The last fixed-price government contracts offered for offshore wind energy in Britain—hardly the cheapest of renewables—were under 5p per kilowatt hour (kWh). That’s less than a quarter of the typical domestic tariff (what most people pay for electricity at home) that consumers are set to face in 2022. Households are paying for their electricity several times what it now costs to generate and transmit it from the cleanest energy sources at scale.
The design of electricity systems has failed to catch up with the revolution in renewable energy. Competitive electricity markets, established in many countries to try to minimize costs, are actually suffering the greatest price rises. This is not because governments elsewhere use taxes to subsidize electricity (though some do), but because in wholesale electricity markets, the most expensive generator sets the price.
Since renewables and nuclear will always run when they can, it is fossil fuels—and at present, unequivocally gas, plus the cost of taxes on CO₂ pollution—that set the price almost all the time, because some gas plants are needed most of the time, and they won’t operate unless the electricity price is high enough to cover their operating cost. It’s a bit like having to pay the peak-period price for every train journey you take.
If renewables are now so much cheaper, why can’t consumers buy electricity directly from them and avoid paying the gas and carbon costs?
A new golden age
Energy markets aren’t designed to cope efficiently with sources like renewables, which cost a lot to build but far less than fossil fuels to run. Governments offer long-term, fixed-price contracts to generators for their output of renewable energy. This has been the biggest driver of investment, while competitive auctions of these contracts, to companies keen to build renewables, have slashed building costs the most.
By contrast, households and other small consumers can rarely buy fixed-price contracts more than a year or two ahead, given the uncertainties in wholesale prices along with governments encouraging competitive switching between suppliers. The electricity generated from renewables contracts is fed into the rest of the system, which balances the variable output from renewables by generating more or less from conventional sources. That adds about around 1p per kWh to the cost of renewable electricity in the UK and Europe. Even accounting for this, the gap between cheap renewables and expensive final electricity is becoming unconscionable.
A decade ago, many energy experts projected a “golden age of gas.” Countries are likely to continue burning gas for some years. But with the drive to cut emissions and the advent of cheap renewables, electricity is likely to dominate the energy system in the future, powering heat pumps, electric vehicles, and more. This golden age of electricity cannot arrive as long as the price of electricity is decided by fossil fuels and their carbon costs.
What would electricity markets appropriate for renewable energy look like? In research I led with colleagues on electricity prices, we proposed a green power pool that would aggregate long-term contracts with renewable energy generators and sell the power on to consumers. The price would mainly be set by the actual investment costs of generators, rather than gas-driven wholesale markets.
When there isn’t enough renewable power being generated or stored—like on cold and calm winter days—the green power pool would buy electricity from the wholesale market for limited periods and quantities. To minimize those costs (and emissions), contracts could give discounts to customers who can use electricity outside of peak times, or those with two-way electric vehicle connections who can sell power back to the grid.
It won’t happen overnight. It won’t cut bills tomorrow. But new electricity needs a new market—one that cuts energy bills at the same time as decarbonizing the energy system.
This article is republished from The Conversation under a Creative Commons license. Read the original article.
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