How will the increase in electricity costs be dealt with by TOCs and Network Rail?

[Mike Machin]

With the wholesale price of electricity closing yesterday at 87p per KWh and with industrial and commercial users not being protected by price capping, how will Network Rail pass on the increased costs to TOCs and freight operators and how will they deal with or mitigate these costs?

 

[RichardAsh1981]

I believe that the train operators buy their electricity directly from the market these days, not from Network Rail. This requires energy meters on the trains, but most stock is now so fitted. Track access charges for electric stock are uplifted to account for Network Rail transmitting the electricity to the train. So Network Rail doesn't have to do a great deal (it's energy bill for stations, signalling etc. excepted).

The vast majority of rail operators won't pay the spot (closing) wholesale price, because they will have bought the energy (which they know they are going to need) in advance. Could by anywhere from months to a couple of years in advance. It will still be costing them more, but advance deals insulate them from short term volatility. The exceptions to buying in advance will be freight and charter operators where there is a lot more uncertainty (or just not a lot of volume overall). In the longer term the contract-in-advance prices also are going up, which is a business cost - but diesel is going up at a similar rate, like the whole economy. In principal this is why rail fares are adjusted annually in line with inflation, it just isn't working very well with rapid changes in inflation rates at the moment. Expect cash flow impacts on train operators, but they will hope to recoup on falling energy prices at some point in the future.

Buying energy in advance helps with the price because you (as user) effectively agree a price with one or more generators based on their cost of production. If you can find a cheap to operate power station, you get to split the savings with the operator/owner of the power station. In the spot electricity wholesale market, the bids from power stations come in, and are stacked from the cheapest until there is enough supply to match demand. Then everyone gets paid the price bid by the most expensive generator in the stack. At the moment this means that gas generation (which thanks to the "dash for gas" can't be avoided) dictates the wholesale market close price, and all the cheaper to operate generators in the market get paid more than they bid (the Contract For Difference subsidy scheme muddies the waters a bit, most of them are paying the Gvt. back at the moment).

Why would any generator make an advance deal? Because if your bid is too expensive, you might not win the half-hourly auction, and end up being paid nothing (but you probably can't shut your power station down instantly and use no fuel). So an advance deal is a trade off of risk vs. reward for both parties in the short to medium term.

 

[JamesT]

I believe that the train operators buy their electricity directly from the market these days, not from Network Rail. This requires energy meters on the trains, but most stock is now so fitted. Track access charges for electric stock are uplifted to account for Network Rail transmitting the electricity to the train. So Network Rail doesn't have to do a great deal (it's energy bill for stations, signalling etc. excepted).

The vast majority of rail operators won't pay the spot (closing) wholesale price, because they will have bought the energy (which they know they are going to need) in advance. Could by anywhere from months to a couple of years in advance. It will still be costing them more, but advance deals insulate them from short term volatility. The exceptions to buying in advance will be freight and charter operators where there is a lot more uncertainty (or just not a lot of volume overall). In the longer term the contract-in-advance prices also are going up, which is a business cost - but diesel is going up at a similar rate, like the whole economy. In principal this is why rail fares are adjusted annually in line with inflation, it just isn't working very well with rapid changes in inflation rates at the moment. Expect cash flow impacts on train operators, but they will hope to recoup on falling energy prices at some point in the future.

Buying energy in advance helps with the price because you (as user) effectively agree a price with one or more generators based on their cost of production. If you can find a cheap to operate power station, you get to split the savings with the operator/owner of the power station. In the spot electricity wholesale market, the bids from power stations come in, and are stacked from the cheapest until there is enough supply to match demand. Then everyone gets paid the price bid by the most expensive generator in the stack. At the moment this means that gas generation (which thanks to the "dash for gas" can't be avoided) dictates the wholesale market close price, and all the cheaper to operate generators in the market get paid more than they bid (the Contract For Difference subsidy scheme muddies the waters a bit, most of them are paying the Gvt. back at the moment).

Why would any generator make an advance deal? Because if your bid is too expensive, you might not win the half-hourly auction, and end up being paid nothing (but you probably can't shut your power station down instantly and use no fuel). So an advance deal is a trade off of risk vs. reward for both parties in the short to medium term.

I believe that may be true for the freight operators, but I was under the impression that the passenger TOCs were supplied by Network Rail. NR signed a 10 year deal with EDF so they have fixed prices - https://www.networkrailmediacentre....ail-electrification-programme-in-a-generation

Network Rail has awarded EDF Energy a ten-year deal for the supply of low carbon electricity to power Britain’s growing electrified rail network.

The contract will see EDF Energy, the largest producer of low-carbon energy in the UK, supply around 3.2TWh of electricity a year, powering a network which carries 3m passengers and tens of thousands of tonnes of freight a day. EDF Energy will ensure 100% of the electricity it supplies to Network Rail will be matched by low carbon energy generated from its eight nuclear power stations.

So as long as the prices return to a somewhat lower level in the next couple of years it's okay, otherwise I'd assume NR would have to pass on the new higher prices.

 

[Agent_Squash]

I believe that the train operators buy their electricity directly from the market these days, not from Network Rail. This requires energy meters on the trains, but most stock is now so fitted. Track access charges for electric stock are uplifted to account for Network Rail transmitting the electricity to the train. So Network Rail doesn't have to do a great deal (it's energy bill for stations, signalling etc. excepted).

This is incorrect. All electricity for the rail network is purchased through Network Rail as they own the infrastructure.
Traction electricity is through a deal with EDF, non traction is with Npower iirc.

EDF’s deal with NR expires in 2024. TOCs do have electricity usage measuring equipment onboard - but only in a way so they can provide accurate figures for their usage rather than relying on an estimate which doesn’t account for regen braking.

 

[DarloRich]

It is fine at the moment as the price is fixed at a decent rate. When that contract expires..............

 

[Clarence Yard]

When the prices do increase the 14 DFT TOCs will be protected from any cost exposure, via their NRC, because the DfT is now on risk for the TOCs costs.

 

[Starmill]

It's likely that the rates that have been negotiated are commercially confidential so we probably won't have any details beyond the obvious: the long term trend is up and short term rises are happening quite fast. As pointed out above, you're most exposed when it's time for contract renegotiation, though contracts probably include a tracking mechanism and aren't likely to be fixed price for as long as ten years.

As the railway industry is also one of the largest industrial consumers of electricity, if the gas crisis gets really bad during December, January and February, gas for electricity generation may be rationed in order to preserve supply for domestic boilers. In that circumstance, limits on industrial electricity consumption are also likely in order to keep the grid in balance. There is a strong chance of major industrial users of both gas and electricity being asked to cut back or disconnect. It's not going to be pretty.

 

[tomuk]

It is fine at the moment as the price is fixed at a decent rate. When that contract expires..............

They aren't at fixed price NR have an agreed contract with EdF but within this are able to buy and sell on the market, the TOCs and FOCs can either take a fixed price or also join in trading.

 

[uww11x]

FOC's pay the going rate. DRS/DBC replaced 88s/90s with diesels last winter when the price went up.

 

[Nicholas Lewis]

With the wholesale price of electricity closing yesterday at 87p per KWh and with industrial and commercial users not being protected by price capping, how will Network Rail pass on the increased costs to TOCs and freight operators and how will they deal with or mitigate these costs?

NR last reset the price of electricity for FOCs and smaller users of traction energy back in March at the price of 19.166p/kwh for any operator that wanted to join the buying group which is stonking good deal so lets hope all operators bought in.

https://www.networkrail.co.uk/wp-content/uploads/2022/03/EC4T-Freight-tariff-letter-2022-23.pdf

Whether this rate is reflective of the rate charged to the big energy consuming TOCs under the EdF isn't clear but given the rate for wholesale electricity was around 175-200/MWh in March seems they may have bought forward for 12mths on behalf of these operators.

Current wholesale pricing is 400-450/MWh for big consumers and whilst its clearly double NRs current rate its not 87p/kwh that small business are probably being quoted.

Looking to 2024 expiry as EdF largely only run nukes now in UK I suspect NR got a rate well below 19p but whether it was fixed rate for ten years (unlikely) but probably has some mechanism for an annual uplift maybe CPI but could be related to an electricity index Whats for sure is EdFs nukes will virtually all be off line come end of 2024 and with Hinkley Point now delayed into late 2020's and given whats happened in France with that design potentially even later can't see they will be able to offer such a good deal this time around so industry will be confronted with an increased cost.

So others say doesn't matter as its cost pass through but it does matter and in the key area of business cases for more electrification its going to have an adverse effect against diesel which hasn't experienced anywhere near the same cost increase per unit of energy.

Finally HS2 won't be able to afford the energy for 360km/h vs 300km/h so other than testing can never see that being the commercial speed.

 

[Starmill]

diesel which hasn't experienced anywhere near the same cost increase per unit of energy.

It hasn't yet, no. But much of that is because of cheap supply from Saudi Arabia, who are widely thought to have been exaggerating their reserves.

Finally HS2 won't be able to afford the energy for 360km/h vs 300km/h so other than testing can never see that being the commercial speed.

There's no financial case for 360 over 320 anyway, even at 2010 - 2020 average electricity prices, because of the extra energy consumption and wear and tear. This has been widely discussed but we won't know the answer as to what they go with for another decade almost.

 

[devon_metro]

It hasn't yet, no. But much of that is because of cheap supply from Saudi Arabia, who are widely thought to have been exaggerating their reserves.

Can you elaborate??

 

[Starmill]

Can you elaborate??

The price of all fossil-derived fuels will rise significantly in the coming decades, just as natural gas is at the moment. It's purely a guessing game as to exactly when it happens, but it's coming all the same. Oil from Saudi Arabia is usually the cheapest that's readily available in the mass market.

 

[devon_metro]

The price of all fossil-derived fuels will rise significantly in the coming decades, just as natural gas is at the moment. It's purely a guessing game as to exactly when it happens, but it's coming all the same. Oil from Saudi Arabia is usually the cheapest that's readily available in the mass market.

Sorry, I was refering to the statement about KSA overstating its (I assume) oil reserves. It's the first i've heard of it.

Future price rises aren't a given - it depends on demand. If the world is to meet its climate targets, oil demand needs to fall. If low cost producers flood the market (as per recent oil price crashes), then we'll see low prices. In terms of cheapest oil available in the market, whilst it may be one of the lowest cost to produce, the Saudi's see the upside, not us the consumers. Of course they have a lot of ability to move the market due to the scale of production.

The ability to move oil to where it is needed much easier than gas should mean we don't see such a crazy market as with gas.

 

[Starmill]

Future price rises aren't a given - it depends on demand.

Do you see any meaningful progress in transitioning away from hydrocarbon-based fossil fuels? I do not. Therefore I'm afraid that price rises are inevitable unless that changes, because exploration and investment in new oil and gas has extremely long lead times and has nearly ceased. Even if there were new investment now in oil and gas exploration, the low-cost reserves have already been substantially used up so you'd be looking at more expensive drilling options and thus much higher prices.

The ability to move oil to where it is needed much easier than gas should mean we don't see such a crazy market as with gas.

Certainly in the short term yes. However, in the long term the market conditions are similar.

Sorry, I was refering to the statement about KSA overstating its (I assume) oil reserves. It's the first i've heard of it.

Saudi oil reserves ‘overstated’

Leaked cables reveal US fears of kingdom not having enough oil to prevent prices from spiralling.

www.aljazeera.com

The most recent news articles on it come from the Wikileaks Cables, but since the United States sold its stake in Saudi Aramco there's been some significant doubt about whether the Saudi government is telling the truth about its reserved apparently discovered since then.

 

[LNW-GW Joint]

Looking to 2024 expiry as EdF largely only run nukes now in UK I suspect NR got a rate well below 19p but whether it was fixed rate for ten years (unlikely) but probably has some mechanism for an annual uplift maybe CPI but could be related to an electricity index Whats for sure is EdFs nukes will virtually all be off line come end of 2024 and with Hinkley Point now delayed into late 2020's and given whats happened in France with that design potentially even later can't see they will be able to offer such a good deal this time around so industry will be confronted with an increased cost.

Network Rail claims it only uses renewable electricity under the EdF deal, mostly nuclear based on EdF's French nuclear fleet.
There is presently considerable stress in that fleet, and continued delay replacing the UK nuclear fleet.
In the meantime many wind/solar/hydro sources have come online, plus more continental interconnectors, so the energy mix in contracts going forward (from 2024 when the current EdF deal expires) might look very different.
I think we can expect a price jump for a number of reasons, which will just feed into the wider inflationary spiral of rail costs.
The full nationalisation of EdF by the French government might also have an impact.

 

[STINT47]

If electricity costs continue to rise whilst diesel prices come down we could see TOCs who use bi modals crossing to run them on diesel under the wires. Not great for the environment but if it helps keep them in business it may have to be done.

 

[devon_metro]

The most recent news articles on it come from the Wikileaks Cables, but since the United States sold its stake in Saudi Aramco there's been some significant doubt about whether the Saudi government is telling the truth about its reserved apparently discovered since then.

Aramco's reserves have been recently independently audited by American consultants. Even at the most recent published number - 253 billion barrels of oil and gas, that's equivalent to over 50 years of production at today's rate. Even if it were overstated by 20%, the demand for oil in 2060 is going to be very different to today. Many government's are legally bound to reducing emissions. I wouldn't be particularly concerned about Aramco's ability to deliver production for decades to come. There's probably a greater risk that OPEC will manage the market (and keep prices higher) if demand does fall, as needed to reduce carbon emissions. Only last week there was talk of slowing production increases as the price had fallen below $100/bbl. As for demand, even Saudi Arabia is talking about big investments in electric vehicles, and fuel is dirt cheap, so you may not see change yet, but it's coming.

The big issue I see for UK power prices is that we don't yet have a solution for when the wind doesn't blow.

 

[snowball]

Drifting wildly off topic but why is electricity more expensive than gas for UK domestic customers? and is it in the power of the UK government to change that?

 

[JamesT]

Drifting wildly off topic but why is electricity more expensive than gas for UK domestic customers? and is it in the power of the UK government to change that?

Because electricity is generated from gas, so you have the costs of doing that on top of the costs of simply supplying the gas.

 

[Starmill]

Aramco's reserves have been recently independently audited by American consultants. Even at the most recent published number - 253 billion barrels of oil and gas, that's equivalent to over 50 years of production at today's rate. Even if it were overstated by 20%, the demand for oil in 2060 is going to be very different to today. Many government's are legally bound to reducing emissions. I wouldn't be particularly concerned about Aramco's ability to deliver production for decades to come. There's probably a greater risk that OPEC will manage the market (and keep prices higher) if demand does fall, as needed to reduce carbon emissions. Only last week there was talk of slowing production increases as the price had fallen below $100/bbl. As for demand, even Saudi Arabia is talking about big investments in electric vehicles, and fuel is dirt cheap, so you may not see change yet, but it's coming.

The big issue I see for UK power prices is that we don't yet have a solution for when the wind doesn't blow.

Oh decarbonisation is coming. That's not what I was saying. Although it also won't be coming fast enough to actually halt climate change. What I was saying is that the supply isn't adequate for the current price level to be maintained in the long term. How is there going to be enough oil in 10 or 15 years for retail diesel to be as cheap as £2 per litre.

 

[tomuk]

Oh decarbonisation is coming. That's not what I was saying. Although it also won't be coming fast enough to actually halt climate change. What I was saying is that the supply isn't adequate for the current price level to be maintained in the long term. How is there going to be enough oil in 10 or 15 years for retail diesel to be as cheap as £2 per litre.

Well based on current trends due to the 'dieselgate' hysteria 'retail' diesel will be for trucks and vans only.

 

[Teaboy1]

Wellover half is derived from Gas as per above snap shot.
This is why our electricity is so expensive at moment to respond to thread by JamesT.
Will be even greater when the sun goes down and Solar = 0!

 

[Trainbike46]

If electricity costs continue to rise whilst diesel prices come down we could see TOCs who use bi modals crossing to run them on diesel under the wires. Not great for the environment but if it helps keep them in business it may have to be done.

That is highly unlikely to ever be the case; Electric drive is so much more efficient (easily exceeding 80%) compared to diesel (usually 20-25%), and the price advantage of electric is so large that it is highly unlikely to ever be cheaper to run a bimode on diesel compared to electric

 

[tomuk]

Wellover half is derived from Gas as per above snap shot.

One has to be careful looking at snapshots. Aside from the variation in conditions we are in an unusual situation as we are exporting a lot of power currently due to gas shortages in Europe and reduced nuclear output in France.

Fossil fuels were 35% generation in 2021.

 

[Egg Centric]

I believe that the train operators buy their electricity directly from the market these days, not from Network Rail. This requires energy meters on the trains, but most stock is now so fitted. Track access charges for electric stock are uplifted to account for Network Rail transmitting the electricity to the train. So Network Rail doesn't have to do a great deal (it's energy bill for stations, signalling etc. excepted).

The vast majority of rail operators won't pay the spot (closing) wholesale price, because they will have bought the energy (which they know they are going to need) in advance. Could by anywhere from months to a couple of years in advance. It will still be costing them more, but advance deals insulate them from short term volatility. The exceptions to buying in advance will be freight and charter operators where there is a lot more uncertainty (or just not a lot of volume overall). In the longer term the contract-in-advance prices also are going up, which is a business cost - but diesel is going up at a similar rate, like the whole economy. In principal this is why rail fares are adjusted annually in line with inflation, it just isn't working very well with rapid changes in inflation rates at the moment. Expect cash flow impacts on train operators, but they will hope to recoup on falling energy prices at some point in the future.

Buying energy in advance helps with the price because you (as user) effectively agree a price with one or more generators based on their cost of production. If you can find a cheap to operate power station, you get to split the savings with the operator/owner of the power station. In the spot electricity wholesale market, the bids from power stations come in, and are stacked from the cheapest until there is enough supply to match demand. Then everyone gets paid the price bid by the most expensive generator in the stack. At the moment this means that gas generation (which thanks to the "dash for gas" can't be avoided) dictates the wholesale market close price, and all the cheaper to operate generators in the market get paid more than they bid (the Contract For Difference subsidy scheme muddies the waters a bit, most of them are paying the Gvt. back at the moment).

Why would any generator make an advance deal? Because if your bid is too expensive, you might not win the half-hourly auction, and end up being paid nothing (but you probably can't shut your power station down instantly and use no fuel). So an advance deal is a trade off of risk vs. reward for both parties in the short to medium term.

The background information about how the wholesale electricity market works here is exceptionally interesting @RichardAsh1981 - could you recommend some resources for learning more about it?

 

[RichardAsh1981]

The background information about how the wholesale electricity market works here is exceptionally interesting @RichardAsh1981 - could you recommend some resources for learning more about it?

A good question with a lot of complexity hiding underneath it! Many of the industry documents which govern the system are in the public domain, either as legislation or various industry "codes" (https://www.nationalgrideso.com/industry-information/codes) but these are far from easy to understand unless you are a specialist in the field.

The label for the arrangements I attempted to summarise is "New Electricity Trading Arrangements" (as introduced in 2001) then renamed as "British Electricity Trading Transmission Arrangements" in 2005.

The Government's "Review of electricity market arrangements" consultation document (July 2022) has an attempt at a 1-page summary of the current system on page 23: https://assets.publishing.service.g...00/review-electricity-market-arrangements.pdf but it's not great (the list of all the additional features added on top of the 2001 system to try and achieve the subsequent desired outcomes is notable!).

Dieter Helm (and economist) was commissioned in 2017 to produce a Cost of Energy Review, which is well written in that you do not need to be an economist, or energy specialist, to understand it. Page number 80 would be the relevant section for electricity generation costs (the railway does quite a bit of it's own distribution of power, so does not pay all of the distribution costs discussed) https://assets.publishing.service.g...nt_data/file/654902/Cost_of_Energy_Review.pdf Dieter does however have Views (not very complementary about the historic or current system!), and pre-dates the massive rises in gas costs we have seen since 2020. he continues to independently publish at http://www.dieterhelm.co.uk/ but that is probably a side track.

For statistics (like how much generation capacity we have, and what fuels are used over the year), honorable mention to the Office for National Statistics "Digest of UK Energy Statistics (DUKES)": https://www.gov.uk/government/stati...est-of-united-kingdom-energy-statistics-dukes (but this is a retrospective compilation of data, so don't expect it to tell you anything about 2022!).

The Energy Systems Catapult (government-funded academic research body) has produced "An Introductory Guide to the GB Energy Industry: Chapter 2 – Electricity Market Structure and Statistics" https://es.catapult.org.uk/guide/th....com/2021/08/GB-Energy-Industry-Chapter_2.pdf (You'll need to fill a form out to download the PDF). It's rather thin at 8 pages, and probably not worth the faff. It was authored by Cornwall Insight, who are worth knowing about.

Most of the predictions (broadly accurate as it turned out) for changes to the retail price cap quoted in the media have been from Cornwall Insight https://www.cornwall-insight.com/. They are market analysts and you pay for the good stuff, but they do have some free stuff on their website, and if you sign up for their newsletter you get to see more. I know plenty of people in the energy industry do, they have a reputation for knowing their stuff.

 

[Ken H]

The background information about how the wholesale electricity market works here is exceptionally interesting @RichardAsh1981 - could you recommend some resources for learning more about it?

Look at https://gridwatch.templar.co.uk/ its a visual presentation of current demand and the mix of power sources for leccy.
There is history too. You can see the data for up to a year.
Mouseover the dials and it gives a bit of text about the data.
For nerds you can download the data to excel to do your own analysis.
Link on there to a sister site for French data.

 

[Deepgreen]

Sorry, I was refering to the statement about KSA overstating its (I assume) oil reserves. It's the first i've heard of it.

Future price rises aren't a given - it depends on demand. If the world is to meet its climate targets, oil demand needs to fall. If low cost producers flood the market (as per recent oil price crashes), then we'll see low prices. In terms of cheapest oil available in the market, whilst it may be one of the lowest cost to produce, the Saudi's see the upside, not us the consumers. Of course they have a lot of ability to move the market due to the scale of production.

The ability to move oil to where it is needed much easier than gas should mean we don't see such a crazy market as with gas.

Indeed, but, sadly, the world is very clearly not going to meet its so-called targets, or anything remotely like it. Consumption will continue at maximum possible levels - it's human nature and anyone wanting to be elected to office can promise limits and action to curb consumption (and sign all the documents they need to) to ensure election, and then abandon the promises for a multitude of reasons. Demand and consumption will simply rise and rise for the foreseeable future, and probably as long as fossil fuels play any significant part in the global economy. Johnson's promised 'green recovery' from C19 is a classic example - not a jot of truth in it, just an empty soundbite.

 

[Nicholas Lewis]

Indeed, but, sadly, the world is very clearly not going to meet its so-called targets, or anything remotely like it. Consumption will continue at maximum possible levels - it's human nature and anyone wanting to be elected to office can promise limits and action to curb consumption (and sign all the documents they need to) to ensure election, and then abandon the promises for a multitude of reasons. Demand and consumption will simply rise and rise for the foreseeable future, and probably as long as fossil fuels play any significant part in the global economy. Johnson's promised 'green recovery' from C19 is a classic example - not a jot of truth in it, just an empty soundbite.

If they don't totally neutralise the price increases there will be demand destruction which is no bad thing. Personally I would have a policy of telling the public we need you to cut back as we need enough gas to run the ovens cooking your chocolate digestives!!