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UK to meet with energy firms in push to cap low-carbon power costs

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The UK government is set to meet with some of the country’s biggest power producers to push through a measure that would cap wholesale electricity prices starting this winter.

  • The UK government aims to tackle rising energy costs by signing long-term, fixed-price contracts with low-carbon power providers.
  • An agreement would allow energy consumers to benefit from the low costs of renewable energy, while guaranteeing its developers a long-term income stream.
  • Attempts to push the deal through too quickly could see it rejected, risking the introduction of a power-price cap that would be less beneficial in the long term.

A deal could see UK Business Secretary Jacob Rees-Mogg sign long-term contracts with low-carbon energy sources like wind farms, nuclear plants and biomass-burning stations to sell power at fixed prices in the coming weeks. Such a measure could provide long-term certainty for those producers.

The UK wants to get the measure set up as soon as possible, potentially by Oct. 1, according to people familiar the matter who asked not be named because the talks are private. The government is seeking to tackle soaring energy prices this winter that are driving a cost-of-living crisis, and the measure is viewed as key to those plans.

It’s an accelerated timeline for the negotiations and no price has yet been set, according to the people. Among the companies leading the negotiations with the government are the UK units of RWE, Orsted, Vattenfall and Electricite de France.

Local companies SSE, Drax Group, Scottish Power and Octopus Energy are also involved.

The Department for Business, Energy and Industrial Strategy didn’t immediately respond to a request for comment.

“EDF has entered negotiations with government to explore a voluntary pricing mechanism for the output from its nuclear fleet,” said Matt Sykes, managing director of the company’s generation business. “The industry likes stable returns, commensurate with a business investing over many decades and needing to manage all the costs and investments required.”

A spokesperson for Vattenfall said investing in renewable electricity is a long-term solution to the current crisis and that it’s important for bill payers to be supported.

Fixed Contracts

While the UK gets an increasing amount of power from low-cost renewable sources, it’s not readily apparent in wholesale prices, which have soared to record levels this year. That’s partially because all generators are paid the price set by the most expensive source, a concept known as marginal pricing. In most cases, that’s natural gas.

Last week Prime Minister Liz Truss announced that she would offer renewable and nuclear generators the chance to switch to using so-called contracts for difference, which pay a set price for electricity produced over a fixed period.

Britain’s growing fleet of offshore wind farms is already supported by the contracts, which can be attractive to developers because they offer guaranteed income over a relatively long period of 15 years. There is a worry among industry that if companies don’t sign up to the contracts, the UK could come back with a power-price cap that would be less beneficial in the long term.

The plan has been promoted by industry lobbies Energy UK and Renewable UK, but the urgent timeline being pursued by the government is now drawing some of the companies involved to push back, the people said. Most of the power for this winter has already been sold through forward hedges, positions that would have to be unwound and repurchased. That could end up making the measure costlier this winter than it would have been without the intervention.

It’s not yet settled whether the contracts will be set in some kind of auction or through bilateral negotiations between the government and each company, according to the people.

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