“Gas sets the price of electricity” might just have been the most popular British energy commentary of 2025. This insight offers a simple solution to policy-makers: push gas out of the market to bring down energy bills. But whether gas sets the wholesale price or not is less relevant in a market where an increasing share of electricity has locked-in prices. Contracting so much power may end up counter-productive to reducing cost even if it reduces volatility.
This is a helpful summary, though as you point out, CFD's that are currently in operation reflect auction prices from some time ago. Like you I don't find the 'gas usually sets the price so lets get gas off the network' narrative terribly helpful. Even with some declines in pricing it is hard to justify renewables mainly on cost grounds; the rationale is about decarbonisation and, to a limited extent, reducing exposure to volatility.
It needs a braver government to explain the trade-offs.
Thanks Kevin - yes, the old ones look so expensive. I also think solar, batteries and to some extent onshore wind are cheaper than offshore now but we still focus on offshore wind a lot, and nuclear. I also agree on explaining these trade-offs. I think it is a remarkably good time to be making the case that energy security is important and worth paying for, given all the international chaos at the moment.
"This cost is projected to be between £4.3 to £5.2 billion in the 2025 calendar year" -- where did £5.2 billion come from? The linked document shows a range of £2.5 to £4.3 billion.
"In 2025, there wasn’t a single half-hour period when gas didn’t supply at least one gigawatt of power. Reducing electricity prices is not as simple as building more renewables to use less gas if gas power is more competitive than CfD contracts" -- well both of those aged badly! OK the US and Israel attacking Iran was unexpected but gas gen falling below 1 GW was pretty much a given.
Hi Dan - thanks for your comment, though I don't think the post needs updating. Check the chart on page 32 of the linked report, it's the constraint costs estimate with the recommended CP30 network, if this still seems off to you I'll go check the excel where the numbers were provided. The second point is a historic observation so I am unclear what the correction is. I do think renewables are an important contribution to lowering prices, but my post is about highlighting that sometimes CfDs are signed at prices higher than gas power prices and so we should be clear on what problem we are solving with CfDs - predictability/insurance or investment attraction or lower prices in absolute terms. Gas may in future be more competitive than CfD contracts. This is the first in a series, might be interesting for you to read the remainder of my posts which go deeper on these topics - insurance value of CfDs, the value of long-term contracts, how we can speed up grid connections (external report with CBP), installing renewables more cost-effectively, and the value of locational pricing to bring down constraint costs.
Right, I thought you were talking about thermal constraints costs i.e. that part of balancing costs due to in the increasing levels of VRE, which, if you look at page 56, are much lower than your quote for 2025. Page 32 shows total balancing costs which, as you say, includes other costs -- £2.7 billion in the counterfactual scenario.
My observation about "In 2025, there wasn’t a single half-hour period when gas didn’t supply at least one gigawatt of power. Reducing electricity prices is not as simple as building more renewables to use less gas if gas power is more competitive than CfD contracts" is that it sounds like you are trying to make a point. As we've now had half hours with (much) less than 1 GW of gas gen (even before 102 GVAs min is introduced) and we now have a price of gas gen that is well above that of wind and solar -- and is expected to remain so for some time to come -- it's clear that pushing gas off the grid is the sustainable path to lower electricity prices.
CfDs aren't signed at prices higher than gas power prices. It only looks that way if you compare the marginal cost of running a CCGT against the total financial cost of building a windfarm (which is what a CfD strike price is). If you compare like for like, which the DESNZ publication "Electricity Generation Costs" does, you'll see that gas is much more expensive.
None of the AR3/4 offshore windfarms that are operational have yet to actualise their CfDs and can hold on till 2028. So the benefit that was lauded so much at the time is yet to be realised and may never ever be if the owners believe wholesale prices will always be higher
On the capacity market 3.7B is already baked in for 28/29 and thats before they add in the T-1 auction. Then in 29/30 they are proposing to add a new higher priced tier in to incentivise new gas to act as standby.
They way I see it is they are throwing ever more consumers cash in applying sticking plasters to keep NZ afloat because they wont confront the reality of how complicated the system is becoming.
Global warming is real, cumulative and non-reversible by any means that is cheaper than rapid decarbonising. Decarbonising matters. Leaving out the E or the S or the G and relying purely on the unexpected successes of RE will be a serious mistake. Assessing the relative worth via markets where the biggest energy subsidy is to fossil fuels via ongoing amnesty on externalised costs will be skewed. That RE can compete successfully in markets where the biggest players cheat is a remarkable but not good enough.
This is a helpful summary, though as you point out, CFD's that are currently in operation reflect auction prices from some time ago. Like you I don't find the 'gas usually sets the price so lets get gas off the network' narrative terribly helpful. Even with some declines in pricing it is hard to justify renewables mainly on cost grounds; the rationale is about decarbonisation and, to a limited extent, reducing exposure to volatility.
It needs a braver government to explain the trade-offs.
Look forward to reading more from you.
Thanks Kevin - yes, the old ones look so expensive. I also think solar, batteries and to some extent onshore wind are cheaper than offshore now but we still focus on offshore wind a lot, and nuclear. I also agree on explaining these trade-offs. I think it is a remarkably good time to be making the case that energy security is important and worth paying for, given all the international chaos at the moment.
"This cost is projected to be between £4.3 to £5.2 billion in the 2025 calendar year" -- where did £5.2 billion come from? The linked document shows a range of £2.5 to £4.3 billion.
"In 2025, there wasn’t a single half-hour period when gas didn’t supply at least one gigawatt of power. Reducing electricity prices is not as simple as building more renewables to use less gas if gas power is more competitive than CfD contracts" -- well both of those aged badly! OK the US and Israel attacking Iran was unexpected but gas gen falling below 1 GW was pretty much a given.
Might be worth updating the post.
Hi Dan - thanks for your comment, though I don't think the post needs updating. Check the chart on page 32 of the linked report, it's the constraint costs estimate with the recommended CP30 network, if this still seems off to you I'll go check the excel where the numbers were provided. The second point is a historic observation so I am unclear what the correction is. I do think renewables are an important contribution to lowering prices, but my post is about highlighting that sometimes CfDs are signed at prices higher than gas power prices and so we should be clear on what problem we are solving with CfDs - predictability/insurance or investment attraction or lower prices in absolute terms. Gas may in future be more competitive than CfD contracts. This is the first in a series, might be interesting for you to read the remainder of my posts which go deeper on these topics - insurance value of CfDs, the value of long-term contracts, how we can speed up grid connections (external report with CBP), installing renewables more cost-effectively, and the value of locational pricing to bring down constraint costs.
Hi Lucy, thanks for the reply!
Right, I thought you were talking about thermal constraints costs i.e. that part of balancing costs due to in the increasing levels of VRE, which, if you look at page 56, are much lower than your quote for 2025. Page 32 shows total balancing costs which, as you say, includes other costs -- £2.7 billion in the counterfactual scenario.
My observation about "In 2025, there wasn’t a single half-hour period when gas didn’t supply at least one gigawatt of power. Reducing electricity prices is not as simple as building more renewables to use less gas if gas power is more competitive than CfD contracts" is that it sounds like you are trying to make a point. As we've now had half hours with (much) less than 1 GW of gas gen (even before 102 GVAs min is introduced) and we now have a price of gas gen that is well above that of wind and solar -- and is expected to remain so for some time to come -- it's clear that pushing gas off the grid is the sustainable path to lower electricity prices.
CfDs aren't signed at prices higher than gas power prices. It only looks that way if you compare the marginal cost of running a CCGT against the total financial cost of building a windfarm (which is what a CfD strike price is). If you compare like for like, which the DESNZ publication "Electricity Generation Costs" does, you'll see that gas is much more expensive.
None of the AR3/4 offshore windfarms that are operational have yet to actualise their CfDs and can hold on till 2028. So the benefit that was lauded so much at the time is yet to be realised and may never ever be if the owners believe wholesale prices will always be higher
On the capacity market 3.7B is already baked in for 28/29 and thats before they add in the T-1 auction. Then in 29/30 they are proposing to add a new higher priced tier in to incentivise new gas to act as standby.
They way I see it is they are throwing ever more consumers cash in applying sticking plasters to keep NZ afloat because they wont confront the reality of how complicated the system is becoming.
Global warming is real, cumulative and non-reversible by any means that is cheaper than rapid decarbonising. Decarbonising matters. Leaving out the E or the S or the G and relying purely on the unexpected successes of RE will be a serious mistake. Assessing the relative worth via markets where the biggest energy subsidy is to fossil fuels via ongoing amnesty on externalised costs will be skewed. That RE can compete successfully in markets where the biggest players cheat is a remarkable but not good enough.