Renewables are inexpensive, so why are electricity costs rising?

Renewables are inexpensive, so why are electricity costs rising?

The global energy market is in upheaval for the second time in a row. In 2021, international gas prices tripled. Since then, several energy companies have gone bankrupt, resulting in skyrocketing energy costs for consumers all throughout Europe. Even if energy costs are soaring, it’s also a good time to remember an ancient saying: “Never squander a good crisis.”

Unavoidable factors in skyrocketing energy costs include the fact that most governments have limited control over wholesale natural gas prices. It takes years for the investments made by fossil fuel businesses to mature, resulting in periods of moderate pricing followed by supply shortages. It is estimated that the pandemic in 2020 will have a significant impact on gas demand.

A significant portion of the gas used in recent decades has been imported into areas where domestic supplies are either nonexistent or almost exhausted. Many nations in Europe’s periphery, notably the UK and much of the Mediterranean, felt that they could rely on worldwide supplies of liquefied natural gas (LNG). However, tankers from major gas producers like Qatar might choose to go to Europe or Asia based on who is willing to pay the most. In the current scramble, Asian demand has taken the lead.

In the UK and other European nations where electricity is organised through wholesale markets (in which generators bid to run if the price is correct) and where the majority of houses use gas for heating, the knock-on impact to energy costs is accentuated. During £1,200 (US$1,630) in 2021, the average UK household energy expenditure is expected to rise by nearly 50% over the following year. Half of the increase will be due to the impact of rising gas prices on power costs.

As a result, why is the gas price constraint affecting electricity bills? Moreover, gas generates less than half of electricity—about 40% in the UK and around 20% in the EU—so it’s not a major contributor. At present, nuclear and imported power supply the remaining one-quarter of UK power needs. Costs for onshore wind and solar have dropped by over 40% in the last decade, and solar and offshore wind have dropped even more.

Even though offshore wind energy is one of the most expensive forms of renewable energy, the last time the government provided fixed-price contracts for it, they were less than 5 pence per kilowatt hour (kWh). In 2022, the typical residential tariff (the price most people pay for energy at home) will be less than a fifth of what it is now. Families are shelling out many times as much money for power as it would cost to produce and deliver it using the cleanest forms of energy.

When it comes to designing power networks, we have not kept up with the renewable energy revolution. Electricity markets in several nations have been developed in an effort to reduce costs but have instead seen the highest price spikes in recent years. This is not because governments elsewhere employ taxes to subsidise power (though some do), but because in wholesale electricity markets, the most costly generator determines the price.

As long as renewables and nuclear are available, fossil fuels—and at the moment, unequivocally gas—and the cost of taxes on CO2 pollution set the price almost all the time, because some gas plants are required most of the time and they won’t operate unless the electricity price is high enough to cover their operating costs. To put it another way, it’s like being forced to pay for every rail ride at peak hour rates.

Consumers should be able to buy power directly from renewable sources and avoid paying the prices of gas and carbon dioxide.

A brand-new Golden Age has dawned in America.

Renewable energy sources, which cost a lot to construct but are significantly less expensive to run than fossil fuels, are not well-suited to the current energy market structure. Long-term, fixed-price contracts are offered by governments to renewable energy providers. Competitive auctioning of these contracts to firms eager to produce renewable energy has been the most significant driver of investment, while reducing construction costs the most.

As a result, families and other small customers are unable to purchase fixed-price contracts more than a year or two in advance because of the volatility in wholesale pricing and governments’ encouragement of competition between providers. To counterbalance the fluctuating output from renewables, the remainder of the system uses more or less power generated by traditional sources. In the UK and Europe, that adds around 1p per kWh to the price of renewable power. Even taking this into consideration, the disparity between inexpensive renewable energy and costly final power is becoming unjustifiable.

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