Renewable energy is getting cheaper. Generation costs have fallen dramatically in recent years and continue to do so. That means you might expect energy costs to have fallen. And they have. According to an OECD NEA report, between 2008 and 2015 low marginal-cost variable renewable energy deployment “caused an electricity market price reduction of 24% in Germany and of 35% in Sweden”. While wholesale costs may have fallen, this hasn’t always resulted in savings being passed on to consumers as reduced retail costs. The power utilities often argue that this is because they face increased overall costs. Some of these, it’s sometimes claimed, are due to the various green levies, and the losses the utilities incurred managing the system with increasing amounts of variable renewables on the grid — the so-called “system costs”, an issue I explored recently.
That doesn’t seem to be the case in the UK, where energy bills have gone up much faster than the green levy and grid-balancing costs. Most of the rise has arguably been due to increased fossil fuel and supply costs. The various green energy levy surcharges, supporting the growth of renewables, have only been a small element. And the so-far small balancing costs, reflected in the levy supporting the new capacity market, have only just started to be passed through to consumers. What’s more, some of these levy costs may have been offset by consumer savings from the green initiatives – electricity use has fallen year by year.
Views differ on renewable energy futures
The government certainly claimed earlier that this was going to be the way ahead. In 2014, when green energy and climate policies were adding around 7% to a typical domestic bill, the Department of Energy and Climate Change (DECC) claimed that, as a result of the associated energy-saving programmes, the overall real net costs to consumers of the green energy programme up to 2020 was likely to be 7% lower than the costs they would otherwise have faced. Indeed, at one point DECC said the costs would be 11% lower.
Falling power use
That may have been somewhat optimistic, especially given the subsequent collapse of the Green Deal energy-saving programme and the watering down of the Zero Carbon Homes plan. In 2017, green and social taxes added 9.7% to typical UK dual — gas and power — bills, 17.5% to power bills, according to the Office of Gas and Electricity Markets (Ofgem). So costs have been building up. But so have savings, despite the demise of some of the efficiency initiatives. UK electricity use is now back to 1994 levels. Gas use is also down. Not all that reduction will be due to the efficiency schemes – rising energy prices and austerity will also have played a part. However, it is worth noting that, whatever the cause, according to the UK Climate Change Committee, while power and gas prices have risen, average domestic energy bills have actually fallen — it said that, after adjusting for inflation, household bills in 2016 were lower than in 2008.
It’s hard to say what will happen next, although energy retail prices are continuing their seemingly inexorable rise. As more renewables are added, the balancing costs may begin to rise, although the government has capped the overall green levy allocation, blocking many new green energy projects.
What we cannot have is a move to be more equitable at the expense of sustainability
Catherine Mitchell
What about the situation elsewhere? The UK is about mid-way in the global ranking of domestic energy prices, with relatively high generation costs but lower energy taxes compared with most others, the US apart. In Germany, taxes make up more than half the consumer charge. Much of this is to support green energy. A paper in The Electricity Journal (EJ) from Chukwuka Monyei, Ben Sovacool et al claims that green power puts prices up and casts this in “energy justice” terms — it will hurt the poor most. The paper says that the energy transition in Germany saw non-hydro renewable energy increase from 15% to 35% of the fuel mix between 2010 and 2017. Over the same period, Germany’s residential electricity tariffs increased by 16%, considerably more than in most other European countries. Similarly, California’s non-hydro renewable generation grew from 11% to 26% of total generation between 2010 and 2017. Average residential electricity prices increased by 10%, and inhabitants of the state pay considerably more than the national average for their electricity. And in Australia, non-hydro renewable energy grew from 4% to 9% of generation between 2010 and 2017, and the average residential electricity price increased by 12%.
Community renewables – on to version 2.0?
Are these implied correlations valid? The analysis of the UK above seems to imply that it is much more complex than that. For example, there will also be savings. As the EJ paper admits, Germany avoided about €8.8 billion of primary fuel import costs in 2015 due to renewable energy. Some are hopeful that, as renewables expand, savings like this will compensate for any increased costs and that in the longer term renewable costs should fall. Some also argue that, although balancing costs may rise, some of the new balancing technologies and mechanisms will reduce costs by better matching variable supply and variable demand. For example, by shifting demand from peak times, the introduction of variable time-of-use power tariffs could save both generators and consumers money.
Change-over costs
Some say that the new system will end up being cheaper than the one we have now. Nevertheless, a shift to a balanced flexible green energy system may impose some extra costs, at least initially as the system gets established. If that turns out to be the case, or if we really do have to face higher costs, as some suggest, how should these costs be distributed? Equally, pro-rata for energy use, across all consumer categories? Or can safeguards be built in for the less well off? And can some high energy users be hit harder — to get them to change?
In the UK, Ofgem has looked at the extra system-balancing costs. It seems to want them to fall mostly on renewables, which might initially seem logical but would penalize them and so, by default, promote non-renewable options. If we want a sustainable system there’s a cost, but it’s the whole system’s cost. It can’t be ducked. Though there may be temptations to delay the development of renewables and reduce carbon-saving targets to postpone the problem. Or to accept lower system reliability to reduce it.
Catherine Mitchell of the University of Exeter, UK, will have none of this. “We have moved on from trade-offs between sustainability and equity or equity and security,” she says. That was in the context of Ofgem’s claim that some green projects were getting unfair preferential treatment by not paying their full balancing costs. Mitchell argued that this wasn’t the point — we needed them. “What we cannot have is a move to be more equitable at the expense of sustainability.”
Would that also apply to social equity? As The Electrical Journal paper noted, and as consumer revolts make very clear, there are perils and inequities with imposing high prices on unwilling consumers, especially poor consumers. So not all pressures to duck out from making compromises can be resisted. Yet governments do seem able to get away with what might seem to be ludicrous expensive projects, like the Hinkley nuclear plant. Evidently, some projects are outside the economic framework. They get pushed and defended whatever the upfront and ongoing costs.
In the end it may come down to being a matter of choice as to which technology to back. They will all cost money, and someone has to pay. No one wants to put extra costs on energy bills, but some may be inevitable for longer term survival. If it has to be done, then it has to be done fairly, though hopefully the costs can be limited by improved technologies. But not by delaying the transition; that will end up costing us more as climate change hits harder. And, quite apart from any other issues, with the direct costs of renewables falling, and the need for subsidies for the developed options reducing, the case for doing that via renewables, and also improved efficiency, seems stronger than ever.
In my next post I will look at the UK situation and at what to expect next.
