Renewable energy: Costs

Approximate read time: 40 minutes

On 14 November 2024, the House of Lords is due to consider the following motion:

Lord Frost (Conservative) to move that this House takes note of the cost of renewable energy and its effect on energy costs in the United Kingdom.

1. What is meant by renewable energy?

The UN defines renewable energy as energy which is derived from natural sources at a higher rate than they are consumed.^[1] It contrasts this with coal, oil and gas—fossil fuels—which take hundreds of millions of years to form and are therefore not considered renewable. Common forms of renewable energy include:

• Solar. Typically, solar is associated with photovoltaic panels which convert sunlight into electricity, but other forms of solar energy generation exist that concentrate solar radiation using mirrors to heat up a liquid to drive a turbine (sometimes called ‘concentrating solar-thermal power’ or CSP). The UN states that the “rate at which solar energy is intercepted by the Earth” is estimated to be 10,000 times greater than the rate at which humanity consumes energy.^[2]
• Wind. Wind energy uses turbines to convert kinetic energy in moving air into electrical energy through turning a turbine. These can be located either on land or out at sea. The UN has said that although wind speeds can vary considerably by location, “the world’s technical potential for wind energy exceeds global electricity production, and ample potential exists in most regions of the world to enable significant wind energy deployment”.^[3]
• Geothermal. Geothermal energy utilises heat found deep underground in the Earth’s interior. This heat can then be used to generate electricity. The UN has described the technology for generating electricity from hydrothermal reservoirs as “mature and reliable”.^[4]
• Hydro. Hydro power utilises the kinetic energy of moving water in a similar way to wind power. This typically uses water moving from a higher elevation to a lower elevation to drive turbines, for example by using dams. The UN states that hydropower is currently the largest source of renewable energy in the electricity sector.
• Ocean/tidal. The UN describes ocean energy as being at “an early stage of development” but it involves using the kinetic and thermal energy of the sea to produce electricity or heat.^[5]
• Bioenergy. The UN places both the production of liquid biofuels from crops and the burning of biomass (for example wood) under the category of bioenergy.^[6] It argues that because the energy created from biomass creates greenhouse gas emissions it should be used in limited applications, even though it states that emissions are lower than when burning fossil fuels. The National Grid states that bioenergy sources such as wood are considered renewable because they can be regrown “and absorb as much carbon as they emit across their lifespans”.^[7]

Apart from reducing carbon emissions, the UN has argued that moving towards non-emitting or clean energy sources such as wind and solar would also reduce particulate air pollution and benefit public health:

According to the World Health Organization (WHO), about 99 percent of people in the world breathe air that exceeds air quality limits and threatens their health, and more than 13 million deaths around the world each year are due to avoidable environmental causes, including air pollution.

The unhealthy levels of fine particulate matter and nitrogen dioxide originate mainly from the burning of fossil fuels. In 2018, air pollution from fossil fuels caused $2.9tn in health and economic costs, about $8bn a day.

Switching to clean sources of energy, such as wind and solar, thus helps address not only climate change but also air pollution and health.^[8]

However, whilst renewable energy sources have advantages over fossil fuels in terms of emissions and pollutants at the point of generation, there are additional considerations in the rollout of these sources as the UK seeks to achieve net-zero carbon emissions, such as the need for energy storage. This is discussed further in section 3 of this briefing.

2. How much of Great Britain’s electricity comes from renewable sources?

Renewable energy already accounts for a large proportion of Great Britain’s electricity generation. In 2023 wind, solar and hydro produced 36.1% of the electricity generated in Great Britain.^[9] Of this, 29.4% was generated by wind energy. Figure 1 below shows the full energy mix for 2023. This does not represent all the energy that is actually used in Great Britain as it refers to electricity generation and does not include other forms of energy used for other purposes, for example fuel for petrol or diesel vehicles or gas used to heat homes.^[10]

Figure 1. Total electricity generation by source, Great Britain, 2023

The National Energy System Operator (NESO), established under the Energy Act 2023 as the UK’s independent system planner and operator to help accelerate Great Britain’s energy transition, has said that Great Britain hit several electricity generation milestones in 2023. It stated:

• Gas was our largest fuel source in 2023, but our use of gas was the lowest it’s been since 2015.
• December 2023 was the 15th month in a row where zero-carbon generation produced more than fossil fuel generation, showcasing our growing use of zero-carbon electricity.
• We’ve reduced coal’s involvement in our generation mix by over 97% since 2013. Coal was responsible for just 1% of generation in 2023. In 2018, coal represented 5.1% of electricity produced, and 39.6% in 2013—illustrating the significant reduction that is taking place.^[11]

The UK’s last coal-fired power station closed on 30 September 2024.^[12]

In terms of wind power, NESO said that wind accounted for a peak of 69% of Great Britain’s electricity generation on 19 November 2023 between 4.30am and 5am. It accounted for 29.4% of electricity generation overall in 2023.^[13] NESO stated that overall, zero-carbon energy sources generated 51% of the electricity used in 2023 compared to 32% from gas and 1% from coal. NESO states that zero carbon sources include nuclear energy.^[14]

3. What are the Labour government’s policies on renewable energy?

In its manifesto, Labour committed to decarbonising the UK’s electricity system by 2030, saying this would help the UK achieve its 2050 net zero target.^[15] In order to achieve this, Labour said it would “work with the private sector to double onshore wind, triple solar power, and quadruple offshore wind by 2030”.^[16] To achieve the planned expansion of renewable energy production, Labour said it would:

• spend £4.7bn each year of the new parliament to support the transition to renewable energy through the ‘Green prosperity plan’.^[17]
• establish Great British Energy, a new publicly owned company which would co-invest with the private sector in order to expand clean power^[18]
• reform the planning system in order to enable the expansion of onshore wind energy.^[19]
• increase government investment in carbon capture and storage.^[20]
• increase investment in hydrogen and marine energy (including tidal and wave energy).^[21]

Labour said that investment in clean energy would be supported through the creation of a national wealth fund that would be capitalised with £7.3bn over the course of the parliament.^[22]

As well as reducing the UK’s greenhouse gas emissions, Labour has argued expanding the use of renewable energy would achieve other benefits, such as lowering household energy bills, improving the UK’s energy security and creating new jobs in the renewable energy sector.^[23]

At the same time as providing support to expand the renewable energy sector, Labour said it would not issue any new licences to explore new oil and gas fields or grant any new coal mining licences.^[24] It also said it would introduce a permanent ban on hydraulic fracturing (fracking).^[25] The Conservative government introduced an effective moratorium on granting permission for fracking in England in 2019.^[26] This moratorium was briefly lifted in September 2022 during the Liz Truss administration but was subsequently reintroduced in October 2022 following Rishi Sunak becoming prime minister.^[27] Further information on the environmental policies in Labour’s 2024 manifesto is provided in the House of Lords Library briefing ‘King’s Speech 2024: Energy security, net zero, environment and agriculture’, (11 July 2024).

The government’s autumn 2024 budget said that “transitioning to net zero and delivering on the government’s clean energy superpower mission” was key to ensuring sustainable long-term growth. The budget included a number of measures to enable the UK to transition to net zero. It stated:

• Providing £3.9bn of funding in 2025/26 for carbon capture, usage and storage track-1 projects to decarbonise industry, support flexible power generation, and capitalise on the UK’s geographic and technical strengths.
• Delivering on the first steps of the clean energy superpower mission, with £125mn in 2025/26 for Great British Energy, which will be headquartered in Aberdeen.
• New nuclear will play an important role in helping the UK achieve energy security and clean power, while securing thousands of good, skilled jobs. This settlement provides £2.7bn of funding to continue Sizewell C’s development through 2025/26. The equity and debt raise process for this project will shortly move to its final stages and will conclude in the spring. As with other major multi-year commitments, a final investment decision on whether to proceed with the project will be taken at phase 2 of the spending review.
• The government will provide support for the first round of electrolytic hydrogen production contracts, harnessing renewable energy to decarbonise industry across the length and breadth of the UK.^[28]

The government said that accelerating grid connections and building new network infrastructure was central to unblocking private investment.^[29] It said it was working with NESO and Ofgem to “develop a robust grid connection process, to ensure viable projects are connected in a timely manner”.

In her speech to the 2024 Conservative Party conference, Shadow Secretary of State for Energy Security and Net Zero Claire Coutinho criticised the way in which Great British Energy was being established. The Great British Energy Bill, which would create the new company, has passed its House of Commons parliamentary stages and is scheduled to have second reading in the House of Lords on 18 November 2024. Ms Coutinho argued that the Energy Secretary Ed Miliband would be given too much power to direct the way in which funds were invested.^[30] She also criticised the government’s target for decarbonising electricity by 2030, describing it as “rushed, and likely expensive”.^[31] She argued this target would mean the UK would miss out on technologies that would mainly come on stream after 2030. Ms Coutinho stated this included fusion energy, small modular reactors, space solar, carbon capture and carbon removals.

4. How much does electricity from renewable energy cost to generate?

Estimating the cost of electricity generated from different sources is complicated, with a number of different factors to consider. One commonly used measure to compare the cost of different energy sources is the ‘levelised cost of electricity’ (LCOE). The LCOE is the discounted lifetime cost of building and operating a generation asset.^[32] It is expressed as a cost per unit of electricity generated in cost per megawatt-hour (£/MWh). It is a unit of energy equivalent to 1,000 kilowatts of electricity used continuously for one hour.^[33] The Department for Energy Security and Net Zero (DESNZ) publishes annual statistics on electricity generation costs that use LCOE.^[34]

DESNZ describes LCOE as a ‘rule of thumb’ comparison between different types of generation technology, but states that the simplicity of the measure means “some relevant issues are not considered”.^[35] These include a technology’s impact on the wider system given the timing, location and other aspects of its generation. DESNZ gives the following example:

A plant built a long distance from centres of high demand will increase transmission network costs, while a ‘dispatchable’ plant (one which can increase or decrease generation rapidly) will reduce the costs associated with grid balancing by providing extra power at times of peak demand.^[36]

DESNZ also states that it is important to understand that levelised costs are not the same as strike prices, which include additional considerations “such as market conditions, revenues for generators, and policy factors, which are not considered in levelised costs”. It states that generation cost assumptions, like those summarised in the form of levelised costs, “are one set of inputs into setting administrative strike prices—the maximum strike price applicable to a technology in a contracts for difference (CfD) allocation round”.^[37] Other inputs may include:

• revenue assumptions
• other costs not included in our definition of levelised cost (for example the generator’s share of transmission losses, route to market costs reflected in Power Purchase Agreement (PPA) discounts, and technology-specific estimates for decommissioning costs and scrappage values)
• CfD contract terms including length, risk allocation, and eligibility requirements within technologies
• other relevant information such as studies or data published by industry
• developments within industry
• wider policy considerations^[38]

Contracts for difference are a way in which the government incentivises investment in renewable energy by providing developers of projects with high upfront costs and long lifetimes with protection from volatile wholesale prices. They are discussed further in section 4.2 of this briefing.

Table 1 shows levelised costs for different kinds of generation technology.

Table 1. LCOE estimates for projects commissioning in 2025, £/MWh, in real 2021 prices

(Department for Energy Security and Net Zero, ‘Electricity generation costs 2023’, November 2023, pp 24–5)

This shows that the LCOE of the three renewable energy sources listed is lower than that of a combined cycle gas turbine. However, as DESNZ states levelised costs are not a complete picture of the costs of different sources of electricity generation. The predecessor department to DESNZ, the Department for Business, Energy and Industrial Strategy (BEIS), examined the issue of levelised costs and in 2020 it produced estimates of ‘enhanced levelised costs’ (eLCOE).^[39] This followed an analytical framework which BEIS published in 2017.^[40] This work did not consider impacts beyond the electricity system, for example, impacts on the wider economy, international trade or technological innovation. BEIS listed the following wider impacts on the electricity system that occur in addition to technology’s own costs. It stated that these wider system impacts are not accounted for in levelised costs and fall into the following categories:

• Impacts in the wholesale market. This category considers how timely or valuable each MWh generated by a technology is. This will differ by technology type. For example, a CCGT [combined cycle gas turbine] plant is dispatchable and will be able to focus its generation on valuable/useful time periods, while renewable technologies’ generation is determined more by availability of resource.
• Impacts in the capacity market. This category considers how firm or reliable each MW of capacity provided by a technology is at moments of peak demand. This will differ by technology type. For example, an OCGT [open cycle gas turbine] plant is very reliable at moments of peak demand (eg on a winter’s evening), while other technologies’ available capacity in those moments is less reliable (eg solar).
• Impacts in balancing and ancillary service markets. This category considers how helpful or unhelpful a technology’s generation is for the balancing and operability of the system. This will differ by technology type. For example, a technology whose output is more difficult to forecast is likely to increase the need for balancing in the system, while flexible, dispatchable technologies will potentially be able to solve balancing issues more cost-effectively. Regarding operability, technologies that, for example, provide additional inertia (which helps to slow a drop in frequency following a system loss, eg a large generator coming off the system unexpectedly) will help to reduce costs, while plants that currently cannot or are not incentivised to provide inertia will increase the system’s need to procure additional inertia from other plants. The model also considers technologies’ ability to provide reserve.
• Impacts on networks. This category considers how conveniently located a technology is, ie its proximity to demand centres. This will differ by technology type and location. This category is highly subjective as it depends on where a technology is assumed to be located.^[41]

BEIS estimated these costs and added them to levelised costs to create enhanced levelised costs. BEIS said that the eLCOE measure importantly did not “show the full system cost of different pathways but provide an indication of the relative marginal impacts of different technologies to the system in different scenarios”.^[42]

The Office for Budget Responsibility (OBR) has added BEIS’ additional system costs to the levelised costs of gas and renewable energy sources to provide an illustrative view of the costs of different energy sources.^[43] This can be seen in figure 2 below, which is taken from the OBR’s report.

Figure 2. Illustrative enhanced levelised costs of energy

Figure 2 presents data based on fuel costs before and after Russia’s invasion of Ukraine. The OBR explains that this impacted the relative costs of gas compared with renewables for electricity generation:

In chart B [figure 2 above] we add the ‘additional systems costs’ this metric [BEIS’ eLCOEs] incorporates on top of the basic ‘electricity generation costs’ of a reference technology—gas-powered generation. At pre-invasion prices, the eLCOEs for renewables are higher than the levelised cost of gas (the green bars), reflecting the greater additional systems costs (the yellow bars) associated with renewable generation compared to gas generation. Adding in the costs of the carbon capture usage and storage (CCUS) necessary to render gas carbon neutral (the yellow block in the second bar) leaves overall costs similar across all technologies at pre-invasion prices. To illustrate the additional costs of gas-fired power generation post-invasion, we have simply scaled up fuel costs to account for the percentage increase in gas prices in 2025 implied by our latest medium-term gas price forecast. This takes the eLCOEs for both gas measures (without and with CCUS) well above even the most expensive renewable technology.^[44]

The OBR stated that in practice “costs depend on the path taken by gas prices over the entire period that a plant is in operation”.^[45] It also argued that the relative LCOEs of different technologies would continue to evolve over time, whether one looked at LCOEs or eLCOEs, and indicated an expectation that renewables would continue to fall in cost:

And if the past is a reasonable guide to the future, that will make the comparison increasingly favourable to renewables, where costs have repeatedly fallen faster than predicted.^[46]

4.1 Estimated costs of transitioning to a renewables-led power system

Certain aspects of the nature of renewable energy sources are often cited as having a particular impact on wider costs. For example, in its report the OBR highlighted the dispatchability of different energy sources and the typical location of renewable energy generation:

• Intermittency vs dispatchbility. Renewable energy is often described as ‘intermittent’ and what it generates is dependent on factors other than demand. For example, wind turbines require the wind to generate electricity and solar is also weather dependent. Whereas gas is described as ‘dispatchable’. It can be switched on and off to generate in response to demand.^[47] This therefore means that a renewables-only generation system would be expected to require additional energy storage infrastructure to store excess energy which can be used when demand is higher and generation is lower.^[48] There are different ways of storing excess renewable energy including pumped hydroelectricity energy storage; electrochemical batteries; thermal and phase transition energy storage; mechanical energy storage; and hydrogen electrolysis.
• National grid connection improvements. Offshore wind, for example, is located further away from where the electricity it generates is to be consumed. The OBR has said that this adds to the overall cost of delivering power to where it is needed.^[49] It has also stated that renewables tend to require a larger number of smaller-scale generators to be connected and balanced on the grid, as compared with gas-fired power stations.

Professor of Economic Policy at the University of Oxford Dieter Helm has argued that the costs associated with addressing the problem of intermittency has been ignored by “almost every calculation of the costs for these renewables”.^[50] He summarises the issue as follows:

A system with the capability of supplying 100% demand when the wind blows and the sun shines needs a back-up system which is very large scale. Put simply, with intermittent technologies, there needs to be a lot more capacity for a given demand. That has costs, and the back-up costs more because it is rendered intermittent by the renewables. It has fewer periods to recover its costs and a gas station will be confronted by the uncertainty of when it will need gas supplies at short notice to provide this back-up. (Lots of wind and solar power will also make nuclear intermittent too.).^[51]

Professor Helm stated that there were ways of addressing intermittency other than with back-up power stations, citing battery storage, active demand management and (in time) hydrogen as storage. However, he said that these solutions had costs “and some are large” and “are not features of conventional generation”. He argued that it costs more in these respects to include renewables on the system once they reached a certain proportion of total capacity. Professor Helm also argued that the costs of addressing the location of renewables and the associated grid costs “should be added to the near-zero marginal costs, the capital costs, and the back-up intermittency costs”. He argued that incorporating these costs would require a recognition that “someone had to pay”. He said “telling people that they should support net zero and that it is going to cost them is a painful message for the advocates and lobbyists to admit”.

He has argued that the narrative that transitioning to net zero would not cost people much money risked a backlash, but he argued that the country was not currently paying for the impact of emissions:

The harsh reality is that we, the polluters, are living beyond our sustainable means. We are not paying for the carbon (and multiple other forms of) pollution we are causing. If we were, prices would be higher and living standards would be affected. We do not want to vote to pay for the damage we are causing. We are not living in the sustainable economy.^[52]

Whilst Professor Helm highlighted what he argued was a problem with not being open about the costs of net zero, he also argued that this did not suggest “we should not take climate change extremely seriously, nor that we should slow up in switching out of fossil fuels”. He said:

Rather, it says two things: first, that it is going to cost consumers and voters quite a lot more than they have been told to expect; and, second, that the extra costs should be targeted and measured by their impact on climate change. Unless these are addressed, the UK is going to experience both higher costs and the consequences of climate change, and not what has been suggested—that the costs are less than the costs of climate change, which they have been told that the current UK policies will help to avoid.^[53]

Others have argued that whilst investment in new infrastructure is required (and has a cost), a renewables-dominated power system would have a lower cost per unit of electricity generated than at present. Keith Bell, holder of the Scottish Power Chair in Future Power Systems at the University of Strathclyde, has asserted that:

It is often thought that the cost of providing backup for variable renewables will result in a more expensive energy system than one based on fossil fuels. However, not only is electrical energy from renewables cheaper than from gas, but by limiting dependency on gas, a power system dominated by renewables is expected to reduce costs overall in comparison to the average electricity wholesale market price over the last year.^[54]

He argued that:

Crucially, studies that have looked at the total system cost, including the cost of backups to handle the variability of renewables, have found that the future decarbonised power system will have a lower cost per unit of electricity than the average price in Britain’s wholesale electricity market in 2023 of £127/MWh.[Footnote from original article: £127/MWh was, according to Ofgem data, the average price paid in advance—the ‘forward price’—for electricity in Britain’s wholesale market across 2023. Prices paid by traders vary according to demand. The prices offered by producers include the costs recovered by the system operator to operate the system and by the transmission network owners. Thus, the average wholesale price provides a good basis for comparison with a future ‘system cost’.]

The Climate Change Committee’s assessment of the potential technology mix and cost of a fully decarbonised British electricity system in 2035 considered a system based on a large share of renewable technologies that reliably meets demand for electricity, including in a four-week ‘wind drought’. It found the average system cost of electricity production in 2035 to lie between £55/MWh and £73/MWh (the cost range reflects the inclusion or exclusion of the costs associated with hydrogen production, transport and storage, including for non-electricity related uses). A study by the Royal Society on energy storage estimated the system cost of electricity in 2050 using only wind and solar power and ‘green’ hydrogen to reliably meet demand across a wide variety of conditions to be in the range of £56–£100/MWh.^[55]

Professor Bell said that in addition to new generation capacity, a fully decarbonised system would require “significant investment” in the national grid. However, he argued that the power network required investment, “whatever the dominant sources of power”, because “component parts are reaching their end-of-life and need to be replaced but the opportunity will need to be taken to expand capacity”. He said it was uncertain how much this additional cost would be, but “one estimate for the transmission network comes from the Royal Society’s report, of £4/MWh in 2050, which would be in addition to the system cost outlined above”.

On 5 November 2024, NESO published its advice on how to achieve clean power by 2030.^[56]The report set out three key messages about how Great Britain can achieve clean power by 2030:

• Clean power is a huge challenge but is achievable for Great Britain by 2030.
• Clean power will require doing things differently. It will only be achieved with bold action and sustained momentum, across every area and every step of the way between now and 2030.
• Achieving clean power by 2030 will put Great Britain in a strong position.^[57]

Chapter 5 of the report specifically considered the costs and benefits of a clean power system. NESO stated that the overall impact on electricity costs of a clean power system would depend partly on supply chains, but based on its analysis NESO did not expect the overall cost to consumers to increase:

A crucial determinant of overall costs will be the impact of the government’s new approach to clean power. If it can provide greater visibility and greater confidence while unblocking barriers and easing delivery, there may be opportunities for costs to fall. Conversely, if supply chains become excessively stretched, costs could escalate. Taking a neutral view over these effects, our analysis shows that overall cost to consumers would not increase as a result of the move to a clean power system. Other factors will also impact electricity bills to 2030, including a reduction in legacy policy costs (as contracts expire) and energy efficiency improvements.^[58]

In terms of estimating how costs would change in the future, NESO said there were multiple effects to take into account. Including many of the issues discussed above:

Power will be generated from different means with different underlying costs. More will be generated, not just to service growing demand, but because some will be curtailed, exported or lost during storage cycling. Also, there are costs to be covered in expanding the networks and storage infrastructure.^[59]

NESO said that examining these expected effects in 2030, its analysis suggested “a slight increase in total system costs for our New Dispatch pathway, equivalent to around £10/MWh”. This was broken down by cost of generation, curtailment, net exports, storage, and network and constraint costs.^[60]

NESO did highlight a risk to its estimates, stating that the need to contract and then build a large amount of generating capacity in a short period could lead to an increase in CfD strike prices. NESO stated that:

Our analysis is based on an assessment of the pipeline of potential offshore wind projects and the potential for inframarginal rents from the CfD auction.[Footnote from original article: Our analysis was developed with Baringa using their proprietary offshore wind CfD auction model. Infra-marginal rent refers to the extra payment (above costs) received by lower cost projects that get paid the same strike price as the more expensive projects that set the clearing price in the CfD auction.] In an extreme case where all offshore wind projects are paid in line with the costs of the most expensive project and costs are further pushed up 25% due to supply chain pressures, average costs of the electricity system could increase by a further £15/MWh. To keep overall costs down, it is therefore vital that an element of competitive pressure is maintained and that high inframarginal rents are avoided.^[61]

NESO said that despite its projected increase in system costs for clean power, it did not expect costs to consumers to increase:

While our system cost analysis points to a slight increase from a move to a clean power sector, there will be direct benefits offsetting these, suggesting that overall costs to consumers would not increase from the shift to a clean power system. Specifically, in our clean power pathways, gas sets the price less frequently. The resulting reduction in wholesale prices would lower payments and infra-marginal rents for generation with low marginal costs, such as existing nuclear plants and those receiving renewable obligation certificates (under current market arrangements). Our analysis points to this reducing average electricity prices by around £10 /MWh under a clean power system. This reduction would not happen without the shift to clean power.

Further bill reductions can be expected as levies for older renewable support schemes, such as the renewables obligation and feed-in tariffs, reach the end of their contractual periods. Some of the plants with these contracts may need new support for repowering, but this would be at much lower levels than in the legacy contracts and could come with an opportunity to increase output relatively cheaply. This effect would happen even without a shift to clean power and would reduce average prices by around £10/MWh by 2030, with continuing falls through the 2030s.

There are also additional opportunities to reduce bills through energy efficiency. For example, our clean power pathways involve an efficiency improvement in lights and appliances for households that sees typical electricity usage drop by c. 5–10%.^[62]

NESO said that more generally the move away from gas as the main price setter for electricity would “greatly reduce” the risk of major price spikes.^[63] It said such spikes were passed on to consumers and gave the example of gas prices in 2022. NESO said that whilst gas prices fell in 2023, “prices remained very high as forward hedging locked in higher costs”. It said that whilst such spikes were hard to predict, the move to a clean power system “greatly reduce the exposure for consumers and the public purse”.

Policy choices would also impact the translation of clean power costs into bill impacts. These included how and when costs were reflected in prices and how they were distributed across different consumers. NESO said that:

These choices will affect both current and future consumers, as well as the allocation of costs between gas and electricity consumers. The impact on bills may vary among consumers, such as those with electric vehicles or electric heating and those who have more flexibility in their electricity usage. Potential distributional impacts across residential and business users should be carefully considered when designing policies in this area.^[64]

4.2 Contracts for difference

The government supports the roll out of renewable energy through the contracts for difference scheme.^[65]

A contract for difference (CfD) is a private law contract between a low-carbon electricity generator and the Low Carbon Contracts Company (LCCC), a government-owned company. The contract is designed to provide the generator with price certainty over the lifetime of the contract. It is also designed to incentivise investment in renewable energy by providing developers of projects with high upfront costs and long lifetimes with protection from volatile wholesale prices. CfDs require electricity generators to sell energy into the market as usual, but where the market price is lower than a pre-agreed strike price, the generator is given a payment to make up the difference.^[66] When the market price is higher than the strike price, the generator has to pay back the difference.^[67]

Eligible renewable generators in Great Britain have been able to submit sealed bids for CfDs through auctions, of which there have been six to date. CfD contracts run for 15 years.^[68]

The strike prices vary by generation technology and have fallen since the first auction round (AR) took place between October 2014 and March 2015 (AR1).^[69] Prices for CfDs are expressed in 2012 prices, but the amount generators receive is the equivalent uprated for inflation.^[70] Analysing data from the LCCC’s auction outcomes dataset,^[71] the House of Commons Library have summarised the reduction in strike prices as follows:

The average strike price for offshore wind projects fell from £120/MWh in AR1 to less than £40/MWh in AR4. The strike prices for the earlier investment contract projects were higher still at £140 to £150/MWh. No offshore projects bid in AR5. The average price in AR6 was just over £57/MWh. This was just over 50% higher than in AR4, but well below the administrative strike price for this technology of £75/MWh in AR6.

Strike prices for onshore and solar projects fell between AR1 and AR4 by 48% and 30% respectively (neither were included in rounds 2 and 3, hence the dotted line below). Strike prices for onshore wind increased in AR5 and fell back slightly in AR6. Prices for solar increased slightly in both AR5 and AR6. The AR6 prices for both technologies were still well below the AR1 levels.^[72]

The CfD scheme is funded through the CfD supplier obligation levy. The LCCC explains:

Electricity suppliers are required to fund the CfD scheme. They do this through the CfD supplier obligation levy. We determine in advance what amount a supplier will need to pay in each quarter, and set the Levy accordingly. We are also required to collect a Reserve Amount from each electricity supplier, and this, like the Levy, is based on assumed levels of electricity generation. If assumptions change due to unforeseen events, we can reduce the levy and the total reserve amount, before or during a quarter. We publish all our quarterly assumptions in the levy dashboards.^[73]

The LCCC’s allocation round resource portal states that it is expected that “suppliers will pass on the net cost of the CfD levy to consumers through electricity bills”.^[74] Ofgem adds an allowance for CfD costs to the energy price cap for household energy bills.^[75]

House of Commons Library calculations based on Ofgem’s data,^[76] found that:

The CfD allowance added a total of around £100 to typical domestic electricity bills over the period April 2019 to December 2024. This was 2.9% of the total electricity bill that a household with typical consumption would have paid over this period.^[77]

5. Recent debate in the House of Lords

The House of Lords recently debated the impact of the government’s climate policy on jobs, growth and prosperity.^[78] The House of Lords Library produced the following briefing to support that debate, section 2 of which examines the economic costs and benefits of reducing emissions:

• House of Lords Library, ‘Government climate policy: Economic impact’, 17 October 2024

Lord Lilley (Conservative), who moved the debate, described the science of global warming as “rock solid” but expressed concern that the financial cost of achieving net zero had not been adequately debated.^[79] Lord Lilley argued that proponents of net zero were reluctant to discuss costs because they had “convinced themselves that there are none”. He also argued that estimates of the costs that had been produced by public bodies were optimistic, saying that “it is sad that we do not have the information on which we can have an honest and informed debate”.

Lord Lilley expressed concern that the UK had invested too early in technology before it had reduced in cost:

If renewables are cheaper, why is our electricity more expensive than in other European countries, which have less than us? If renewables are cheaper, why do they need subsidy?

Apologists say that those are the costs of old technologies and that the costs are coming down. The first part is true, although it is a shame they did not tell us at the time. Dieter Helm has calculated that Britain wasted up to £100bn by investing prematurely in immature technology, rather than waiting until it was cost effective.^[80]

Lord Frost said he thought that consensus on net zero was “beginning to crumble”.^[81] He said he did not believe that there was a climate emergency, he asserted that climate change was a challenge that could be met and did not require “us to upend our entire economy and way of life”. He asserted that the claim that net zero was good for growth and prosperity was “nonsense”. Lord Frost set out what he described as a number of “fallacies”. For example, he said that investing in a new energy system had some “economic spin-offs and does get you an asset”, but he argued that renewables were not a valuable replacement for the current national grid:

In fact, what we are doing today is creating a reduction in wealth: the new asset is worse than the old one. The replacement of the current grid with rickety and expensive renewables is not an improvement; it is a massive reduction in productive capacity—malinvestment of the worst kind. Just think of all the genuinely productive projects that could be funded with the trillions that we are going to spend over the years and how much real wealth could have been created.^[82]

Giving her maiden speech in the House of Lords, former prime minister Theresa May (now Baroness May of Maidenhead) said that the debate should not just be about money:

I also think that, if we look at this debate just as a matter of who has the biggest sterling figure on their side of the argument, we are missing something. There is a real human cost to climate change.^[83]

However, she believed that “we can reap economic benefit from dealing with climate change”.^[84] She argued:

It can bring jobs and prosperity, but it can also help us reduce vulnerability to modern slavery and human trafficking. I urge the government and all across this House to recognise the need to deal with climate change to save our planet and to save our humanity.^[85]

Lord Willets (Conservative) said “our free and open economies” had operated without “acknowledging the external costs created by the energy that we were using”.^[86] He argued that we needed to move to “honest prices that fully reflect the costs of carbon emissions as part of a belief in a functioning market economy”. Lord Willets asserted that there were benefits to doing this even if the cost of adjustment was high:

If we go through this process, we will end up with a system with enormous benefits: with greater security of supply, with much less exposure to the risks of volatile gas prices and indeed, in many cases, with lower operational costs, particularly for people driving motor vehicles. The costs of adjustment are indeed high. We absolutely need rigorous economic analysis of what those costs are and who bears them.^[87]

Lord Browne of Madingley (Crossbench), former group chief executive of BP, said that the UK “probably [had] 50% of the technologies we need to get to net zero”.^[88] However, he also said that the UK had the ability to move scientific developments into commercial deployment and could redeploy expertise from the fossil fuel sector:

[…] we also have universities such as Cambridge that are awash with groups that have the potential to take discovery science, incubate it and prepare it for the commercial markets at the scale that we need not just in the UK but also in the world. There is a wealth of engineering and technical expertise among those who have spent decades working in my old industry, oil and gas, that can now be deployed in the wind, solar, nuclear and other energy sectors.^[89]

Responding for the government, Lord Hunt, minister of state at the Department for Energy Security and Net Zero, argued for the importance of political consensus in the transition to net zero. He said “I get [Lord Lilley’s] argument, but I think he would recognise that he had a mixed response even from his own benches”.^[90] Referencing Lord Frost’s comment on consensus, Lord Hunt went on to say that he sensed that some of the political consensus on net zero “may be breaking down”. However, he said this would be a “great pity” and would make it harder to explain the importance of net zero to the public:

To pick up the point about the need to take the public with us and to paint them a picture of where we are trying to get to on net zero, a lack of political consensus would make it much harder to get that over to the public, whose support we need for what are often going to be very challenging policies.^[91]

Lord Hunt said that whilst he understood that Lord Lilley was critical of levelised cost to compare the cost of energy generation “it does attempt to compare the costs of different generating technologies over different timescales: essentially, over the lifetime of the generator”.^[92] On a question raised by Lord Leicester (Conservative) as to whether the UK could afford the transition to net zero, Lord Hunt quoted the OBR, which he said had said in 2021 that the “costs of failing to get climate change under control would be much larger than those of bringing emissions down to net zero”.

Lord Hunt thanked Lord Lilley “for his willingness to raise sometimes challenging issues”, but the government was delivering on a manifesto commitment.^[93] Lord Hunt said “we need decisive action on both climate change and energy security” which he argued would “have a big positive impact on jobs and prosperity”.

6. Read more

• House of Lords Library, ‘Government climate policy: Economic impact’, 17 October 2024
• House of Lords Library, ‘Offshore wind energy’, 4 September 2024
• Parliamentary Office of Science and Technology, ‘Energy security’, 30 August 2022
• House of Commons Library, ‘Contracts for difference scheme’, 14 October 2024
• House of Commons Library, ‘Why is cheap renewable electricity so expensive on the wholesale market?’, 14 September 2023
• Cameron Hepburn, ‘Do the economics behind the UK’s climate ambitions stack up?’, Royal Society, 27 August 2024

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Cover image by American Public Power Association on Unsplash.

This briefing was updated on 13 November 2024 to clarify uses of the word ‘energy’ as compared with ‘electricity’, primarily in section 2. A link to the Office for Budget Responsibility’s gas price forecast in its October 2024 economic and fiscal outlook was added to a reference in relation to the discussion of figure 2.