Manufacturers and engineering leaders will be looking at the commodity markets and wincing, as they know what impact the ongoing disruption in the Middle East will have on the price they pay for energy to keep their facilities going.
After oil passed $125 a barrel in late April, and the gas price at the UK National Balancing Point approached £1.60 a therm in March, it is all too clear that our industrial sector’s end-of-month bills are too dependent on what happens elsewhere.
The Iran war came hot on the heels of the continuing conflict in Ukraine, which had already spiked oil and gas prices, much of which transited through Ukrainian pipelines to reach the UK and Europe. The shutdown of transit through the Strait of Hormuz is worsening the situation, causing alarmingly high prices for both oil and gas.
In response, the government has set out plans to decouple gas and electricity prices. In the UK, the gas price effectively sets the electricity price because the wholesale market operates a marginal pricing model, where the price for all electricity is determined by the last (and usually most expensive) generator needed to meet demand – which is almost always a gas‑fired power station, even though renewables now supply more than half of UK power.
Marginal pricing is common across the world, but the UK is affected more often because gas sets the electricity price roughly 95-98% of the time, far more often than neighbouring countries where hydro, nuclear or more diversified flexible capacity can act as the marginal supply.
“The UK has the highest electricity prices in the West, so the government’s commitment to delink electricity pricing from gas and expand Contracts for Difference for renewables is a long overdue correction,” says Chris Glover, director of utilities and energy at engineering consultancy Buro Happold.
Government plans include long‑term fixed‑price contracts for renewables, along with immediate action to tax excess profits through the Electricity Generator Levy, which it said would ensure that an “increased proportion of the extraordinary revenue generated when the gas price spikes is available to government to support businesses and households with the cost of living”.
The benefit of breaking that link would be substantial, says Thierry Bros, an energy consultant and professor at Sciences Po in Paris. If only 30% of electricity pricing remained linked to gas, while 70% was fixed-price or cost-based, the exposure of bills to gas would fall sharply. Doing so would provide “the growth that you need for AI, and also the growth that you need for electrifying your whole company, your whole city, your whole country,” Bros says.
Separating gas and electricity prices is “exactly what manufacturing needs right now,” says Leon Huang, CEO of RapidDirect – an AI-driven manufacturing platform specialising in CNC machining and injection moulding. “Expensive gas makes renewable energy cost more than it should, and that holds back the whole engineering sector. If electricity prices actually matched the lower cost of renewables, the impact would be huge.”
If and when utility bills drop, Huang says the money saved would be put back into the national economy by firms upgrading their automated processes to take advantage of the price cut.
The move is “the best way to stabilise the hardware supply chain”, agrees Hommer Zhao, founder of printed circuit board manufacturer WellPCB. “Because gas prices are linked to electricity, whenever there’s a global issue that causes gas prices to spike, our power bills jump too,” he says. “This makes the cost of electronic components completely unpredictable for engineers.”
Like Huang, Zhao says that any cost savings would allow companies to “safely invest in cleaner, greener factory equipment without constantly worrying about sudden energy price spikes ruining our budgets”.
The change would be a boost for the circular economy, says Zhao. “It makes building electronics cheaper and much more reliable,” he explains.
Breaking the link will be far from easy, however. “For engineers, a critical factor to consider are the continued grid challenges,” says Glover. “Bottlenecks of connection delays are stretching up to 15 years; insufficient network capacity is an added constraint; and curtailment costs on excess renewable energy are ultimately passed on to consumers.”
Most experts agree that decoupling would be beneficial – whether it is feasible is another question. “It is possible,” says Thierry Bros, “but it needs a little bit of political courage, and also a little bit of courage fighting the renewable industry that wants to be indexed to gas.”
Extracted from IMechE website, read more here