New report from Onward not enough to stop electricity prices rising.
DAVID TURVER
Last week saw the launch of a courageous new paper from the Onward think tank that had the temerity to challenge the Net Zero narrative and put forward an alternative way of running the electricity grid that would be lower cost than the current path we are taking. The report was supported by the Conservative Party, with Shadow Energy Secretary Claire Coutinho providing the foreword for the report.
Breaking the Net Zero spell has brought the predictable response from the green blob with Carbon Brief publishing a rebuttal based on what it calls ten flaws in the report. Most of the rebuttal is the usual spurious wailing like claiming reducing carbon taxes on gas-fired electricity is not really a saving because the government will no longer receive the tax. In typical puerile fashion, Ed Davey was so performatively outraged about the proposals to save money he claimed Tory support for the report showed they were “taking orders from Donald Trump.” Newly appointed Parliamentary Private Secretary for DESNZ, Dr. Jeevun Sandher, described the gas-price forecast used in the report as “shoddy numbers” until it was pointed out to him by Claire Coutinho that the gas prices used in the report were his own department’s central forecast.
However, my assessment of the report is that it does not go nearly far enough to cut costs and any incoming government will need to be far more radical and ambitious.
Onward Firm Foundations Report Summary
This report is important because it is probably the first time a think tank has put forward a potential solution to Net Zero, rather than just moan about how bad things are and how much worse prices are going to get. Ed Hezlet and Marlon Dey should be commended for their efforts. The faux outrage from the green blob and the amount of flak the authors have received indicates they are over the target and on to something.
The main proposition of the report is that Britain’s overall Net Zero strategy relies on electrifying everything – electric vehicles, heat pumps and so on. However, the focus on intermittent wind and solar power has pushed up and will continue to increase the fixed costs of the grid making electricity more expensive and discourage further electrification.
The paper argues that instead of continuing down the path of more wind and solar, Britain should instead focus on firm generation capacity from gas and nuclear. Onward claims their Alternative Policy Pathway (APP) would save £320bn between 2030 and 2050 compared to the current Business As Usual (BAU) scenario. Although the APP would increase emissions in the electricity sector, overall emissions would likely fall because lower electricity prices would encourage greater take up of EVs and heat pumps.
Although the attempt to put forward an alternative plan is impressive, there is a major problem with the report in that there is a sleight of hand in the numbers that means even if their plan is implemented electricity system costs will still be considerably higher than today. As shown in Figure 1, the Onward report shows the system cost index falling under both the APP and BAU scenarios compared to the 2027 baseline of 100.
The BAU cost index falls from 100 in 2027 to 86.8 in 2050, by contrast the APP cost index falls from 100 in 2027 to 69.1 in 2050. Both scenarios give the impression of falling electricity prices. But there is a sleight of hand in the data.
This can be explained by looking at how system costs have changed over time and comparing those costs to the figures used in the Onward report. Figure 2 shows how transmission, balancing, capacity market and subsidy costs have evolved over time.
Back in 2016/17 the total of these costs were £10bn per annum. By 2024/25 subsidy and grid integration costs had almost doubled to £19.8bn and the OBR and NESO forecast these costs to double again to £40.3bn by 2030/31. It should be remembered the total system costs of £19.8bn in 2024/25 came at a time when Britain had the most expensive industrial electricity prices in the developed world.
The Onward report gives the numbers they included in system costs for both scenarios. These include Transmission, Distribution, Balancing, Ancillary, Capacity Market and subsidy costs. Together, these total £35bn in 2030 under BAU and £33.9bn in the APP scenario (excluding distribution costs). Distribution costs have been excluded to give a like-for-like comparison to the analysis in Figure 2. The comparison of the 2024/25 outcome, the 2030 forecast and the Onward scenarios is reproduced in Figure 3.
First note that system costs under the APP scenario are indeed lower than the BAU scenario by approximately £15bn per year for 20 years which gives rise to their claimed £320bn overall saving. However, the sleight of hand comes from the starting point for both scenarios in 2030. First, the starting point is much lower than the forecasts from the OBR and NESO. Second and most importantly, in each of the years from 2030 to 2050 even the APP scenario has system costs that are far higher than in 2025 when we already had the highest industrial electricity prices in the developed world.
Whilst it is commendable that Onward have taken the first step towards putting a plan together to deliver cheaper electricity, it is clear this plan is not enough. The cost structure of the electricity system is already far too high, and the system costs are set to double again by 2030. If this is allowed to happen, Britain will be left with a structurally uncompetitive economy for decades to come that will lead to catastrophe.
Any new government needs to acknowledge this problem and begin now to prepare the ground to implement a radical plan to slash costs from the system. This should mean setting a target to get system costs back down to levels seen in 2016/17. This means cutting about £30bn from the forecast costs for 2030, or about 10p/kWh if the grid is delivering about 300TWh.
This will require far more radical and ambitious action than is being contemplated at the moment. Measures could include bringing forward the abolition of carbon taxes on electricity and ending the RO scheme much earlier. But these measures will deliver only relatively small improvements. More draconian measures could include cancelling or renegotiating existing CfD contracts and terminating many of the projects to expand the grid to connect remote renewables. Drastic measures such as these will be required to get electricity prices under control and help Britain regain competitiveness. More on that coming soon as Eigen Values continues onward and upwards.
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