Some suspect that electricity prices have gone up because of government support to renewable energy. But there’s evidence that this is not the case. Sugandha Srivastav writes that the cost of electricity generation is strongly affected by the price of gas.
Energy bills in the UK are going up – are renewables to blame?
The rise of renewable energy has happened alongside a rise in the energy bills for British households. This might lead one to conclude that renewables are the culprits. But is that the real cause? Let’s explore the data.
A deep vulnerability in the UK’s heating system needs to be repaired
Approximatelyhalf of the average household energy bill in the UK is due to gas heating. The cost of gas has gone up dramatically from 2020, largely driven by geopolitical crises. When Russia invaded Ukraine, gas prices shot up from a low of 1.5 USD/MMBtu in the summer of 2020 to a peak of 9 USD/MMBtu only two years later. This sixfold increase was felt by residents all over the UK and led to an affordability crisis in winter. In fact, the spikes in gas prices were of a magnitude not seen since the 1970s-80s. This means roughly half of the energy bill’s increase is due to gas. But what about the other half, which is driven by electricity?
Figure 1. Electricity and gas prices in the UK 2020-2024
Source: The Department of Energy Security and Net Zero (December 2024)
Could the increase in electricity prices be caused by renewables?
Some suspect that electricity prices have gone up because of government support to renewable energy. While others say it is the fact that large amounts of wind energy need to be transported all the way from Scotland down to England. If this were true, then we would expect “policy costs” and network costs” to have shot up but the major increase in bills has come from wholesale costs, that is, the cost of generating electrons. Could renewables be the culprit here?
It turns out that the cost of electricity generation is strongly affected by the price of gas
If you look at a plot of electricity prices and gas prices, you will see a striking co-movement. When gas prices go up, so do electricity prices and vice versa. The two move in tandem.
Figure 2. Price changes as measured by the CPI
Notes: Index values in current prices, 2010=100. Source: UK Parliament
Why does gas strongly affect electricity price movements?
In the UK, electricity generating technologies are ranked in order of cheapest to most expensive. On any given day, to satisfy demand, the cheapest technologies are called upon first. This means renewables are used on a priority basis to satisfy demand because unlike fossil fuels, which require a constant fuel input to keep the power plant operational, renewables rely on wind and sunshine, which is free. But if there is still unmet demand, then the grid operator works its way up to more expensive technologies. The price of the technology which satisfies the last piece of demand gets to set the overall wholesale price of electricity, and in the UK, this technology is typically gas.
Figure 3. The “merit order” of electricity generators in the wholesale market
Source: House of Commons Library
So, once again, we are back to the same common denominator: gas
With gas ultimately being the technology that sets wholesale prices, the electricity grid is subject to the same vulnerability as the heating sector: an exposure to volatile gas prices set on international markets. As a result, oil and gas companies have made extraordinary profits since the Russian invasion of Ukraine. British Petroleum and Shell alone made £75 billion between 2022 and 2024, at the expense of struggling households in the UK and abroad.
Huge spikes in oil and gas prices are nothing new
In the 1970s, oil prices quadrupled and importing nations took heed. Iceland accelerated its pivot to geothermal energy and so did Kenya. The 2008 oil price crisis prompted Uruguay to build out huge amounts of wind power. The lesson was simple: diversify out of risky imported fossil fuels to an energy source that is secure, local and clean. The advantage of renewables is that they have no “fuel cost”. When was the last time you paid for a gust of wind or a ray of sunshine? By contrast, you probably can remember the last time you paid to fill up your car with diesel or petrol.
The UK is at a similar crossroads where it can reduce its dependency on gas boilers for heating
As long as the UK remains dependent on gas for heating, it will always have an Achilles’ heel. It can take a page from the books of Iceland, Kenya and Uruguay and diversify, chiefly by switching to heat pumps. This will, of course, impose short-term costs but in the medium to long-term the investment will pay off, most saliently when the next shock hits oil and gas markets.
In terms of electricity, the way forward is grid-scale batteries
Grid-scale batteries are already economic on the UK grid due to lucrative arbitrage opportunities, and upcoming changes to the process of securing a grid connection will make them even easier and faster to integrate. These trends, alongside rapidly declining costs and the government’s target to install 30 GW of energy storage by 2030, will crowd out gas. One of the key roles for gas on the grid is to balance renewables. If you look at generation across one day, you will see that when renewables dip, gas rises and vice versa. However, once batteries are on the scene, they will do this much faster and cheaper, thereby putting downward pressure on prices and providing much needed relief to UK bills.
In sum, going full speed ahead on the energy transition will be an effective way to reduce system costs.
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