If renewables are so cheap, why are our bills so expensive?

We’ve all felt the strain in recent years, electricity has become vastly more expensive than what we grew to expect in the 2010’s, with prices increasing year on year between 2020 and 2025. Whilst average energy bill in 2020 was £769 per year, it has now reached roughly £1,849. This is a 140% increase on a bill that we all have to pay, and paired with the upcoming energy cost cap rise of 6.4% in April, prices will keep rising. 

To help solve this, the government has set an ambitious target of building a power system that is at least 95% ‘clean’ by 2030. They expect that this will reduce bills by over £200 per year for British households, but how much will this help, and if renewables are so comparatively cheap, why won’t our bills go down by more?

To answer this, we need to understand how the UK’s electricity market currently sets its pricing, it’s similar technique that most of Europe has adopted and it’s called ‘marginal pricing’. Through this technique, the price of electricity is set by the cost of the most expensive energy generation source needed to meet demand at any given time. Generators bid for the cheapest sources first (usually renewables, then nuclear, then fossil fuels) and is considered to be efficient as it incentivises the use of cheaper electricity sources. 

This has helped grow the adoption of renewable energy into our grid, ensuring it is prioritised due to its low cost per MWh, but it has the disadvantage of not passing down the benefits of the cheaper energy used to the consumer. Above is a very useful graph which shows how this works, as our domestic electricity prices are based off the highest cost supply, which is currently natural gas. 

High gas prices have only been exacerbated by supply issues, the war in Ukraine and a global increase in demand for fossil fuels to power the post-COVID recovery. Despite the UK’s energy production using 27% less fossil fuels since 2020, and our renewable energy output increasing by 12.5%, we are still left vulnerable to these shocks due to the marginal pricing model.

Unfortunately, this means that without some kind of energy supply reform, UK consumers will still be beholden to the highest cost of energy, as natural gas is still a critical element of the UK’s energy supply network. The versatility of gas power stations, and their ability to be switched on and off at short notice make them incredibly useful for supplementing renewable energy in periods of low wind, or at night.  

Another source of clean power that the government is exploring is nuclear, given it produces zero carbon dioxide per unit of electricity. Plans are in the works for eight new large nuclear power plants to be built by 2050, with a framework being drawn up for many small and medium reactors to supplement them, further enhancing our energy supply with cleaner alternatives. 

The elephant in the room, is that our current method of charging customers for energy does not help consumers benefit from the diversified grid that we need to support our energy transition and secure energy independence in the UK. The current Labour government has made it very clear that reducing household bills is a core goal of theirs. Energy pricing is clearly on the agenda, but with the incoming price cap increase, it will be very interesting to see how this issue will be addressed, and whether large scale reform will happen.  

Until then, it seems like our household bills will continue to rise, but the amount of time, effort and investment into our grid is something to be hopeful for when looking to the future. We only have to look back to last year when the last coal fired power station was shut down in the UK. Our grid is changing, and we’re still making world-leading progress, but it won’t happen overnight.