Why is electricity so expensive?

Thats the understatement of the year! Fortunately we have a good captain & crew at the helm.

Tony

The magical thinking is that something new and different will prove better than an existing technology that has had the sharp edges knocked off over many years. Take wind generation, which is perceived as new and shiny. When was the first wind farm of recognisably modern machines? The answer is about 1978! Thus the technology is more than 40 years old, and it can be argued has just about reached its full potential.

A rule of thumb that fits the energy sector quite well starts with a successful demonstrator. Unless this leads to a satisfactory first of series within 10 years, the concept will not succeed. Try this to evaluate your favourite notion. Then remember that full infrastructure takes decades to put in place.

The world population has tripled over my lifetime, in no small part enabled by low cost energy to provide a myriad of essentials to our wellbeing. Such things as refrigeration and distribution systems, and pharmaceuticals and chemicals including fertilisers to name but two sectors. These things are the real baseload of the energy system, and it is unclear how any existing renewables can adequately support our lifestyle. On the other hand, reversion to an agrarian economy may not turn out to be popular!

Edited By Macolm on 06/04/2022 12:01:33

Edited By Macolm on 06/04/2022 12:02:16

Thanks for replies. I'm not surprised that that the title of the thread has invited wide-ranging discussion, which is welcome. We humans are indeed in a bit of a pickle. I liked SoD's inversion of the question - why is electricity so cheap? I am a 'baby boomer' on a final salary index linked pension myself and can see that nice as that might be for me, it's a sort of fluke. Not sustainable for future generations I fear.

MichaelG - that Pathe news clip took me back a bit! But doesn't answer my my question about the relative prices of electricity and gas which I don't think anyone else has addressed either.

To put it another way.

Wholesale forward gas and electricity prices in GB (prices in GB pence per kWh, ratios electric/gas, source Ofgem)

March 2021 - Electricity 5.0 , gas 1.7 - ratio 2.9

Dec 2021 - Electricity 24, gas 9.0 - ratio 2.7

Jan 2022 - Electricity 20, gas 7 - ratio 2.9

So it's a pretty consistent - per Joule, electrons at the plug are getting on for three times as pricey as gas molecules at the nozzle. OK, derate that as electricity is 100% efficient for heating, gas maybe 70-80% . But still a big difference.Why would that be?

In my case, the ratio from my supplier ( elec 32p, gas 7p) is more like 4.6. But I'm with Green Energy so I get special electrons of course - I had a close-up look at the blighters through my welding helmet tonight and they did indeed have a greenish tint. You have to pay for that!

Robin

Edited By Robin Graham on 07/04/2022 00:19:57

Edited By Robin Graham on 07/04/2022 00:20:34

Edited By Robin Graham on 07/04/2022 00:23:28

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Agreed, Robin : The clip itself doesn’t answer your question … But my observations do.

The dangled carrot of “too cheap to meter” encouraged the public to like the prospect of Atomic Power

Decades later, the prospect of selling their Solar Electricity back into the grid, at a very generous FIT, encouraged householders to decorate the roof.

These are just two examples of ‘manipulation’

MichaelG.

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Edit: __ and as Electricity prices continue to rise … people will ‘learn’ the required behaviour.

Edited By Michael Gilligan on 07/04/2022 00:48:17

In your opinion, what is the reason for the electricity cost rise? Should we nationalise essential utilities like water and electricity?

I was looking through the OFGEM graphs and there is a graph giving a breakdown of how the cap is calculated. https://www.ofgem.gov.uk/energy-data-and-research/data-portal/all-available-charts

What surprised me is that this year there was a 38% rise in Network costs, £268 to £371. Network costs are the allowance for the distribution, but why after being stable for years did it need to rise so much this year?

The cap rose by £730 but the Network Costs rose by £103, so 14% of the rise has nothing to do with wholesale costs!

What alternative reality world do you live in?

Don't know for sure, but 'stretching the assets' is a common problem with infrastructure management.

Infrastructure projects start well by installing shiny new gear, which stays reliable and low maintenance for a good many years. The initial cost is sky high, so the money almost always borrowed. Thereafter installation, maintenance and interest costs are repaid by the customer over many years. But the whole thing degrades slowly and eventually has to be replaced.

Infrastructure has a Best-Before rather than a Use-by Date. As it ages, maintenance costs rise as failed elements have to be replaced or patched up. Like owning an old car, fixing wear and tear eventually costs more than buying a new one. Many other advantages to buying a new car - lower emissions, better mileage, increased comfort and a DAB radio. Same with modern infrastructure rather than older. Unfortunately, buying new requires the owner to find a large sum of money in one lump, which is harder than making many small payments over time.

Deciding what to do about an unreliable car when you can't afford to replace it is bad enough. The finances of major infrastructure projects are more complicated because the idea either has to be justified to investors or to politicians. The latter like to stay popular by cutting public spending even if that means big trouble later (by which time they will have moved on.) Many other factors come into play, and they all tend to delay action on major spending until it's unavoidable.

I think this has happened here. An ageing gas infrastructure has stretched to the limit and it's no longer possible to avoid replacing large lumps of it. Bad luck on government and consumers that an infrastructure crisis coincides with record breaking rises in the cost of wholesale gas! Or is it?

Voters, of course, have to decide how much of a government's 'bad-luck' is self-inflicted. In another example, you might expect Western democracies to have long since recognised the threat posed by Mr Putin and had a well-prepared plan of action ready to go. Mr Putin should have been whacked with a full set of severe sanctions five minutes after his troops crossed the border. Instead of financial shock-and-awe linked directly to his actions, he's being given plenty of time to manage a slow trickle of bad news. He'll be able to shift blame for economic ill-effects on Russians from himself to the West. This is negligence - politicians choosing not to have a plan, in hope Mr Putin would behave better in future. Despite the evidence...

Dave

Dave,

, I think the need for major maintenance of the gas distribution infrastructure has been with us for many years and has been tackled for quite a few years now, it must have been about five years ago that all the gas mains in our local area were sleeved because the cast iron pipes had deteriorated badly. So it would appear that there has been ongoing replacement of “large lumps of the gas infrastructure “. Dave W

AdrianR and Dave

I was surprised by the 38% rise in Network Costs in the info from Ofgem.

This area is heavily regulated by Ofgem and companies can’t just increase their charges. The amounts they can charge are specified by Ofgem after a lot of wrangling.

This page on the Ofgem website gives more detail on the breakdown of costs:

**LINK**

There is a note next to the chart regarding Network Costs:

Network costs: The main driver of this increase is the recovery of Supplier of Last Resort (SoLR) levy costs (£68). A supplier acting as a SoLR can make a claim for any reasonable additional, otherwise unrecoverable, costs they incur. These levy claims are paid to energy companies by the distribution network companies and recovered from consumers via their charges.

So £68 of this (plus, I imagine the ‘reasonable additional costs they incur ) is to be paid by all of us because of the Suppiers who have gone bust.

I must admit that I don’t understand why at least some of this isn’t recovered from the companies that fail.

The other reasons that Dave suggests will no doubt increase costs in the future as networks are reinforced and replaced as a result of the Governments push to move to electric vehicles and heat pumps etc plus network resilience to cope with extreme weather.

Stuart

Edited By Stuart Smith 5 on 07/04/2022 10:35:11

Edited By Stuart Smith 5 on 07/04/2022 10:37:00

From what they’ve said on the media I thought the answer was simply Greed? Over and over they’ve said the higher the demand the higher the price - the raw materials like oil and gas didn’t suddenly cost 20% more to extract? Quite why the standing charge has gone up though is something of a mystery, the media haven’t asked anyone that particular question. I suppose that’s at least partly down to greed as well?

So it would appear that there has been ongoing replacement of “large lumps of the gas infrastructure “.

Strange then that the new tariff information that I got from British Gas yesterday showed the new daily standing charge for gas went down by a penny a day from my soon-to-expire fixed rate deal to 27p, but the same charge for electricty doubled from 24p to 48p.

Nigel B.

Todays news that 8 new Nuclear power stations are to be built will certainly make the cost go up, almost time to start generating your own electric by whatever means.

It's interesting to look at some global realities. Petrol in Venezuela at 2p a litre. China responsible for 35% of global co2 averaging 1.5 times us per head. The USA using 3.5 times us per head and about 25% global. And a Russian tank on 1 mile per gallon diesel. UK responsible for circa 1% global emissions and pretty good figures per head but only around 1% saving per head over 20 years. Stuff may be more efficient but everyone has more stuff.

I have a plan based on large treadmill drums in city centres. Schoolkids PE lessons sorted, cheap gym memberships,special wheels for the Zimmer impaired and a requirement for everyone to earn treadmill points for NHS access or air travel. Cheap leccy and a fit population plus it warms you up so no heating bills. Sorted.

Pgk

The announcement of 8 new nuclear power stations to be approved by the end of the decade seems like too little too late. The quickest that a nuclear power station could be brought into service after it has received approval is in the region of 12 to 15 years, so we aren’t going to see them contributing to our energy needs for many years yet, we need a much increased energy output by the end of this decade in order to keep up with the projected demand from home heating, electric vehicles etc. Renewables will obviously be able to contribute to the energy mix required but only if the sun shines and the wind blows, not all that reliable as recent statistics show, I think our country will still be operating on a knife edge as regards being able to meet requirements, and I can’t see our electricity price becoming any cheaper in relative terms. Dave W

Well spotted Stuart! How stuff is financed is fascinating and understanding it explains much! I wondered what British Gas got out of being the Supplier of Last Resort. I wrongly guessed the government volunteered them and arranged for the taxpayer to pick up the bill if a cheap retailer went bust. Doesn't work that way : the bill lands on consumers!

This is a bit annoying. Anyone who switched to cheap gas managed by a fly-by-night company paid less for energy than the rest of us while the party lasted. When the gamble went sour they returned to British Gas and burst into tears on being told the new rates.

Now it turns out they've dodged part of the bill and are being subsidised by the rest of us! Might write to my MP suggesting any customer returned to British Gas by a failed supplier should pay the full cost of their failure to choose a sound supplier in the first place. I don't see why existing customers should bail out anyone who chose to take a risk on sexy gas prices.

What next? A scheme for refunding people who lose money betting on horses?

Failed companies of this type aren't worth much because they're bankrupt and don't have many assets. They're administrative entities with a small staff and a computerised billing system, likely operating with leased equipment from from a leased office. Retailers don't extract gas, or store it, or own any pipes. They manage buying and selling gas, but it's paperwork rather than a solid business. (More likely computers rather than paper!)

Really annoying - I expect all the Board Members got a substantial bonus on the way out. They usually do...

Dave

I have been transferred to BG, my supplier having gone bust.

I find your bigotted statements interesting, and look forward to an explanation as to how you are subsidising me.

Edited By Anthony Kendall on 07/04/2022 18:14:47

Anthony

No doubt Dave will give you his reply, but the costs of failed Suppliers is picked up by everyone. See my previous post.

As a former Trading Standards man for Lancashire used to say on the local radio consumer programme, ‘if it seems to good to be true, it probably is’ . Some suppliers were happy to sell at too low a cost to get business, but were not resilient enough to withstand increases in wholesale prices.

Stuart