Renewable energy is free, isn’t it? The sun shines and the wind blows, tides and rivers flow without us – all we need to do is build the technology to harness it. So with ever-more of these free renewable sources in our energy system, why are prices still rising. Clearly the picture is not straightforward – we need to look longer term to understand the impact renewables will ultimately have on UK energy supply and costs.
Not all about the price
Renewables are desirable for all sorts of reasons. They improve our energy security, reducing the UK’s reliance on international gas and oil markets – a reliance that not only makes us vulnerable to price fluctuations but puts us at the mercy of regimes we’d much rather not be associated with.
Renewables are also fantastic for tackling climate change. Yes there are carbon costs of building wind turbines and solar panels, but these are a fraction of those of extracting and burning fossil fuels.
The notion of lower prices for renewable energy is often lumped in with the benefits of energy security and climate change, but right now that’s not the reality. In the long run (15 years or beyond) the widespread adoption of renewable energy could significantly reduce energy prices – but only if certain other changes happen first. Let’s explore them.
Tethered to marginal pricing
Government figures* show the proportion of UK energy generated by renewables increased from 3% in 2000 to 42% in 2022, while the proportion generated by fossil fuels decreased from 73% in 2000 to 41% in 2022. These statistics are encouraging but hands up if you’ve seen your bills drop as a result.
The fact is the UK’s energy system is not yet set up to reap the full benefits of renewable energy. The wholesale electricity market in the UK operates on a ‘marginal pricing’ system, where the price of electricity is determined by the most expensive generation method that needs to be turned on to meet demand every half hour. Renewables may be clean, but they are neither consistent nor produced in anywhere near enough quantity to meet peak demand, so that marginal energy unit is frequently generated from natural gas.
As long as we’re tied into marginal pricing – indeed whatever pricing mechanism we adopt – reducing demand is critical to cutting costs; that means behaviour change and energy efficiency retrofit. It may be in this time frame governments will be forced – by their public promises to reduce carbon – to change the market mechanism and decouple energy prices from gas prices. There are complicated methods for doing this but if we can this would be transformative.
Infrastructure costs still high
At the same time about 43% of our standing charges go towards maintaining and developing our existing energy infrastructure – cables, pylons and all the other equipment needed to deliver power to our homes.
As we invest in solar and wind farms in distant these costs will stay high, but that should begin to change as the infrastructure develops and we gain from economies of scale.
Harnessing public opinion
Whether or not most people know about or understand marginal pricing and the limitations of the electricity grid, it’s a fair generalisation that the UK public supports the idea of renewable energy as critical to addressing the climate emergency. And – it’s common sense after all – people expect to see a reduction in energy prices as a result. Clearly there’s a mismatch between the drive towards renewables and money in consumers’ pockets – and that stops clean energy gaining the momentum and support of the electorate that could force policy change.
Reducing demand is crucial
The problem we face is one of supply and demand; if we reduce our demand for energy the supply of renewables will meet it more often – reducing our dependence on that marginal unit price. Worryingly, however, demand is predicted to continue to grow as we electrify our heating and transport – some estimates predict a rise of 30% or more. These figures are in addition to very ambitious targets for improving the energy efficiency of our homes and businesses – targets on which we are falling woefully behind. If we don’t retrofit our leaky homes and reduce day-to-day energy use we could see demand rise by as much as 50% on today’s figures. The UK’s track record on energy efficiency is patchy at best and missing these energy-saving targets will put further demand on the grid – pushing prices up further.
Long-term success factors
There is a clear route to reduced energy costs through renewables over the next fifteen years, but only if we save energy and reduce demand. If we can’t achieve this there is a clear risk that, despite a lower carbon and more secure energy system delivered by renewables, energy prices will remain high for decades to come.
We must invest in renewables, invest in our infrastructure, and change the market mechanism that prices our energy – and we must all play our part in reducing energy consumption – if we are to see the benefits of renewable energy any time soon.
* Why is cheap renewable electricity so expensive on the wholesale market?
Why are UK energy prices so ridiculously high? – King’s Think Tank
