I think are correct — but that’s just not political or economic reality to fight it when all politicians and parties broadly buy into that thinking) and someone, somewhere will be paying for it.

Only thing I would add is, technological innovation has now made it possible to link domestic peak consumption with particular consumers and charge them accordingly. Historically, the only limit was the DNO cutout fuse size and price, which apart from some very limited time of use tariffs like Economy 7 or 10, was flat regardless of the cost of supply at the point of consumption.

Now, with smart meters, it’ll be possible — and you can guarantee this will start to happen but perhaps gradually on a boil-the-frog basis — the market can pass on the high cost of peak useable to the peak consumers. Want to take a nice long hot shower (using an instantaneous water heater) in the evening peak while whacking the heating up to make the house nice and cosy as dinner is cooking? Expect to pay for it. Of course, there will also be some revenue sharing if consumers cut usage in times of either peak demand or limited supply (and especially, when both conditions are present). Whether that payment to consumers is a fair cutting in on the deal, that needs strong regulatory action on to ensure consumers aren’t left with crumbs. Not at all confident regulators or politicians are capable of delivering that for us, though.

Matt said...

If energy prices continue to rise then our economy is screwed. Cheap energy drives everything, if it's not cheap, then we'll get less growth.

Stupid government policies are to blame for energy price rises, no matter how you dress it up. The energy market is basically a socialist construct with price caps and EPL.

The problem is not CO2, CV-19 or Ukraine, it's the political classes that have caused the problem (irrespective of what the gob shite Grove says).

Sobers said...

At some point the masses will revolt. Its happening in France, which is nominally about pensions, but thats just happens to be the last straw. People are fed up of being taken for fools and having the Elites take stuff away from them constantly, all the while telling them its for their own good. It won't necessarily be having to shell out a fortune for a heat pump that does a worse job than your gas boiler at hardly any less running cost, or not being able to run a car any more because electric ones are so expensive that sends people onto the streets, but eventually something will, and then all the other grievances will fuel the anger. The Governing classes should be careful - they can push people so far, but the more they think they are getting away with it the worse the backlash will be when it comes. The governing classes should remember they only have 100k police and less than 100k of Army, and there's tens of millions of people out here who are not happy. That maths does not look good for the governing classes in a Sri Lanka situation.

Clive said...

@ Matt 4:37

Erm, someone really should tell Japan about how it has no industrial future wot wiv dem energy prices so high and evry’fin. Oh, wait a minute…

Anonymous said...

They told us sanctions on Russia would destroy the economy, weaken the military, cause mass protest in the streets and removal of leaders.

They were right, but they were happy to let us believe those effects would be felt in Russia!

Anonymous said...

Clive - oof! Compare gas prices in Japan and Germany! As for Sweden and Netherlands... I see no Norway in that list - am I blind?

Does anyone know why UK gas prices are 50% higher than Ireland's?

Clive said...

The reason for mentioning Japan was that it has always had very high energy prices (it has no natural resources for energy whatsoever).

This has led to two things which are relevant here. The first is that high energy prices have, unlike in, say, the US, led directly to Japanese leadership in energy efficiency technologies. If energy is costly, capitalism will figure out ways to reduce the burden. Try telling a Japanese person that a heat pump doesn't work as well as a natural gas boiler or water heater and she'll laugh in your face -- while sitting warming her feet in a nice blast of heat from the air conditioner delivering a coefficient of performance of 5+. Variable speed motor drives are another Japan-dominated area. The US, by comparison, where energy is laughably cheap, is also prone to laughably high levels of consumption per capita and industry which guzzles it too. One day, that will come back to bite it on the bum with a vengeance.

The second is that, while I don't claim to know what the best industrial future for the UK is (capitalism is again quite good at figuring out the vast number of variables in play there, although a sensible government industrial policy also helps), what I know with absolute certainty is that for a high cost country like the UK, one thing it resolutely should not be doing is trying to compete with the likes of India or Vietnam at the commodity end of the market. At the bottom of the heap in terms of added value industry, energy input costs are material. In high value-added segments -- such as Japan specialises in -- I'm not saying it doesn't matter at all what the cost of energy is, but it's not a deal-breaker.

E-K said...

On point 3 (which the Tories are bringing us - energy austerity) this will do nothing but widen the disparity between rich and poor and make us hate Tories.

So how does making us Green and war in Ukraine (rationing by bills) under Conservatism do anything but make us yearn for redistributive socialism ?

If we wanted all that we would have voted Labour.

E-K said...

Secondly, the British people did choose a low carbon future with a low birth rate but the Tories decided to increase the population against our wishes.

It is sickening to see Sunak offering red meat in the run up to a general election.

13 years of policy avoidance - the Tories own everything Blair and Brown did now.

Anonymous said...

Clive, am I particularly thick tonight or did you not answer my question re cheapo Japanese gas prices. Where is this cheap (well a lot cheaper than ours) gas coming from?

Diogenes said...

With increasing energy prices, we can forget a future a future for UK based steel and chemical plants - unless the subsidy mandarins have a say. So goodbye Ineos and JLR (eventually)

Then there is the issue of electric cars and the phasing out of petrol/diesel engines. A small garage near us in a regional town installing 6 meaty EV Charge Points. Power has to come from somewhere so a gas fired expensive load balancing generator somewhere using carbon based fuels to replace .... carbon based fuels.

And now were handing out "cost-of-living" subsidies to everyone - especially if they are voting in an election somewhere. Politicians like to heap praise on "the market" but then interfere at every turn. Who would have thought the Conservative party would be so ... left wing.

Clive said...

@ Anonymous 11:38

That was my point — Japan pays nosebleed gas prices, pretty much the highest anywhere, but you’d hardly call Japan deindustrialised.

Anonymous said...

Meanwhile to show how quickly things can change despite Clives conjecture above that we'll just have to live with it.
Paul Homewoods latest article:
"Net Zero Watch has welcomed yesterday’s EU agreement not to ban the sale of cars with internal combustion engines (ICE) after 2035."

Clive said...

@ Anonymous 1:04

As always with the EU, it's never over 'til the fat lady has sung and, boy, does she go on a bit.

Eurointelligence expands on this mess and explains how it's not quite as simple as the EU banning, or not banning, ICE cars (think you have to scroll down to the 17th March entry).

Frankly, that all reminds me how glad I am to be out of that particular clown car. I can't say how that saga will end, it might well end with the ban being lifted, but it's certainly nowhere near an ending just yet.

And regardless, ICE for passenger cars (or not) is fairly trivial a concern -- the Large Combustion Plant directive was an astounding revolution to our energy security and energy mix. It was, like so much else with the EU, simply conjured into existence with nary a thought for the long-term implications nor any real national decision-making. We're still well and truly stuck with that one -- and its profound consequences.

Even if the LCPD was removed right now (and it isn't going to be), it would take a generation to put in place any infrastructure changes to seriously row back on what it has ended up doing. And, to return to the point of the blog post, there's zero, zilch, nada political will to do anything like that.

Matt said...

WTF has Japan got to do with anything? It's not energy that makes the Japanese economy better that the UK.

The Isle of Man had a GDP per capita of half the UK in the mid-90s and now it is about double the UK.

What happened in the UK between the mid-90s and now I wonder?

Does the almost entirely white Isle of Man share anything in common with Japan that might explain why they are doing so well and the UK isn't?

Clive said...

@ Matt 3:50

Exact-a-mundo Matt.

Energy (access to it locally in the form of hydrocarbons and the price of it) is only, at best, tangentially related to the success, or otherwise, of an economy. If energy was indeed the determinant factor, Venezuela would be Top Trump’s Lamborghini Countach and Japan would be the 2CV. They clearly aren’t.

So, can we please, if I beg, I will if I have to, please please pretty please quit with the “if they don’t give business lots and lots of cheap energy, they’ll close all your factories” nonsense? It is patently counter-factual. I know it’s counter factual, ‘cos when I present a fact, like Japanese industrial success in the absence of cheap energy, I get told to stop mentioning Japan because it has nothing to do with either industrial success or the lack of cheap energy. Gawd…

Anonymous said...

Clive, but according to that chart Japan doesn't pay nosebleed prices, that's why I was asking.

They pay about the same as UK for industry (.096 dollars per "whatever") and
0.112 for households where the UK pays 0.172.

OK, they're not Russian prices and they're twice the US price, but it's not in Holland territory.

Anonymous said...

So where are Japan getting natural gas (not LPG) from?

Clive said...

@ Anonymous 6:40

Okay, perhaps not super nosebleed but at much higher than the US and just as bad as (supposedly, so I’m told) the ruinously high prices in Europe. They are not leading to “deindustrialisation” and nor have they ever done (Japan has long had to pay high energy prices due to import dependency).

High energy prices do not necessarily lead to a lack of industrial development. There’s a load of economic theory devoted to the “resource curse” which suggests the opposite is true — high levels of energy availability means a high currency exchange rate and uncompetitive manufacturing export conditions (and a tendency to suck in imports due to their cheapness).

Nick Drew said...

just to compound the debate, Taiwan and S.Korea are in a similar boat to Japan (importing LNG) & they do, errr, "OK" on the hi-tech industrial front, too

Anonymous said...

From a pro-Russian site, not checked their figures, but I get the general drift... on the side of the "west" was only one really productive exporter that wasn't running what Fingleton now calls 'the Confucian system', and we've crippled it.

"...there is the future of energy supply and industry in the EU. 25-30% manufacturing capacity of EU is inside Germany - a large part of that is chemicals. Without German trade surpluses the Euro has no value. German trade surpluses used to cover the oil trade deficits of ALL Eu countries in Club Med.

Clearly EU is moving into energy import trade deficits which will affect external value of Euro.

As Poznar stated - Germany built a $2 Trillion economy on $27 billion of gas imports from Russia which is exponential operating leverage. Without that leverage either wages must fall dramatically in Germany (and net wages are nothing special owing to high deductions) or companies must exit Germany.

The full adjustment to the EU economy has not even started..

Matt said...

BASF are just crying wolf I guess -

Clive said...

@ Matt 7:35

And German steel giant Salzgitter waxed lyrical today about moving to hydrogen from 2025 and completing its energy transformation to "green" sources by 2033

You pay's your money and takes your choice -- but for every BASF carping on about how terrible it all is, there's someone else saying there's opportunities. Methinks those opportunities are, how shall we say, encouraged by and dependent on subsidies from the kindness of the taxpayer. But corporate welfare is nothing new. I have little doubt BASF will, in the fulness of time, be making pronouncements like Salzgitter's and saying how it's looking forward to making its energy transition, the future's bright, the future's green blah blah blah. When either the EU or Germany's government (or both) have smoothed the way with a fistful of euros, in other words.

You can whitter all you like. And if, as I suspect, you've got a dislike for the ecology movement felt on a personal level, well, you're perfectly entitled to feel that way. I too am not a little annoyed by the phoniness of the green ideology and its soy lattes and sandals vibe.

But if you simply don't like an ideal, then it's far better -- and much more honest and so convincing -- to simply just that than to try to hoodwink people by means of claiming to be an honest broker acting purely on a good faith basis but confecting not-especially-plausible economic doom-mongering and your own pocket-sized iteration of project fear merely because you're pee'd off by eco crowd.

Anonymous said...

We all know that energy supply's not everything, but it's not nothing either. There's a reason why inflation is high here, and it's not all odd weather patterns in UK and Spain.

The German economy doesn't seem to be doing too badly, looking at their trade figures.

Interesting looking at the Ngram for "UK balance of payments" - max in 1977, mentions in books had more than halved by 1997.

Apparently is doesn't matter any more that we don't export things or people any more. Instead we import things AND we import people.

Elby the Beserk said...

"global anthropogenic CO2 emissions haven't peaked, and won't peak for a very long time (if at all) "

Big deal. CO2 levels now close to maximum absorption with regard to heat radiation.

Can't post images in Blogger (it really is beyond archaic now!), so have put them up on Mediafire. CO2 warms quite hard up to 260ppm, and then levels off exponentially.

Similarly, long and short term graphs of CO2 and temperature show no correlation between the two for more than around 30 years. Statistically of NO significance whatsoever.

CO2 is actually at the very LOW end of what it has been over geological history. There have been warmer periods with less CO2 than now, and cooler with more. And the Sahara was wet when it was warmer than now by 2 or 3 degrees centigrade.

Here ya go. Tuck in

Matt said...

Clive, that announcement from Salzgitter is short on detail and long on timescales (2033). It says nothing of the relative costs between hydrocarbons and hydrogen. As I stated in my first post, more expensive energy will result in lower growth. If you have some figures the demonstrate a hydrogen/renewables based economy will do better I'd love to see them. Be careful to avoid the argument that things always get cheaper,as the past isn't necessarily a guide to the future.
As for being an honest broker, what gives you that impression? Everyone has their own predjudices that influence their world view.
Playing the man instead of the ball suggests you're not keen on your own viewpoint being challenged.