Research published by UCL confirms that natural gas is the main driver of electricity prices across Europe; in the UK, in recent years it set electricity costs 84% of the time, despite providing well under half of the total electricity.
As a result, revenues of large electricity generators operating directly in the British wholesale market have increased from nearly £15 billion in 2019 to roughly double in 2021 and likely to over £50 billion in 2022.
In two papers being published today, researchers outline reasons why, despite the advance of relatively cheap renewable energy, electricity prices have rapidly risen across Europe alongside the increased cost of natural gas. They identify the structure of the wholesale electricity market as the main driver of excessive prices, and are developing solutions to change this.
Professor Michael Grubb (UCL Institute for Sustainable Resources), who is leading the research, said: "Fossil fuels used to be cheaper than renewable energy sources, but that has turned on its head as gas prices shot up and the cost to produce renewables such as wind and solar power has plummeted. Half of our electricity already comes from non-fossil fuels, and that figure is growing.
"If we actually paid the average price of what our electricity now costs to produce, our bills would be substantially cheaper."
The ongoing energy crisis has pushed retail prices up by over 80% this year, and quadrupled wholesale prices, fuelling the 'cost of living' crisis and inflation. Yet the UK already generates half of its electricity from non-fossil sources, with 25% from wind and solar power, whose costs have fallen hugely to around a quarter of the costs now seen in the wholesale electricity market. But the structure of the UK's power market means that these falling costs are not reflected in bills.
In their reports, the researchers explain how, as the most expensive generator needed to meet the last bit of demand, gas sets the price for all types of electricity generating technologies. This happens even when the bulk of electricity is generated by cheaper renewable sources.
Professor Grubb explained: "While renewables are providing more and more electricity, we still need natural gas to meet the demand. The most expensive natural gas producers are still needed to cope with fluctuations in renewable energy production, so they are setting what's called the marginal cost, at the edge of what's needed. Because natural gas generation is expensive, those producers charge the highest prices - which means that other producers are also able to charge similar prices."
