No, BBC, Electricity is Not Expensive Because of Gas But Because of Renewables Subsidies

From THE DAILY SCEPTIC

The Daily Sceptic ran a story yesterday about an interview that took place on BBC World At One on Monday April 14th. Sarah Montague interviewed Adam Berman who is the Director of Policy and Advocacy at Energy UK. The full interview can be found here (from 18:45). Unfortunately, the Daily Sceptic article failed to recognise that the arguments made by Mr Berman misrepresent the situation and amount to misinformation.

The gist of Berman’s argument was that gas sets the wholesale price of electricity most of the time and the marginal costs of gas-fired electricity are higher than those of wind power. If we could just get rid of all that pesky gas and move quickly to almost all intermittent renewables then bills would be lower.

As with most misinformation, Berman’s argument starts with a grain of truth. Yes, gas does set the wholesale price most of the time and yes, the marginal costs of gas-fired generation are higher than most windfarms. However, this start point has to be a contender for Most Irrelevant Fact of the Year. We have covered before that measured over a long time period, renewables have been a bigger driver of electricity bills than the rise in gas prices at the end of 2024.

Towards the end of the interview, Berman acknowledges that wholesale prices are not the only driver of high energy bills. He mentions the cost of pipes and wires and other policy costs, but manages to completely avoid discussing the elephants in the room, namely renewables subsidies and the extra costs we must pay to make intermittent renewables work. Roughly speaking, these amount to around £15 billion a year once balancing and backup is included, or more than £500 on every household’s electricity bill. Once these costs are included (as they certainly should be), renewable sources of electricity are much more expensive than gas.

Cost of Renewables Subsidies

There are three subsidy schemes supporting renewables. The first is Renewables Obligations (RO). Renewables generators are awarded certificates for each unit of electricity generated in addition to the market price they receive for their output. Accordingly, electricity from these generators will always be more expensive than market rates, often set by gas. Even though this scheme is closed to new participants, the OBR (see the October 2024 detailed forecast tables: receipts) shows us the RO scheme cost £7.6 billion in 2023-24 and the cost is forecast to rise to £8.5 billion in 2026-27. Yesterday, the electricity spot price was £73.25 per MWh, mostly set by gas including the carbon tax. ROC-funded offshore wind farms get about 1.9 certificates per MWh, onshore one certificate and solar gets about 1.4. In the current financial year, the buy-out value of each certificate is set at £67.06. Working through the arithmetic, this puts the current cost of ROC-funded offshore wind at £200 per MWh, onshore £140 per MWh and solar £169 per MWh, all much more expensive than gas-fired electricity.

The second scheme is Feed-in-Tariffs (FiT), paid mostly to small solar installations. FiT generators are paid a fixed amount to generate electricity plus a smaller amount for the power they export (or are deemed to export) to the grid. Again, this scheme is closed to new entrants. However, analysis of Ofgem’s latest report into the FiT scheme shows it cost nearly £1.9 billion in 2023-24, or around £221 per MWh which is over three times higher than market rates today. These prices are index-linked, so current prices will be higher.

Finally we have the Contract for Difference (CfD) scheme used for the now annual renewables auctions. Here, generators receive a fixed amount for the power they generate. They receive the market value for their power and are then paid a top-up to the strike price of their contract. If market prices are above the strike price, they must pay back the difference. Analysis of data published by the Low Carbon Contract Company shows the CfD scheme cost a record £2.24 billion in subsidies during financial year 2024-25. Even though CfD generators paid back a net amount of about £346 million during the energy crisis of 2022, the total cost of CfD subsidies recently broke the £10 billion barrier. During 2024, CfD-funded offshore wind generators cost about £153 per MWh and received more than half their revenue from subsidies. Onshore wind cost £112 per MWh and solar £110 per MWh. These prices were recently indexed upwards for the new financial year and so the average will rise again, except for solar where new, lower priced generators will bring down the average for that technology.

The total cost of these subsidy schemes amounts to nearly £12 billion per year or the equivalent of over £420 per household per year and as we have seen we can expect these costs to continue to rise, putting upward pressure on bills.

Extra Costs of Renewables

However, subsidies do not represent the full cost of renewables. First, because wind and solar are intermittent their output can fluctuate significantly so that sometimes they produce less than expected and at other times can produce more than demand or more than the grid can handle. Therefore, the grid needs to be balanced, usually using gas-fired generators. NESO produce Monthly Balancing Services Summary reports and the data for 2023-24 show the cost of this service was £2.54 billion. In addition, we pay for backup through the capacity market and the OBR shows this cost us £1 billion in 2023-24 and the costs are forecast to rise to £4bn per year in 2027-28. Even if balancing costs remain constant, we can expect the total costs of balancing and backup to rise by £3 billion by 2027-28 or the equivalent of over £100 per household.

Wind and solar farms tend to be sited away from the source of demand, so we need to spend even more money to expand the electricity network to connect them to the grid. NESO has announced £54 billion of spending on grid infrastructure to 2030 and a further £58 billion to 2035, making a total spend of £112 billion. If we assume an 8% cost of capital and 2% operations and maintenance costs, the annual costs on energy bills will amount to about £11 billion once the investment is complete, or the equivalent of another £385 per household.

However, these announcements were made before the Clean Power 2030 (CP2030) plan was announced. NESO estimated this would cost £44-48 billion per year to the end of 2030, or a total of £264-290 billion over the six-year period. According to the Digest of UK Energy Statistics (DUKES) we used 205.7 TWh of gas to produce 101.7 TWh of electricity in 2023. Using the current price of gas of 83.7p per therm (or £28.57 per MWh), this gas would have cost us £5.9 billion. The CP2030 plan would eliminate much of this gas, giving a saving of around £5 billion per year. However, assuming a cost of capital of 8% and operations and maintenance costs of 2% for CP2030, would give an ongoing cost of £26-29 billion per year or more than five times the projected savings on gas. Adopting the CP2030 plan will likely increase our energy bills by £900-1,000 per household. Additional costs are in the pipeline from subsidies for Carbon Capture and Storage (CCS) and green hydrogen.

Taxes on Gas-Fired Electricity

Energy bills are also increased by the taxes placed on gas-fired electricity generation which is subject to the Emissions Trading Scheme (ETS). The UK ETS Authority has set the carbon price for 2025 at £41.84 per tonne of carbon dioxide. Actual carbon prices vary somewhat, but this price can be used to estimate the extra costs of gas-fired generation. Modern gas turbines emit around 350kgCO₂ per MWh of generation, so gas-fired generation attracts a carbon tax of about £14.60 per MWh, or about 20% of today’s electricity spot price. The CP2030 plan anticipates carbon prices rising substantially to around £147 per tonne, adding further upward pressure on energy bills.

Conclusions

By ignoring the giant bull elephants in the room representing renewables subsidies and the extra costs of grid balancing, backup and expansion of the network, Berman was allowed to paint a false picture of the drivers of high energy bills. The truth is that renewables are the major force driving bills higher and if Miliband gets his way with CP2030, then our bills will rise higher still.

Perhaps we should take Adam Berman at his word and offer to pay renewables generators just the market value of their output, which on summer days can often be negative. I don’t think we will see many takers. Remember, if something needs a subsidy, it’s more expensive.

I have tried before to complain to the BBC, but the response has been along the lines of our editorial staff know more about this than the great unwashed, so we are not going to change our article or editorial stance. Others might want to see if this analysis can penetrate the citadel and force a correction, or at least a right of reply on World At One.

David Turver writes the Eigen Values Substack, where this article first appeared. 

Stop Press: Paul Homewood has made the same points in his latest article. Branding Berman’s argument “grossly dishonest”, he writes: “Yes, of course, gas does tend to set the market price, but on top of that price renewables receive massive subsidies, which get added on to bills. These subsidies have to be paid because renewables are intrinsically much dearer than gas power, not the reverse.”