What’s going on here?

Earlier this month the UK Government introduced the Energy Prices Bill to the House of Commons. The bill would give the Government emergency powers, intended to help households and businesses with increasing energy costs.

What does this mean?

In light of massive energy price rises, many have welcomed the financial support for consumers and businesses. But, industry and campaign groups alike are concerned about the broader implications of the bill.

For some, the concern is about the control that the bill would give the Government to overrule the independent regulator, Ofgem. This ongoing intervention in the energy market could introduce more instability.

We however, are going to focus on a specific part of the bill called the Cost Plus Revenue Limit (CPRL). This caps the price low carbon generators can be paid for a unit of electricity at a fixed level, regardless of the overall market price. Industry groups have described this as “a 100% windfall tax”, as any revenue that could be generated above the threshold is effectively lost.

Why should we care? 

In the UK the market price of electricity is predominantly dictated by the cost of natural gas (see Be Curious!). Currently, this means that electricity prices are going up. Without any intervention, this would lead to increasing revenues for all electricity generators in the market, whether they’re using renewables or fossil fuels.

However, the CPRL modifies this natural state of play by limiting the revenues of specifically low carbon generators who power the grid with the likes of wind and solar. After years of government subsidies to the fossil fuel industry this is morally questionable.

It’s also causing unease at an economic level. The uncertainty over the level of the threshold and the timeframe it will be valid for risks undermining the industry’s confidence when it comes to investing in low carbon generation in the UK.

At a time when transitioning to a low carbon grid could not be more important, this uncertainty is something we can ill afford.

Be Curious!

Photo by Gonz DDL on Unsplash

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