Gas price spike to add £29 billion to UK electricity bills next year

Forecasted increase in the cost of fossil gas to the UK will be equivalent to more than 1% of the country's GDP

Sarah Brown

Senior Energy & Climate Analyst

9 October 2021 | 12 min read

About

New forecast from energy think tank Ember shows an extraordinary increase in electricity prices for households and industry when compared to projections by the government’s BEIS department.

Executive summary

Gas prices set to add an extra £29 billion to 2022 UK electricity prices

A new forecast by energy think tank Ember examines fossil gas and electricity forward prices for calendar year 2022, and compares them with the most recent price forecasts by BEIS (the Department of Business, Energy, and Industrial Strategy).

  • UK businesses and consumers will be spending an additional £29 billion on electricity next year – equivalent to 1.3% of UK GDP
  • Current fossil gas and electricity prices are triple the BEIS forecast
  • Fossil gas is set to be responsible for roughly 80% of the forecasted rise in electricity prices

A gas phase-out insulates the UK from the ongoing risk of unexpected price shocks in the global fossil fuel market. With an out of control global fossil gas price, the only escape route is rapidly building clean power, especially offshore wind. The government’s commitment to a 2035 gas phase-out is essential to insulate ourselves from future gas crises. Every new domestic wind turbine the UK builds will cut exposure to imported fossil gas – and keep energy bills lower.

Phil MacDonald COO, Ember

Spiking gas prices drive up electricity costs

Businesses and consumers face paying the bill for UK gas dependence

The 2035 gas phase out – as committed to by the government – is vital to reduce exposure to the volatile global fossil gas price.

A new forecast by energy think tank Ember examines fossil gas and electricity forward prices for calendar year 2022, and compares them with the most recent price forecasts by BEIS (the Department of Business, Energy, and Industrial Strategy). Ember’s calculations show that UK businesses and consumers will be spending an additional £29 billion on electricity next year – equivalent to 1.3% of UK GDP. Electricity costs were expected to be £18.5 billion in 2022. Ember’s forecast based on 2022 forward prices suggests they will be £47.5 billion. Approximately 80% of the expected electricity price rise in 2022 will be caused by the spike in fossil gas costs.

In the government’s most recent energy and emissions projections, BEIS forecast that electricity prices would be £58.5/MWh in 2022. Due to the recent surge in UK electricity prices, calendar year 2022 is now priced at £150/MWh* – an increase of £91/MWh. In the same projections, BEIS estimated that UK annual electricity demand would be 317 TWh in 2022. Using the BEIS forecast power price of £58.5/MWh, the total cost of electricity would have been £18.5 billion. However, based on the current price of £150/MWh, the total cost of electricity will be £47.5 billion. This equates to an additional £29 billion compared to the BEIS projections.

*EEX UK Power settlement prices on 4 October 2021

The hike in UK electricity prices is predominantly due to skyrocketing fossil gas costs. Global prices for fossil gas have seen extraordinary increases in recent months, as a perfect storm of factors combine: depleted storage levels due to a colder than average northern hemisphere winter; lower European gas production caused by planned maintenance disruptions due to Covid-19 restrictions; reduced pipeline imports from Russia; reduced delivery  of LNG (liquified natural gas) into the UK due to production problems and higher prices and demand in Asia and Latin America; and strong global demand as countries emerge from the pandemic.

The surge in fossil gas prices has significantly increased the cost of generating electricity in the UK. For calendar year 2022, the cost of fossil gas fuel required to generate electricity is currently £105/MWh*. Using the forecast 2022 gas prices from BEIS, the cost of producing electricity from gas would have been £34/MWh. This represents a jump of £71/MWh. Consequently, the rise in fossil gas costs accounts for ~80% of the electricity price increase of £91/MWh.

*Fossil gas cost calculations based on a plant efficiency rate of 55% (Lower Heating Value) excluding carbon costs.

Conclusion

Gas dependence is costing the UK

Clean power is the solution

Rapidly phasing out fossil gas from the UK electricity grid is the most significant way to bring spiking power sector costs down. Recent Ember analysis found that electricity from new wind and solar is already significantly cheaper than existing gas generation in the UK. The government’s new commitment to a 2035 gas phase-out (as recommended in Ember’s recent Clean Power Plan) must be swiftly followed by the policy that will facilitate the build out of clean power, including investment in innovative long-term energy storage and deployment of offshore wind.

Supporting Material


Methodology

Notes

  • Ember’s calculations do not include the reduction in costs that may be achieved through hedging. However, this is likely to be a very minor reduction.
  • Some low-carbon power on Contract For Difference contracts will have to pay back money to the government when power prices are very high. However, these negative feedbacks are likely to be a minor reduction on the overall cost.
  • National Grid sees a very rapid decline in fossil gas in all scenarios which meet climate targets, with 97%+ of generation coming from fossil-free sources by 2030.

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