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High electricity costs are a harsh reality for Britain's AI dreams: Bousso

NESO report: Data centre energy consumption to triple by 2035

The cost challenge of nuclear and offshore wind investment is highlighted

The UK has the highest wholesale electricity prices of all developed economies

Ron Bousso

LONDON, 7th August - Britain's ambitions to boost its economy and tap into the AI revolution face the harsh reality of the fact that the abundance, clean, and reliable electricity supply required to achieve this is unlikely to be realized any time soon.

The Prime Minister Keir starmer has laid out a number of major industrial policies to revive Britain's stagnant economy. This includes pouring money into the artificial-intelligence industry which, according to the government, would increase productivity and generate over $50 billion in gains each year.

The data centres that run AI are highly energy-intensive and often require a separate source of power to operate. According to grid operator NESO the UK's electricity demand is expected to increase from 319 terawatt-hours in 2024 up to 450 TWh by 2035. Data centres are expected to triple their power consumption during this period.

The government's plans to modernise and expand the country's aging power system through low-carbon sources of energy could paradoxically complicate this effort by increasing Britain's already high energy costs.

EXPENSIVE PLANS

UK power prices are the highest in any developed country. Wholesale electricity prices increased by 40% from a year ago to $115 per megawatt-hour on average, according to International Energy Agency. This was mainly due to an increase in gas-fired generation during cold weather conditions and a reduction of wind output.

This compares to average prices of $100/MWh in Germany and France, as well as $48/MWh in the United States.

The British government wants to lower energy prices through a combination of measures, including reducing the grid's dependence on natural gas, increasing renewable power generation and battery storage, improving transmission infrastructure, and connecting grids with neighboring countries.

These upfront investments, however, will initially increase the cost of electricity for consumers.

Off-Course

Offshore wind represents the flagship of Britain’s renewable energy policy. The government aims for offshore wind capacity to increase to 43-50 gigawatts (GW) by the end decade from the current 15 GW.

Despite rising construction and finance costs, the government increased the maximum guaranteed price for offshore wind projects or the strike price in the auction this year by 11% compared to the previous round. This was a follow-up to a 66% increase in the last auction.

The actual strike price of the contract for difference auction, which starts in this month, could be lower than government ceiling.

Cost increases forced Danish developer Orsted to halt the development of its 2.4 GW Hornsea 4 off-shore wind project in May.

Nuclear energy is a low-carbon alternative that the UK is also exploring. The UK government announced on 22 July that it had secured investment to develop the Sizewell nuclear plant, Britain's 2nd new nuclear plant within a decade. It is expected to become operational by 2030.

Nuclear energy is a reliable source of low-carbon, steady energy. The current sizewell development costs of 51 billion pounds (38 billion pounds) are nearly twice the original estimate from earlier in the decade. This is due to inflation and increased material costs. Cost overruns in nuclear projects are not uncommon.

The focus on offshore wind and nukes could increase the cost of electricity, reducing British industry's competitiveness and decreasing support for energy transition.

CHOICE OR NO CHOICE

Does the government offer any other viable options?

Andrew Birch is the CEO of OpenSolar. He believes that Britain needs to liberalise their power market. This would require removing subsidies, such as CfDs, and letting the market determine which energy sources can best meet consumer demands.

Although the idea is a good one, given that energy is so important to Britain, both in terms of its economy and security (especially with the AI race and the energy transition), the government will not be willing to relinquish control.

A second option would be to transform the UK's old, centralised electricity system into an operation based on many small batteries and generators. This would also increase the grid's efficiency. It would cost billions in advance costs.

All infrastructure and investment could be assessed by general taxation, rather than through energy bills. This would reduce sticker shock for consumers each month.

This option is unlikely be to gain much political support because voters dislike higher taxes as much as they hate high energy prices.

This leaves the possibility of increased private-public partnerships or government-financed investments. To avoid a sustained backlash, the latter would have to be clearly communicated to markets.

If properly planned, UK investments in renewables, nuclear power, batteries, and transmission could pay off. However, given the many challenges, it is unlikely that the benefits will be felt for another decade. This spells trouble for Britain’s ambitious AI plans.

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(source: Reuters)