Green power pool could cut bills for fuel-poor households

The government should reduce the exposure of fuel-poor households and vulnerable industries to gas prices by enabling them to buy electricity from a “green power pool” filled with low-cost renewables.

This would provide a more “economically sustainable and robust” way to provide targeted support to these group’s than other measures so far proposed or adopted, according to a new paper from academics at University College London’s (UCL) Bartlett Institute of Sustainable Resources.

Under their proposals, the green power pool would initially be filled with renewables with Contracts for Difference, whose output would be aggregated by a pool operator. The pool operator would sell this power to eligible consumers, either through direct contracts or indirectly through suppliers, at an “assured price” reflecting the output-weighted average strike price of the participating generators.

When the pool is in surplus, the pool operator would sell the excess power to the wholesale market. This could either be done in the same way as currently happens, with revenues above generators’ strike prices being recovered by the Low Carbon Contracts Company, or at a fixed price reflecting generators’ strike prices.

When the pool is in deficit, the pool operator would buy power from the wholesale market to make up the shortfall. The costs could either added to the assured price to give a single unit price or there could be a separate price for balancing purchases. The latter would have the benefit of exposing consumers and suppliers to the real marginal cost of increasing their consumption, providing an “ideal incentive” for them to reduce their demand or utilise storage.

Based on Contracts for Difference so far allocated through competitive auctions, the renewable power available in the green power pool by 2026/27 would amount to around a quarter of all UK generation in 2021 and would have a weighted average price of less than £60/MWh.

The paper said selling this power to fuel-poor households could give them “more stable and predictable support” that is “far less subject to the repeated changes of government budgetary policies,” whilst also reducing pressure on the government’s finances.

Selling it to power-intensive industries, which were already struggling in Europe prior to the current energy crisis, would enable them to compete with rivals in other countries, many of which benefit from price-regulated electricity markets: “Letting many such industries close and migrate in response to the energy crisis is neither good economics, nor feasible politics, nor would it contribute to global decarbonisation – but indeed, potentially the inverse.”

The paper noted that direct fiscal subsidies go against the accepted principles of world trade, with international rules allowing other countries to impose countervailing duties on those that directly subsidise their exports: “Targeting renewable electricity at internationally trade-exposed industries may indeed be the only way to reduce their electricity costs without risk of retaliatory duties, whilst helping heavy industrial sectors electrify and decarbonise their operations in line with the Paris Agreement.”

To help grow the pool, the paper said other low-marginal-cost renewables could be moved onto Contracts for Difference or long-term power contracts and then added. Along with the continued allocation of Contracts for Difference to new generation, this would enable other groups of consumers to access the pool, including consumers who are signed up to green tariffs or are contributing to decarbonisation by adopting technologies such as electric vehicles and heat pumps.

The paper suggested that the government could also leverage access to the pool to encourage the uptake of energy efficiency upgrades and smart meters.

Furthermore, the green power pool could provide a “stepping stone” to the creation of an open, private sector-based pool of long-term power contracts that would overcome some of the challenges associated with power purchase agreements.

Lead author and UCL professor of energy and climate change Michael Grubb said: “The proposal has an immediate aim to help the most vulnerable consumers, in both households and businesses, by providing direct access to a pool of renewables output on an assured cost-plus basis.”

“The strategic aim, however, is to demonstrate a logical and efficient way to offer access to clean energy sources on a basis that reflects their costs, not fossil fuel prices,” he added.

“Any of you with ‘green tariffs’ will know that is not what they currently offer, but should. We think transparency and consumer demand for clean power at a stable price should be a cornerstone for accelerating the low-carbon transition.”