The government should end its de facto “policy ban” on mature renewables to help cut energy bills for British industry, according a new report by University College London (UCL).
The study, commissioned by the environmental think tank the Aldersgate Group, highlights the lofty power prices faced by industrial energy users in the UK, which were 35 per cent higher than the EU average in 2016.
It draws comparisons with France, Germany and Italy, where industry has benefitted from, among other things, better interconnection, greater levels of cross-border electricity trading and more cost-effective integration of renewables into their energy systems.
The report makes a number of recommendations to help narrow the gulf, the first being that government should launch a “full-scale review” of policy towards mature renewables such as onshore wind and solar.
Mature technologies have been unable to access Contracts for Difference since the first auction in 2015. As part of the review, the government should consider offering them subsidy-free contracts in future auctions to help minimise “political risk”.
In the autumn budget statement, the government revealed that the total carbon price paid by UK generators will be frozen until the end of the coal phase-out due to take place by 2025. The report says it should signal its intention to resume the escalation of the carbon price once this is complete to provide long-term certainty to investors.
“International experience has underlined that for a windy country like the UK, the cost of onshore wind energy can be significantly below the price of industrial electricity, given a non-discriminatory planning environment and investor confidence,” it explains.
To help industrial users reap the rewards, a regulated “green power” market should be created alongside the wholesale market to enable them to purchase “long-term, tradeable, zero-carbon electricity contracts”.
Under this arrangement, renewable generators would be “accountable for the system costs implied by their variability, but in ways that still allowed for the economic benefits of aggregation”. Industrial energy users could gain discounts on contract prices if they could offer flexible demand, “thereby reducing the need for the pool itself to buy balancing services from the rest of the electricity system”.
More generally, industrial consumers should be encouraged to become active participants in the energy market by bidding into the capacity market or providing balancing and ancillary services.
The government should encourage greater co-ordination between investments in networks and generation to prevent the costly curtailment of renewables due to grid congestion by “strengthening objectives” for the system operator at National Grid. A holistic review of funding and charging arrangements for transmission should be undertaken, taking heed of the “continental experience”.
The report says increased cross-border electricity trading will also help close the gap between power prices in the UK and the rest of Europe. The government should therefore establish a new framework for direct-cross border electricity trading and impose the UK carbon price on imports to prevent emissions being exported. It should additionally “underline its commitment” to energy market integration post-Brexit and continue its support for Ofgem’s ‘cap and floor’ regime for interconnectors.
UCL professor and report author Michael Grubb said: “With costs tumbling, the clean energy revolution presents an opportunity for UK industry. But harnessing the benefits will require removing the obstacles to mature renewables including onshore wind and helping business consumers profit from flexibility.
“It also means ensuring that both fossil fuels and renewables face their environmental and system costs along with developing smarter energy markets, through which industry can procure its energy efficiently with the most cost-effective renewables.”
Roz Bulleid, head of climate, energy and environment policy at manufacturers’ organisation EEF, commented: “Energy intensive manufacturers have been concerned for some time about the disparities between UK prices and those paid by their direct competitors. They will be pleased at the recognition of the challenges they face even if the scale of disparity for individual companies may vary beyond the averages necessarily set out here.
“As a starting point, government should commission regular assessments of this type, as already happens in some competitor countries, and launch a wider conversation about the impact a more activist approach to electricity prices could have on UK industrial competitiveness.”
Industrial power prices for heavy users
Source: UK industrial electricity prices: competitiveness in a low carbon world, University College London