Why are we being told that Green Energy is cheap?

The push towards green energy has been strongly promoted as a cheap solution to climate change and energy security.

However, the public narrative - that the cost of renewables is ever-declining and a perfect solution to fossil fuels - may be misleading, as it often fails to consider the additional costs necessary to implement renewables.

Instead, when looking at the price we pay for green energy, we should consider the “whole system cost” (WSC). This encompasses not only the direct costs of building and operating renewable energy installations, but also indirect costs associated with integrating this technology into the energy grid.

Here, we explore how the media’s portrayal of renewable energy as a cheaper alternative might be an oversimplification and, in some cases, little more than an accounting trick that obscures the true costs.

What is the appeal of renewable energy?

Like many other western countries, the UK is finding itself undergoing a significant energy transition as part of its government’s ambitious goal for the nation to reach net zero by 2050.

According to the International Renewable Energy Agency (IRENA), between 2010 and 2021, the global average cost of electricity generation for a renewable generator over its lifetime (including building and operating costs) declined by 88% for solar photovoltaic (solar panels), 68% for onshore wind, and 60% for offshore wind.

These falling costs, as well as environmental benefits that help contribute towards the net zero pledge, means that renewable energy sources have become an increasingly attractive prospect.

What percentage of UK energy is renewables?

As renewables have gained more favour, so too has the amount of electricity produced by their different energy sources.

For example, the proportion of electricity generated in the UK by renewables has increased from 3% in 2000 to 39.5% as of 2023. Conversely, the energy generated by fossil fuels has fallen significantly from 73% in 2000 to 32.3% in 2023.

As of July 2024, 41.8% of the UK energy mix came from renewables in the previous 12 months.

The problem of intermittency

So, although renewables may seem as though they offer the perfect solution to fossil fuels, there are a number of challenges, including intermittency.

What does this mean?

Generating energy from wind and solar power depends on the conditions of the weather, which are inherently variable and unpredictable. This variability poses a significant challenge for delivering a stable and reliable electricity supply.

Over the past two decades, the National Grid has succeeded in virtually ending coal power in Britain, with most having been replaced by wind and solar, as well as by ‘thermal renewables’ – burning wood pellets made from trees (up from 3.6% in 2011 to 12.9% in 2021).

In spite of this, the UK remains heavily dependent on imported gas, and the way in which we are using it is costing us more because of renewables.

For example, the UK uses gas-fuelled power to plug the gaps when intermittent wind and solar falls short.  So, although it has been bandied about by activist group Carbon Brief that UK offshore wind power is nine times cheaper than gas, this is a false comparison.

The figure Carbon Brief refers to comes from comparing the long-term, guaranteed, index-linked prices paid to renewable energy firms with the ‘day ahead’ prices - paid to owners of gas power stations to open them when they are needed to make up for the shortfall in supply from renewables.

The argument of not shifting fast enough to renewables

Unfortunately, although the UK has been able to increase its use of renewables, we do not currently have an alternative for the times when wind and solar are not supplying us with enough energy.

Investing in storage solutions for renewables in the form of lithium-ion batteries, pumped hydro storage, and other emerging technological advancements like flow batteries could offer potential pathways to store excess energy. However, these solutions come at extremely high capital costs and not only require substantial investment, are coupled with limited lifespans and losses in efficiency.

And, although the UK has begun leaning into solutions, for example scaling up its installation of grid scale batteries - batteries which store energy to be distributed at grid level and that are measured in megawatts (MW) - these efforts are only part of the solution.

The UK's daily electricity consumption varies but typically ranges from about 800 to 1,200 gigawatt-hours (GWh). The total energy storage capacity, for all forms of renewables (pumped hydro, batteries, etc.), is significantly less than this, with current estimates suggesting that we can store less than an hour’s worth of the entire country’s electricity demand.

Additionally, overall generation capacity available to the grid has fallen from 77.9 Giga Watts (GW) in 2019 to 76.6GW in 2021. And, although the reliance on wind and solar energy has grown, the actual amount of electricity generated by wind, wave, and solar energy, has fallen by 9.3%. This is largely on account of low wind speeds, and matches a long-term declining trend in wind speeds worldwide.

The problem with surge pricing

In its recently published ‘Road to Zero Carbon’ report, the National Grid ESO , states that ‘the concept of baseload is now gone’, and that the demand for energy will be matched to supply via ‘dynamic containment’ – also known as surge pricing.

Surge pricing means that prices paid for energy will increase at times of higher demand on the grid. But how much will energy suppliers be required to pay in order to manage demand at times when the supply of wind and solar energy falls below 5% even when weather conditions are at their peak?

For example, in September 2020, because of low wind speeds, energy suppliers were forced to pay wholesale prices of £2,500 per MWh (megawatt hour) to persuade gas power stations to enter the market. This figure was 50 times what average prices were at the time.

In July 2021, the National Grid paid £9,724 per MWh to Belgium in order to prevent a blackout occuring in London. This was more than 5,000% the typical price at the time.

And now, those customers who opt for the recently made-available Time of Use (ToU) tariffs are exposed to surge pricing.

ToU tariffs mean customers pay a constantly varying cost for their electricity based on the time of day and reflecting the actual cost of energy production and demand levels.

For example, when demand on the grid is high, typically during peak times (4pm to 7pm), the cost of generating and supplying energy increases, leading to a higher price for customers.

A number of energy suppliers who offer ToU tariffs argue that these types of deals incentivise customers to shift their energy usage to cheaper, off-peak times, and helping save pressure put on the grid.

But not all consumers can so easily adjust their consumption patterns, and it is unfair to place the onus of managing energy usage onto the customer when it is the supplier's job to ensure energy remains accessible at all times.

Although ToU tariffs remain optional for now, they may one day be the only tariffs made available, meaning customers will be forced to pay exceedingly high rates for their energy any time unfavourable weather and market conditions occur. This could force those already struggling to pay record-high energy bills to cut back even further on their usage just to continue to survive.

LCOE vs Whole System Cost

The Levelised Cost of Electricity (LCOE), also known as the ‘headline price’, is often cited by the media and within public discourse as the main financial figures when discussing renewable energy.

LCOE refers to the straightforward cost of generating electricity from renewables, measured as cost per megawatt-hour (MWh).

For example, within recent years, both solar and onshore wind energy have seen costs drop significantly to between £40-£60 per MWh. Bur this number represents only the direct costs, such as the capital expenditure for building the facilities, and the operational expenditure for maintaining them, making them attractive figures and suggestive of a strong cost advantage over fossil fuels and nuclear energy.

But how does the LCOE compare to the Whole Market Cost?

The Misleading Simplicity of LCOE

As mentioned above, LCOE is a common metric used to compare the cost-effectiveness of different energy technologies.

To put it simply, LCOE calculates the per megwatt hour (MWh) cost of building and operating an energy system over its lifetime.

However, LCOE has a number of limitations that may be contributing to the public’s often misunderstood perception over the true cost of renewables, including:-

• Exclusion of Integration Costs: LCOE calculations often do not include the cost of grid upgrades, energy storage, and backup power. This omission means that the LCOE for renewables can appear deceptively low.
  
• Unaccounted Externalities: LCOE does not consider the externalities associated with different energy sources, such as the environmental impact of mining materials for batteries or the decommissioning costs of renewable infrastructure.
  
• Short-Term Perspective: LCOE is typically based on current technology costs and does not fully account for long-term issues like maintenance, replacement of infrastructure, or the costs associated with energy security and grid resilience.

What about the Whole System Cost of renewables?

The Whole System Cost (WSC) is the cumulative expenses associated with generating, distributing, and reliably delivering electricity to consumers. Compared to LCOE, WSC provides a more balanced and realistic view of the true cost of building and integrating a new energy system.

For renewable energy, this includes not only the building and maintenance costs but also:-Grid Infrastructure Upgrades: Because renewables like solar and wind aren't always available and predictable, they're referred to as intermittent.

This intermittency means that significant upgrades to the grid infrastructure would be required in order to handle fluctuating power inputs and outputs. For example, the National Grid estimates that integrating high levels of renewable energy could necessitate investments of up to £50 billion in grid upgrades by 2030. These upgrades would also require a great number of overhead power lines which are unsightly and depending on location, could lessen the value of certain areas where prevalent.

• Energy Storage Costs: Due to the variable nature of renewable energy—where solar power only produces during cloud-free, sunny days, and wind power varies with weather conditions - energy storage systems are essential for storing excess power generated during peak production times and releasing it during periods of low production.
  
  Although large-scale battery systems have become cheaper over time, they still require a significant investment, with the UK government suggesting a required investment of between £20 - £40 billion in storage technologies in order to stabilise a renewable-dominated grid.
  

• Backup and Reserve Power: To ensure continuous electricity supply, the grid needs backup power plants, often natural gas-powered, which can quickly ramp up production when renewable output is low.
  
  These backup systems are essential for avoiding blackouts but add to the total cost, both in terms of capital and operational expenses.
  

• Ancillary Services: These are additional services necessary to maintain grid stability and reliability, including frequency regulation, voltage support, and reactive power services.
  
  As the share of renewables increases, the demand for such services also grows, leading to higher costs.

Could nuclear energy be the solution?

It has been argued that nuclear energy could act as somewhat of a “middle ground” between fossil fuels and renewables: just as reliable as fossil fuels, while remaining a clean form of energy.

Although nuclear power plants have high upfront capital costs – predominantly due to the complexity of their construction and stringent safety requirements – once operational, they have relatively low fuel and operating costs. Factoring in their long lifespan – anywhere between 40 and 60 years allows for amortisation of these capital costs over an extended period.