Fossil gas costs drive UK electricity price increases

Soaring fossil gas costs account for 86% of UK electricity price increases

UK power prices have tripled year-on-year from August 2020 (£36/MWh) to August 2021 (£107/MWh) – a jump of £71/MWh. In contrast, the previous twelve months saw prices remain flat in August 2020 compared with August 2019. Fossil gas costs for electricity generation rose by £61/MWh from August 2020 to August 2021. Meanwhile, the cost of CO2 allowances for fossil gas-fired generation only increased by £9/MWh.

It’s cheaper to generate electricity from new wind and solar than existing gas plants

Generating electricity from existing UK fossil gas power plants is three times more expensive than from new onshore wind and almost twice that from new solar. Even the levelised cost of electricity (LCOE) from new offshore wind is cheaper than generating electricity from fossil gas.

Soaring fossil gas costs

Continued reliance on fossil gas for power generation has caused substantial increases in electricity bills when people can least afford it. UK fossil gas prices have skyrocketed since the start of 2021, with the average day ahead price more than doubling from 45 pence per therm in December 2020 to 109 pence per therm in August 2021.

The soaring prices are due to a combination of factors: a cold northern hemisphere winter depleted fossil gas storage levels; increased demand and prices in Asia resulted in liquefied natural gas (LNG) shipments being delivered there rather than to Europe; global demand has risen as Covid-19 restrictions have been lifted; fossil gas imports from Russia via Ukraine have not stepped up to meet the increase in European demand. This highlights the risks associated with continued dependence on volatile fossil gas that is highly susceptible to geopolitics and global events.

Fossil gas pushes up UK electricity prices

In 2020, the UK relied on fossil gas for 37% of its electricity production. It is, therefore, unsurprising that the exponential rise in fossil gas prices has resulted in substantial increases in UK electricity prices. Average monthly UK wholesale electricity prices have almost tripled from August 2020 to August 2021 – increasing by £71/MWh from £36/MWh to £107/MWh.

The cost of generating electricity from fossil gas, including the associated carbon allowance costs, has also tripled to over £100/MWh (August 2021) from £29/MWh (August 2020). And while the price of carbon allowances has also risen over the same period from £42/tonne to £66/tonne, its contribution to the increased cost of electricity generation is minimal when compared to the fossil gas price.

Analysing the fossil gas cost component alone, it has soared by £61/MWh (from £14/MWh to £75/MWh). Consequently, the increase in fossil gas costs equates to 86% of the wholesale electricity price rise of £71/MWh.

Renewables are key to lower electricity prices

The only way to avoid the volatility of fossil gas is to accelerate the transition to clean electricity. Wind and solar are not exposed to variable fuel costs. According to the latest renewable generation costs from IRENA, generating electricity from existing UK fossil gas power plants is three times more expensive than from new onshore wind and almost twice that from new solar. Even the levelised cost of electricity (LCOE) from new offshore wind is currently cheaper than generating electricity from fossil gas. When carbon allowances are excluded from the generation costs, fossil gas remains more expensive than wind and solar.

With winter approaching, the escalation in gas prices looks set to continue. Moreover, there’s a clear consensus that the UK must phase out unabated gas power by 2035 at the latest to achieve its emissions goals and stay on track for Net Zero.

The need to switch from imported fossil gas to domestic wind and solar generation has never been more apparent or urgent.

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