The usual method for assessing the costs of energy generating technologies misses out their impact on the wider systemThis impact is passed on to consumers on their bills, but it’s being ignoredBiomass UK has published a paper, Bigger Picture, Lower Cost, arguing for including these ‘whole system costs’ and allowing technologies to compete properly, driving down costs for bill payers.
One of the biggest stories in UK energy is cost. Ministers have spent a huge amount of time worrying about, talking about and investigating how to drive down the cost to energy bill payers. The Labour Party promised a price cap in 2015 and the Conservative Party followed suit two years later. Yet prices continue to rise. In August, British Gas announced a 12.5% price rise for their customers, citing government policy as the biggest driver of the increase.
Over the summer, Energy Secretary Greg Clark commissioned Professor Dieter Helm to review all the costs of energy – root and branch – to see how we can drive them down. Clark said he wanted to achieve the lowest energy bills in Europe.
We therefore put together a white paper for Professor Helm, titled Bigger Picture, Lower Cost. The paper outlines the case for including whole system costs as a means to more accurate energy cost assessments. Such an approach would better inform market design and government support decisions. Ultimately, it would cut energy bills for consumers and businesses.
As Helm’s own consultancy, Aurora Energy Research, has stated, the Levelised Cost of Energy (LCOE – the way the government assesses a technology’s cost) is an “ill-suited” methodology that ignores significant pressures created by changes in the generation mix. Aurora’s conclusion is shared by others, including the Committee on Climate Change, Frontier Economics (in a report for DECC/BEIS), NERA Consulting and Imperial College London, inter alia. LCOE is an inappropriate methodology for the evolving energy system.
These findings also echo the former Secretary of State for Energy and Climate Change, Rt Hon Amber Rudd MP, who stated that “we want intermittent generators to be responsible for the pressures they add to the system when the wind does not blow or the sun does not shine. Only when different technologies face their full costs can we achieve a more competitive market.”
In our white paper, we recommend the consideration of whole system costs, which recognise the merits and demerits of different generation sources as they pertain to the wider grid. Balancing services, connection costs, reinforcement costs, security of supply and transmission costs should all be factored in when accounting for new power sources. Currently, they are not. This allows large costs, such as balancing and ancillary services and transmission costs, to be ignored in market design. It rewards technologies that add such costs and undervalues those, such as biomass, that help to reduce them. The Government has demonstrated the ability to apply system costs across technologies when required, as illustrated by the detailed value for money assessment of Hinkley Point C published earlier this year. However, a systemised approach remains largely absent from current policy-making, inadvertently leading to more expensive decisions being taken on behalf of consumers.
Whilst we represent the sustainable biomass power sector, this is not an argument in favour of or against any particular technology. Quite the opposite: a whole system costs approach simply makes the case for more open competition between technologies based on their real-world costs. This, combined with a fairer CfD auction process that enables all technologies to compete against one another on a level playing field, would be a clear route to lower bills for consumers and businesses.
This is also not an argument against other renewables, as some people have suggested. Proper accounting of costs, as well as recognition of the value of flexibility services, will contribute to a stable system in which multiple renewable generation technologies can thrive in support of a low-carbon growth economy.