REF is today (23 January 2025) publishing a study by Professor Gordon Hughes which reveals that the increasing share of intermittent and subsidised renewable generation has increased electricity price variability. Consequently, there are potential cost benefits to using smart meters to shift to dynamic and peak/off-peak consumer tariffs instead of the current standard of fixed electricity prices.
The study also explores the ideas that the impacts of intermittent and subsidised renewable energy on consumer prices could be mitigated by increased storage or imports from other countries and demonstrates that on current evidence neither is likely to provide realistic solutions.
The study also shows that the current trend, as exemplified by Contracts for Difference (CfDs), is towards a fully “pooled” or average pricing system. This will further increase already very high costs to consumers.
Professor Hughes remarks:
“In as far as any general policy goal can be discerned, this seems to be a consistent desire to hide – and socialise or pool – the costs of promoting low carbon forms of generation.” (p. 7).
We conclude from Professor Hughes’ study that the consumer interest would be best served by a firm shift towards a variable pricing mechanism, for which there have always been good reasons. But this would require two governmental actions:
1. Smart meters are essential to a variable pricing system, but the UK deployment of such meters has been deeply unsatisfactory, and compares very unfavourably with that in other countries. The government would need to address this as a matter of urgency.
2. Variable pricing will require government to be entirely candid about the underlying costs of the Net Zero targets, which are as a matter of demonstrable fact extremely high.
Highlights of the report:
ELECTRICITY PRICE VARIABILITY
• The increase in intermittent wind and solar renewable energy in the GB energy system has caused a significant increase in the volatility of electricity market prices (page 12)
• This is expected to continue for at least 5 to 10 years as more intermittent generation is built. (page 24)
• Increased volatility of market prices causes increases in the cost of hedging (insuring) which is passed on to the consumer (page vi)
• Market prices are predicted to be negative for nearly 10% of hours by 2030 (page 25)
ELECTRICITY STORAGE SOLUTIONS
• Increasing electricity storage via pumped hydro or large-scale batteries is often suggested as a means of dealing with increased variability in generation but calculations described in the report show that the average storage margins in 2023 are less than 40% of what is required to cover the cost of capital for such projects indicating neither can proceed without subsidy. (page 17-19)
IMPORTS
• Evidence on imports via interconnectors is given to show that higher UK electricity prices do not increase imports, but instead are associated with lower imports from continental Europe (page 20-21).
TRANSPARENCY
• Modest changes in consumption patterns can mitigate some of the combined impact of intermittent renewable generation and within-day variations in electricity demand. (page 21)
• This would require more transparency and education than has hitherto been promoted by Government, electricity suppliers or Ofgem. For example, electricity bill payers need to be aware they are not primarily paying for electricity. Instead, they are paying for the complex grid and system infrastructure associated with meeting high variable demand plus a set of levies to pay for the Government’s very expensive net zero aspirations. (page 23)
• The reality is that the share of retail electricity bills due to the wholesale cost of electricity has fallen to about 20%. (page 14)
CHANGES IN CONSUMER TARIFFS
• Different retail tariff options are already commonplace in other European countries where consumers are offered flexible tariffs with different prices depending on the time of day, or a dynamic tariff linked directly to market prices with a fixed charge for all other costs. (page 13-17)
• The potential for consumer savings is indicated by the difference between the average retail price in mid-2024 of 29.5p per kWh compared with the spot price of 6.3p per kWh. (page 23).
• The suggested improved tariff regime is dependent on the availability of smart meters. The report notes that the rollout of smart meters in other countries has been faster and at a lower cost. (page 1)