Q4 2022: 2022 in review

Dr Iain Staffell, Professor Richard Green, Professor Tim Green and Dr Malte Jansen – Imperial College London, Dr Malte Jansen – University of Sussex, Professor Rob Gross – UK Energy Research Centre

2022 was arguably the most challenging year for the energy sector since the oil crises of the 1970s. Fears of supplies running out and sky-high prices have dominated the news, but record renewable output and an exceptionally mild winter helped keep the electricity system running smoothly.

Electricity prices

Fuel and electricity prices were already running at record highs at the start of the year. Demand was surging and supply chains struggled to keep up as the world emerged from COVID lockdowns. Then Russia’s invasion of Ukraine in February sent gas and electricity prices spiralling upwards. The wholesale price of electricity centred on £200/MWh over the year – five times higher than the average during 2010-19.

If other goods suffered the same inflation rate as electricity over the last two years, a loaf of bread would now cost £6, a pint would set you back £21 (£27 in London), and a new iPhone would cost north of £6,000.

Gas prices eased off slightly going into winter, as a concerted effort to fill gas storage sites over summer paid off, and the mild weather helped to quell heating demand. But as a whole, there were only four days in the whole of 2022 where power prices were lower than the long-term average across the previous decade.

What happens to power prices in 2023 depends entirely on the state of Europe’s gas market. Gas futures prices are continuing to fall, going below €60/MWh in February for the first time in 18 months. We unlikely to see prices fall back to their pre-COVID levels any time soon though, as cheap pipeline gas from Russia must be substituted with more expensive LNG imports. More price volatility can be expected as the UK and Europe start preparing for another winter without a major source of fuel for heating and electricity, and no guarantee of another mild winter or an end to the conflict in Ukraine.

Daily average power prices in 2022 versus the average during the 2010s.

Renewable generation

Britain’s renewables also helped to stem the impact of high gas prices. Together – wind, solar, biomass and hydropower generated 40% of the country’s electricity over the year. Increased renewable generation helped to restart the trend of annual reductions in carbon emissions from the power sector. Emissions fell by 3% from last year to 51 million tonnes of CO₂.

The share of Britain’s electricity generation from renewables. The dip in 2021 was due to below-average wind speeds that year.

Offshore wind has been the major driver of this growth, with production more than doubling over the last five years. Offshore wind capacity should continue rising strongly. Two major farms, Seagreen and Neart na Gaoithe are expected to come online in 2023, adding 1.5 GW of capacity. Dogger Bank (the world’s largest offshore farm) is also set to achieve first power in 2023, and could bring around 1 GW of capacity online by the end of the year.

Solar PV could also rebound strongly from its recent slump, potentially adding 2-4 GW of new capacity in 2023. This would bring it back to the levels of growth not seen since the peak installations of 2015. The cost of building new renewables is likely to rise in the coming year though. Financing costs are increasing as the Bank of England hiked interest rates for the tenth time to 4%. Borrowing costs for renewable developers have approximately quadrupled since 2019. Most of the cost of wind and solar farms is upfront capital – so, just like with a home mortgage, the borrowing rate has a defining impact on the lifetime cost of renewables.

Daily average output from renewable power sources in 2022 versus the average during the 2010s.

Electricity exports

2022 marked a huge change in our electricity trade, with Britain becoming a net exporter for the first time on record. Imports fell by one-third and exports quadrupled from last year to hit 17 TWh (6% of demand). The lines between England and France saw a dramatic 21 TWh swing in power traded, with GB exporting 7 TWh to France in 2022, compared to importing 14 TWh in 2021.

Electricity is the only energy vector where Britain can domestically produce all that it consumes (albeit partly using imported fuels). Britain produced 101% of its electricity consumption over the course of the year, compared to just 90% of the oil, 43% of the gas, and just 24% of the coal consumed in 2021.

Two factors drove the increase: Britain having lower gas prices than mainland Europe (hence it was cheaper to generate electricity here), and the widespread outages in France’s nuclear fleet which left Europe short on capacity. Overall, Britain’s gross electricity exports were worth over £3 billion at day-ahead prices, helping to reduce the country’s trade deficit. With France’s nuclear fleet slowly coming back online, capacity shortages may ease on the continent, bringing a return to the long-term trend of imports.

Whether the UK continues to be a net exporter depends heavily on the weather, both here and on the continent. Temperature affects demand; wind speeds and sunshine determine generation from renewables; and the amount of rain and snow affects the potential hydro generation over the following months. How many French reactors will return to service, or British ones will retire? Could the cross-channel pattern of gas prices reverse? What the future may hold for us is inherently unpredictable.