Introduction

The United Kingdom has set an ambitious target to achieve a zero-carbon economy by 2050, positioning itself at the forefront of global climate action. Central to this strategy is the phased closure of coal power stations, historically a significant component of the UK’s electricity supply. While the reduction of coal usage is intended to lower carbon emissions, this approach may inadvertently impede long-term emission reductions by driving up electricity costs.

The Role of Coal in the UK’s Electricity Supply

Coal has been a major contributor to the UK’s electricity generation for decades, providing a reliable and substantial energy source. However, driven by stringent environmental policies and carbon taxes, coal usage steadily fell over the recent decade, and now, as of September 2024, the last coal power station in the UK has burnt its last coal.

While superficially this appears to show progress towards a cleaner energy system, it leaves a scar, not from carbon, nor from coal mining, not from its legacy, but from a series of questionable decisions that have led to this point. These decisions have made the UK decidedly uncompetitive, and the population substantially poorer, not only by increasing the cost of electricity with little upside but by making the country anathema to business investment.

Why Losing Coal Made Electricity in the UK So Expensive

The price of electricity in the UK is set by a principle known as the merit order. This system operates as follows:

1. Electricity generators bid in an auction to sell their electricity.
2. National Grid ESO (Electricity System Operator) assesses the demand on the grid and accepts bids starting with the lowest.
3. Bids are accepted until there is sufficient generation to meet demand.
4. All suppliers are paid the same amount as the final highest accepted bid.

The closure of coal power stations has significantly altered this merit order system. While coal-fired power stations typically have higher marginal costs compared to renewable energy sources like wind and solar, they have historically played a crucial role in providing dispatchable baseload power, especially during periods of high demand or low renewable output. However, the introduction and increase of carbon taxes have dramatically changed the economics of coal power generation.

Carbon Taxes and the Decline of Coal

The Carbon Price Support, introduced in 2013 as a carbon tax on fossil fuels used in electricity generation, significantly increased the operating costs of coal-fired power stations. This tax was designed to encourage a shift towards lower-carbon energy sources by making high-carbon fuels like coal artificially uncompetitive. As the carbon tax rate increased over time, coal power became increasingly expensive relative to other energy sources, such as gas and renewables.

It is important to note that coal power stations face higher taxes because they are only around 30% efficient. This is because they burn coal to produce heat, which then boils water to produce steam to drive turbines. In contrast, gas power stations achieve approximately 60% efficiency by burning gas directly in turbines to generate movement. This inefficiency contributes to coal’s high carbon footprint, and hence carbon taxes, not just the carbon content of the coal itself.

As a direct consequence of these carbon taxes:

• Coal-fired power stations faced higher costs, reducing their competitiveness in the electricity market.
• Many coal power plants became uneconomical to operate and were subsequently closed.
• The UK’s energy mix shifted away from coal.

These carbon taxes caused electricity generation to shift towards gas, but not renewables. Why not renewables? Because the incentives to build renewables exist outside of this mechanism. For example, the new Contracts for Difference (CfDs) are a mechanism to disconnect the cost of renewables from the wholesale cost of electricity, meaning the generators get paid a fixed fee whatever happens. Therefore, renewables would have been built regardless of coal capacity as they sell on to the grid when they generate, not when there is demand.

While these policies aimed to reduce CO₂ emissions by discouraging coal usage, they also had significant implications for the electricity market and energy prices.

The Impact on Electricity Prices

With coal power stations pushed out of the market due to carbon taxes, the number of high-capacity, dispatchable generators available for peak demand decreased. The market increasingly relied on gas turbines and imported electricity to meet demand. This reliance on gas, especially during periods of high gas prices, contributed to higher electricity costs.

Household electricity bills increased, not only due to the higher cost of gas but also because the carbon tax indirectly raised electricity prices by removing cheaper coal-generated electricity from the supply mix. Additionally, the revenue generated from the carbon tax added to government coffers but increased costs for consumers.

The carbon taxes had all but removed coal from the UK grid, except for a smattering of power stations, then Russia invaded Ukraine.

The Gas Price Crisis — Why the UK Paid So Much

Had the UK not closed all of its coal power stations, it would have mitigated the severe electricity prices experienced during Putin’s invasion of Ukraine, which led to spikes in global gas prices. With most coal generating capacity closed due to carbon taxes making them unprofitable, there was little coal capacity on the grid to meet demand. Additionally, the UK became a hostile environment for further gas exploration, meaning that the government would forgo the 70% tax on gas profits from gas delivered from UK sources. This would have largely shielded the UK from the gas price crisis. Instead, the UK was compelled to rely heavily on gas imports to produce electricity. The consequences of this decision are multifaceted:

• National debt increase: The government spent £52 billion on energy price support, which could have been avoided or reduced.
• Higher inflation: Increased energy costs contributed to overall inflation in the economy.
• Reduced disposable income: Higher electricity prices left consumers with less money to spend on other goods and services in the UK, instead diverting funds to pay for expensive gas imports.

Why High Gas Prices and the Loss of Coal Slow the Progress to Net Zero

Elevated electricity prices discourage consumers from adopting low-carbon technologies like heat pumps and EVs. Why switch from gas or from fuel when the cost of electricity is so high? Savvy customers do save – such as those who charge at night or have highly efficient heat pumps – but the payback period of efficient heat pumps is higher when electricity prices are higher. Meanwhile, savings from EVs are non-existent for those without a driveway to charge on at night. Higher electricity costs consume a larger portion of household budgets, particularly impacting low-income families. As disposable income decreases, households have less financial flexibility to invest in energy-efficient appliances and low-carbon technologies, so progress stagnates.

So the question becomes, if the UK had kept 10GW of coal, that came on less and less over time, would that have increased the transition to renewables, EVs and heat pumps? It would certainly have reduced the cost of electricity and made industry more competitive.

The Self-Inflicted Crisis

The UK now faces a complex challenge in aligning its environmental objectives with economic stability. It’s crucial to recognize that the current situation, characterized by high electricity prices and reduced energy security, is largely a result of policy decisions such as the implementation of carbon taxes leading to the premature closure of coal power stations. While intended to reduce carbon emissions, these policies have led to unintended economic repercussions that could potentially slow the transition to a zero-carbon economy.

It’s important to note that emissions would have undoubtedly reduced due to the increasing share of renewables in the energy mix, regardless of the amount of coal capacity on the grid. The rapid growth of renewable energy sources, particularly wind and solar, has been driving down the carbon intensity of the UK’s electricity supply. This trend would have continued even if coal power stations had been maintained as a backup for periods of high demand or low renewable output.

The decision to close coal power stations ahead of developing sufficient alternative baseload capacity, driven in part by carbon taxes reducing coal’s competitiveness, has directly contributed to the current energy crisis. This policy choice, rather than external factors alone, has led to increased reliance on more expensive gas power generation, reduced energy security, and higher electricity prices for consumers and businesses.

While the closure of coal power stations has led to an immediate reduction in coal-related emissions, this decrease may be superficial when considering the broader context. The emissions saved by closing coal plants might be offset by:

• Increased use of gas power stations, which, while cleaner than coal, still emit significant amounts of CO₂.
• Higher emissions from households unable to transition to low-carbon heating and transportation options due to increased energy costs.
• Potential increased reliance on electricity imports, which may come from countries with higher-carbon energy mixes.

As a result, the decrease in emissions from coal closure may not be the win they are professed to be. Instead, it may be a superficial virtuous hurrah. A hurrah which forgoes the thought about cause and effect. A hurrah that cheers the death knell for the British State.

References

• Department for Business, Energy & Industrial Strategy (BEIS). (2023). UK Capacity Market Report.
• National Grid. (2024). Electricity Market Performance and Trends.
• RenewableUK. (2023). State of the UK’s Renewable Energy Sector.
• Office for National Statistics (ONS). (2023). Household Spending and Energy Costs.
• Energy Networks Association. (2023). Impact of Coal Plant Closures on Electricity Prices.
• UK Government. (2022). Zero Carbon Strategy.
• Carbon Trust. (2023). Understanding the Carbon Floor Price.
• International Energy Agency (IEA). (2023). Electricity Market Dynamics in the UK.