Where does the money go? Revenues in the UK’s electricity generation sector in an energy crisis

In the second half of 2022 the United Kingdom faced the apex of an energy crisis, driven by the shortage of natural gas following Russia’s invasion of the Ukraine.

One of the key consequences of the resulting energy crisis, which is still far from being overcome, has been the surge in wholesale electricity prices, putting significant financial pressure on businesses and households across the country.

Most electricity in the UK and EU is run through a ‘pay-as-clear’ wholesale market system, in which every generator gets the price that clears the market – i.e. which pays enough for the most expensive generator needed to ‘keep the lights on’. This means that natural gas generators set the price most of the time. But the cost of half the system – non-fossil sources – have not increased significantly.  The implication is a large increase in revenues, not tied to costs.

In this talk, Serguey Maximov and Michael Grubb will present the results of a study in which we calculated the revenues from electricity production among the different generating technologies, and contract types – identifying revenue increases of more than £10bn each to gas (whose costs rose) and £5bn for renewables (which didn’t) – but with considerable variation depending on their stance on the wholesale market. 

We will conclude by discussing implications, whether this is a problem and for whom, and what it might imply for future policy and electricity market design as the volume of gas declines – if it continues to set the wholesale price for the system for most of the time.