Renewables make Over 40% of UK energy - But why stay prices Up?

The UK is facing a second increase in energy price caps this winter, as announced by Ofgem on January 1. Energy bills soared in 2022, and continue to remain well above pre-Covid levels. But why?

A major concern for the UK's energy security is its reliance on gas, highlighted by Centrica's warning that gas stores are at "concerningly low" levels amid the current freezing temperatures. The company indicated that the UK has less than a week of gas demand left in store, despite Downing Street's assurance of adequate supply.

This gas dependency persists, even as more than 40 percent of the National Grid was powered by renewables in 2024—comprising solar, wind, and hydroelectric energy. Labour has pledged to enhance renewable usage as a means of reducing energy prices, yet the volatility of gas supplies remains a pressing challenge.

In the UK, a quarter of the total power generation comes from fossil fuels, with gas being the primary source. The remaining portion of the nation’s energy supply is derived from nuclear energy, which accounts for 13 percent, and biomass sources, including food waste and agricultural residues, contributing 4 percent. Additionally, about 10 percent of the electricity is sourced from interconnections with neighboring countries.

In general, electricity generated from renewable sources is expected to be more cost-effective than that produced from gas, which could potentially lead to lower energy bills for consumers. However, this expectation has not panned out. And the current energy landscape in the UK is significantly more intricate than this rather simplistic view suggests. Several key factors contribute to this complexity; one of them is that the overall capacity of renewable energy sources is still insufficient to meet the total demand for power across the nation.

Another: Renewable energy infrastructure has high initial costs, which raises prices as businesses recoup their investment. But, the main reason for high electricity prices in the UK is apparently the marginal pricing model. A model which ties electricity prices mainly to gas prices and sets the price based on the most expensive energy source used to satisfy demand, updated every half hour. This kind of defeats the purpose.

When both gas and renewable energy are used in a half-hour period, the price always reflects the more expensive price which currently is cost of gas — independent whether more energy is supplied by renewables or not.

According to Bob Hope, policy director at the LSE Grantham Research Institute on Climate Change and the Environment: “The cost of generating electricity is different for each supplier, and so the price the network pays, and then passes on to consumers, is set by the most expensive of the electricity suppliers that is required to ensure all of the demand is met. This is the marginal price and every supplier (whether they are gas or renewable) receives it, regardless of how much it costs them to supply the electricity.”

Consequently, it’s a pricing model issue. As the prices paid for suppliers is the same as gas, even though renewables may be cheaper.

According to Susanna Elks, Susanna Elks, senior policy adviser at climate think tank E3G, the government could do a lot more to change that and make sure that the value creation of renewables actually lands as the consumer. The government could ensure that cheaper prices of renewables could be passed on to the consumer. Including reduced cost of new gen buildings as well as ensuring that households get access to renewable power when cheapest.

So, while high gas prices across Europe are tied to the relationship with Russia and Ukraine and the sanctions, there are things that governments could do. The average price of natural gas reached a 14-year high in August 2022. Crude oil prices are at their highest since 2011.

Using the marginal pricing model, in the UK, electricity prices are set 98% of the time by fossil fuel-generated power — up from 88% in 2015 — and the highest in Europe. By comparison, Germany sets its electricity price tied to fossil fuel sources 72% of the time and France, Portugal and Spain set their energy prices a third of the time by non-fossil fuel sources.

Of course, being an island, isolated from the rest of the continent posts unique issues. Gas is to date the most reliable energy source and reliability when an island is key.

To increase reliability on other sources, you’d have to build power cables under the sea to connect to the rest of Europe. That’s expensive. So, your options in trading energy are not the same as a center European country has. However, the pricing model can be changed. This is where the UK government could begin if they were serious about keeping promises.

Reliable energy is not just a question for the UK. The US is dealing with that topic, too. From many different angles. While the world is dreaming of renewable energy, there are still significant issues to be addressed. — And a lot to learn from Nature.

Windmills affect eco-systems. They kill bats and birds, ruin the harmony of the landscape and are ugly to look at. Solar affect eco systems, too. To date, both recycling and energy storage questions need answers and much better solutions. Just because something is deemed renewable doesn’t make it good for Nature. Unless we learn to also work with Earth and come up with more harmonious innovations in the energy space — plus a willingness to pass the benefits of created value on to everybody in the chain, including the consumer, which means … the economic model in energy must be shifted and allow self-sufficiency vs government control — this space necessitates innovations from the ground up.

Watch an episode on how energy systems could be shifted. Ideology dystopia vs true sustainability?

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