By Paul Homewood

It’s rather been under the radar and seems to have attracted little attention in the media, but this year we have seen a massive rise in wholesale power prices, which currently stand 70% higher than a year ago. In part this simply reflects a recovery from pandemic lows, but as the OFGEM chart below shows, historically prices have rarely got above £60/MWh, so we are now in unknown territory. (The OFGEM chart is only up to Feb 2021).

Power prices closely follow gas price trends, because gas-fired generation is the marginal source of supply:

And as Timera revealed last month, the principal reason for rising gas prices this year has been carbon prices, which have also risen sharply. In the last year, according to Catalyst Energy,

EU carbon prices have risen from €21.34 to €54.40 per tonne in the last 12 months. The newly introduced UK ETS is running at £51.75 per tonne.

EU carbon prices have risen as a consequence of a concerted EU policy push to ramp up emissions reductions, reflected by the recent decision to increase the targeted emissions cut to 55% from 1990 levels by 2030.

Rising carbon pricing have two effects:

  • It directly adds to the cost of coal and gas-fired generation.
  • It encourages switching from cheap coal generation, to more expensive gas, because coal is more carbon intensive. The consequent increased demand for gas therefore pushes up market prices for both gas and power.

Certainly other factors are in play, such as strong Asian demand for natural gas. Also Russia is happy to play the market, by keeping supply tight and prices high. But these appear to be only marginal factors.

Meanwhile UK and European customers are soon going to their energy prices rocket. This is of course the real purpose of carbon prices, which have always been intended to make renewable energy competitive with fossil fuel energy, by raising the cost of the latter.


June 25, 2021