How COVID-19 will impact power markets and what it means for your bills
Published by David Watson | 22nd May 2020
Overall electricity demand has fallen by 15-20%, most of which has been in the non-domestic sector. But this will not change the long-term trends we see in energy today. If anything, it could accelerate the shift towards a low carbon future.
The future for new nuclear
Nuclear is a relatively reliable low carbon baseload power, i.e. it can just run regardless of the weather. It’s also really expensive compared to other low carbon alternatives such as reducing demand through energy efficiency (proposals due out later in the year) and renewables. It may even be more expensive that a gas fired plant fitted with CCS. It’s also really risky – as we’re seeing with Hinkley Point, it’s very prone to large cost increases and construction delays.
With renewable costs continuing to fall, and with flexible capacity options such as batteries and EVs increasingly viable – the question is more whether COVID-19 gives the Government an excuse to kill Sizewell C. I think the thing to watch will be the funding model that the Government and EDF are currently discussing, and whether the offer to EDF is structurally something they can accept.
What does it mean for other non-renewable generators?
UK plant runs according a ‘merit order’, with the lowest cost plant running first and the most expensive one being the first to come off if demand drops. Right now, that’s coal and gas coming off the system.
Right now Drax’s biomass plant is running. The challenge is more for operators of gas and coal fired power plants, and whether this brings forward their decisions to close. Fiddlers Ferry coal plant was closed at the end of March. More could follow sooner than they had hoped if power demand doesn’t pick up.
Is it a net positive for renewables, or will their flexible nature mean that they are the first to get switched off?
Renewables will always run first if they can as they operate at zero (marginal) cost. The issue we’ve seen recently is whether demand might be too low during COVID-19 to meet supply, in which case they might need to be asked to turn off periodically. Or, as we’ve seen recently, National Grid paying people to turn demand up to meet supply. There are also the risks to new renewable deployment from things such as supply chain issues (e.g. solar components from China) and construction delays.
COVID-19 will not create long term problems however. If anything, the economic stimulus going in to infrastructure should be positive for renewables. Investors are getting better returns there than from other energy assets right now. This will enable investment in wind and solar – plus the flexible assets that support them such as batteries and EVs – to hold up well through this.
Fatih Birol, IEA, recently said that variable renewables now have a higher share of power supply than expected in many markets and it’s ‘like a postcard from the future’. This is a fantastic opportunity to accelerate the transition to a low carbon future. It’s also a chance to learn about what the future looks like when we get there and understand the sort of investments we will need to make in things like flexibility.
What does it mean for other non-renewable generators?
Aside from the volume impacts on bills (i.e. people using less), there are a range of things which will likely mean bills should fall in the short to medium term.
COVID-19 has contributed to a large fall in the price of oil and gas. This will translate to lower power and heat bills for all over time, including possibly allowing Ofgem to reduce the level of the price cap.
I’m also mindful of the impacts on the retail energy supplier market. COVID-19 is impacting cashflows for all sorts of businesses, including energy suppliers. It’s possible that even though prices may be generally falling, some of the extremely low, loss-leading, fixed term deals we’ve seen in market could be withdrawn. So, whilst average prices may therefore fall it’s possible the best price available in the market may actually rise.
More long term, how ‘green’ Government stimulus will have an important bearing on the question. A direct investment in the energy efficiency of building stock for example could mean lower bills for longer. Support for struggling coal and gas power plant operators might do the opposite. Government could bail out car manufacturers, or they could link stimulus to accelerating the transition to EVs. There is an opportunity here for Government should they wish to take it.
This is all happening at an interesting point where renewables are becoming the cheapest form of energy – even without subsidy. So, there is reason to believe that even in the long-term energy will be cheaper for longer.
David Watson is an established industry professional who has worked in the energy market since 2005. David spent over 15 years at British Gas / Centrica; progressing through industry, regulatory, market design roles towards ultimately being Director of Group Strategic Planning. He is an expert in UK energy policy & regulations and in interpreting their impacts in a way which supports commercial response; while also being confident working with policy makers to help fine tune their intended changes to ensure the intended benefit is realised. David joined TUME as an Associate in March 2020 until his appointment as Managing Director at The Heat Trust in June 2020.
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