Tag: energy prices

The Case for Diversification

2 April 2026

Opinion
A resilient energy system demands multiple sources of power generation, flexible assets that can rapidly respond to spiking demand and supply-stabilizing storage technologies.

This article first appeared in Energy Intelligence

At the onset of the war in the Middle East, global energy markets reacted instantly. Oil prices surged and gas markets tightened, bringing the risk of renewed cost pressure for consumers and industry into focus. In many power markets, gas-fired generation still sets the marginal price of electricity, so when gas prices spike, electricity prices tend to follow. For the UK, a nation overly dependent on natural gas, this is a familiar dynamic following the shockwaves from Russia’s invasion of Ukraine. Meanwhile, the price of gas in the UK — which imports a large portion of its supply — surged by almost 25% following strikes on critical energy infrastructure in the Middle East. These events expose structural weaknesses in modern energy systems. The risk of disruption has long been visible — in geopolitics, supply concentration and infrastructure constraints — and it has been consistently underestimated.

For decades, countries have optimised for efficiency under normal conditions, focusing on low-cost generation, streamlined supply chains and just-in-time delivery. In doing so, systems have been left with limited shock absorbers.

When disruption hits, there is little buffer — only pass-through cost.

The impact is not just being felt in household bills. For energy-intensive industries, this volatility increases uncertainty, which can delay or deter investment. For governments, it translates into fiscal strain and heightened political exposure. For economies, it erodes competitiveness at the margin.

Pricing the Shock

High energy prices are damaging, but unpredictable energy prices can be worse.

The challenge of this unpredictability is even more acute as global electricity demand from data centres accelerates. Data center power demand could increase to 945 terawatt hours by 2030, more than Japan’s total electricity consumption.

Electrification, industrial growth and expanding digital infrastructure will further accelerate power demand. In this context, reliable and affordable power is nonnegotiable; it’s a prerequisite for growth and security.

Geopolitical challenges are increasingly being seen as a structural feature of the energy landscape, not episodic, and the 2020s are a clear lesson for energy security: The risks were always present, and the system hasn’t been designed to absorb them.

Security Trumps Decarbonisation

At CERAWeek this year, that reality was front and center. Across discussions with industry leaders, policymakers and investors, one theme came through clearly — the era of single-solution thinking is over:

  • Decarbonisation, while still an essential part of the conversation, is taking a back seat to energy reliability and affordability.
  • A diversified portfolio approach is progressively becoming the new default.
  • Power demand is a landscape-shaping force that favors flexibility.

Taken together, these shifts suggest the conversation is moving away from focusing on how to decarbonise energy systems toward how to make them durable, recognising that when reliability and affordability come under threat, sustainability is often deprioritised. Without a more holistic approach to balancing all three, we risk repeating that pattern and exacerbating the climate crisis.

Markets Redefined

This shift has profound implications for economic competitiveness. Markets with stable, reliable and affordable power systems will have a decisive advantage.

Those without could face higher costs, slower growth and reduced investment. Energy policy is, in effect, becoming inextricably linked with industrial policy.

Recent geopolitical crises have punctuated the need to avoid replacing one form of dependence with another; instead transitioning toward building energy systems that are more resilient by design. Today, that means diversification.

A resilient energy system demands multiple sources of power generation, flexible assets that can rapidly respond to spiking demand and supply-stabilising storage technologies. No single source can deliver consistent performance across all conditions, so a diversified mix ensures that when one becomes unavailable or costly, others can step in to maintain supply and limit price volatility.

In the wake of the latest energy shock following the war in the Middle East, inadequate long-term planning has left politicians concerned about pricing and rushing to mobilise short-term solutions — some of which could come at the expense of efforts to progress the energy transition, which risks undermining a truly resilient system long term. For example, some European countries called for quick reform to minimise the EU Emission Trading System’s impact on power prices, while others called for a full suspension.

One outlier in Europe is Spain, which saw renewable energy capacity rise to 57% of the country’s electricity mix in 2025. Spain has added over 40 gigawatts of solar and wind capacity since 2019.

As a result, gas sets electricity prices for a significantly smaller share of the day — around 15% — reducing exposure to global gas price volatility relative to other European markets.

On the other hand, the UK’s experience illustrates the cost of limited diversification. Despite rapid growth in renewables, wholesale power prices remain heavily exposed to gas, a dynamic that has contributed to some of the highest electricity bills in Europe.

Operators are increasingly responding by building more balanced portfolios that combine generation, storage and flexible assets to manage volatility. Drax’s own portfolio, spanning biomass, pumped storage, battery systems and open cycle gas turbines, reflects this shift, providing dispatchable power and system services that help stabilise the grid when supply tightens.

Resilience by Design

Designing for resilience requires a shift in mindset. Disruption should not be treated as exceptional, but as inevitable. The goal is not to predict the next shock, but to ensure the system can withstand it.

In a more volatile world, resilience is becoming the defining measure of energy security. The countries that succeed in the next phase of the energy transition will not be those with the most generation capacity but those with systems designed to endure disruption.

Ross McKenzie is the chief corporate affairs and sustainability officer for UK electricity generator Drax Group. The views expressed in this article are those of the author.

Price matters – lowering the cost of the energy transition

14 April 2025

Opinion

  • Analysis by Baringa shows that Drax Power Station, operating under a new low-carbon dispatchable CfD, will lower the costs of the UK clean energy transition between 2027 and 2031 by £1.6 to 3.1bn, compared with a scenario without Drax.
  • When there isn’t enough electricity from weather dependent renewables to meet demand, Drax will step in to increase generation.
  • This brings down the amount of costly ‘standby’ capacity the Government needs to buy on the capacity market to avoid shortages
  • It also makes the UK less reliant on gas and imports via interconnectors, reducing the upwards influence they have on the wholesale cost of energy.
  • By displacing gas, Drax will reduce emissions from the electricity sector by approximately 4 MtCO2 between 2027 and 2031 – equivalent to taking 1.5 million diesel or petrol cars off the road.   

Over the next six years, the UK will increasingly rely on electricity generated by intermittent renewables and, by 2030, wind and solar will provide the majority of our electricity.

Drax Power Station will play an essential supporting role, stepping up generation when windless, gloomy weather causes wind and solar output to drop, and stepping down again to balance the grid when the weather changes.

As a clean energy source, its flexibility to do this is rare. Nuclear, for instance, provides a steady flow of clean electricity, but it can’t be turned up and down in the same way Drax’s biomass generation units can.

The Government has designed a new low carbon dispatchable CfD to support Drax’s flexible generation between 2027 and 2031.

Analysis by Baringa shows that this lowers the costs of the clean energy transition between 2027 and 2031 by between £1.6 – 3.1bn. There are two major factors in this: lower capacity market costs and Drax’s impact on the wholesale costs of electricity. These are explained in more detail below.

Reduced capacity market payments

The capacity market is colloquially referred to as the UK’s black out prevention system. It works by paying some energy generators to have extra ‘standby’ capacity available, which can then be drawn on when there is a shortage of electricity.

Prices in the capacity market vary from year to year and are affected by the amount of existing guaranteed capacity in the market – the more that there is, the less that needs to be procured in the capacity market, and the lower the price.

Drax Power Station provides 2.6GW of capacity. That’s more than any other single source in the UK and more than double the capacity of the average gas power station. It’s also more than the combined capacity of the UK’s two largest operational nuclear power stations – Heysham 2 and Torness (2.4 GW). *

Having it on the system brings down prices in the capacity market as the Government needs to purchase less capacity. Baringa estimate that this saves the UK between £640m and £1bn from 2027 to 2031.

Reduced wholesale energy cost

Electricity generated at Drax Power Station will make the UK less reliant on gas and interconnector imports. Both are typically expensive, particularly in the winter months when high demand in the UK and Europe, as well as Asia, pushes up prices.

For instance, when the UK was hit with a period of cold, gloomy windless weather in early January, demand increased as supply from wind and solar plummeted and the UK called on additional gas and imports to fill the gap. Power prices briefly surged to £2,900/MWh (40 times their average) as a result.

Research by Baringa estimates that Drax Power Station will reduce gas generation by around 4.3% and imports by almost 4.9%. This brings down the wholesale electricity price, saving £1.8bn compared to a counterfactual scenario without Drax, and potentially more if the price of gas is higher than anticipated.

Drax Power Station also reduces the UK’s exposure to ongoing price volatility in these markets, which influences the wholesale prices of energy in the UK on an ongoing basis. For example, the price of gas shot up by 130% when Russia invaded Ukraine in 2022 and, as the graph below shows, it continues to fluctuate.

Displacing gas reduces fossil fuel use and cuts carbon

Displacing gas not only has a price benefit, it lowers fossil fuel use. In the case of the low-carbon, dispatchable CfD with Drax, reducing emissions from the energy sector by 1 million tonnes CO2e per year (4 MtCO2e over the course of the four-year term). This equates to c.5% of total power sector emissions and is equivalent to taking 1.5 million diesel or petrol cars off the road.

Overall, as the UK moves to a clean energy system, Drax makes sense for consumers and the climate. Beyond 2030 there is also the potential to add carbon capture and storage technology to Drax Power Station, converting it to BECCS. This could create the world’s largest carbon removal facility; saving the UK £15bn on its path to net zero and helping position us at the leading edge of an exciting new technology area that will be critical to meeting global climate targets.

Report: ‘Value for money assessment of the low carbon dispatchable CfD for Drax Power Station’, Baringa (2025) can be read in full here.