Electricity prices – its complicated

I came across this comment the other day from some climate denier, the figure he was referring to being given below. The point he was trying to make was that German electricity prices are high and thus renewables = expensive electricity. However, the reality is a little more complicated than this.


Figure 1, Electricity prices by country (in US cents/kWh) [Source: Statista (2015)]

For example, while yes German electricity costs are high and Germany does have a lot of renewables, but it also has lots of fossil fuel plants, indeed more of its power still comes from fossil fuels than renewables. Yet some of the countries listed above, Portugal, Sweden or Austria for example have significantly lower electricity costs, yet a very renewable heavy electricity, grid (as shown in figure 2). Indeed, Norway and Iceland, two countries with near 100% renewable electricity and relatively cheap electricity prices, aren’t even on this graph. In short, the data would seem to imply that renewables equals cheaper electricity, however that would ignore a number of important factors relating to how electricity is priced. The situation is a little more complicated.


Figure 2, % Share of renewable energy in gross electricity consumption [Source Cleanwire.org based on Eurostat data (2015)]

For example, the UK as a whole gets only 14% of its electricity from renewables, yet Scotland gets 57% from renewables. And for the record, I pay less than this 14.16 cents quoted for my electricity (and I’m in Scotland) and I’m on a 100% renewable electricity contract! Bottom line, the wholesale electricity price of a country is not a very good benchmark by which to compare different energy technologies. The devil is in the detail.

The wholesale price of electricity pays for a lot more than just the power plant. It also includes the cost of the infrastructure (e.g. the power lines, transformers, sub stations, energy storage, etc.) and maintaining that infrastructure. Different countries have very different policies that can have a big influence on how much power costs. Indeed, even comparing by the prices at which the power companies buy and sell electricity can be a bit iffy. Gas fired plants or Hydro will generally only come online when the prices are high, nuclear (which wants to be on all the time) and variable renewables will sell to the grid at whatever price they can get.


Figure 3, Breakdown of a typical UK bill [Source: BBC (2014) based on Ofgem figures]

This is why LCOE is generally used instead. And the latest data on that says that once we factor in the costs of CCS or cleaning up coal, fossil fuels will in future be more expensive than renewables.

But like I said government policy, not so much how much power infrastructure is added, but how this capacity is added can have a fairly large influence on price. The high UK electricity prices being a case in point. Prices in the UK are high because the Thatcher government privatised the industry along laisse-faire lines and we’ve been paying the prices ever since. The industry was set up to benefit the spiv’s and speculators in the city. They’ve consolidated much of the UK’s electricity industry into a cosy cartel of big companies, who are very quick to put up prices whenever they get an excuse to do so (e.g. oil or gas prices go up, brexit, etc.), but they are usually very slow to bring them back down again when costs go down. They’ll engage in all sorts of antics, such as turning off wind turbines at peak demand to create an artificial shortage and push up prices.

And should you wonder why British bill payers don’t abandon the big 6 power companies, well that’s easier said than done. Many people who rent can’t change suppliers without their landlord’s permission. And as they’d have to sign a long term deal to get the best prices, they often aren’t in a position to do so, due to the insecurity and a lack of secured tenure that UK renters have to cope with. I’m paying less than the average because the first day after I bought, I started the process of switching supplier…. which took 3 months and lots of phone calls and threats of legal action. I buy from a smaller firm, and as they mostly generate from renewables (which don’t go up in price every time Putin throws a hissy fit), they can charge me a lower rate and haven’t pushed up their prices since I joined (although with Brexit and the higher inflation we’re now seeing, a bill increase is more or less a dead cert).

It should also be remembered that higher energy prices aren’t necessarily a bad thing, as this incentivises energy conservation and encourages investment. However, while the rest of Europe (notably Germany), have active and highly successful programs aimed and improving energy conservation, the UK under the Tories has actually abandoned such policies. As a result UK energy efficiency is now going into reverse. And often the very people who can lease afford high energy prices in the UK are the very people living in leaky energy inefficient homes, often paying the highest prices.

So all in all, its a mess. And a lack of any coherent energy policy from successive governments does not help. The mixed signals from the Tories means the sort of long term investment in new infrastructure that should have started decades ago, isn’t being made. The country is dependant for a lot of its power from creaky old coal and nuclear power plants, many of which are operating well pass their sell by date. Gaps in capacity aren’t being met by some sort of long term plan (e.g. energy storage tied to renewables, gas fired CHP tied to renewables, etc.) but instead by a proliferation of diesel farms, which are very expensive.

As a result, the UK power grid is a classic example of British make do and mend. The Hinkley C project (assuming it actually gets built of course) highlights everything that’s wrong with the UK’s energy policy. I mean if the Tories really, really want a nuclear plant that badly, why use this ridiculous CfD method to pay for it? Why not just do what the French did and pay for the plant directly out of the national coffers. Nevermind the cost to the bill payers of Hinkley, the cost to the UK taxpayer means it would still be cheaper if they nationalised the project. But that would involve use of that which we do not speak of (socialism), which is against the Tories religion of Thatcherism (shortly to become the state religion of the UK post-Brexit). So like the Merchant of Venice, they are paying those nasty French and Chinese socialist and their state owned companies to nationalise the project for them….same way many of the UK’s “private” train companies (which were also privatised) are now owned by state owned railway companies from around the world!

By contrast, some governments actively try and push down electricity prices. France, by effectively funding their nuclear industry out of the public purse are effectively subsidising electricity prices. Now granted, this comes with its own problems, i.e. it’s not exactly cheap (the French have dozens of reactors in contrast to the one or two the UK is proposing to build), its pushing up France’s national debt and one has to question the wisdom of giving away cheap electricity (and thus encouraging the energy inefficiency). In Scandinavia they’ve promoted and installed lots of things like district heating schemes run by CHP plants (which eliminates the need for a gas grid), invested heavily in energy efficiency, or large renewables projects which all help improve the reliability of the grid, lower energy demand and generally help to keep prices reasonable.

But back to the question, why is German electricity so expensive? Well unlike the UK (who produces a lot of its gas or can buy it cheaply from Norway) Germany has issues securing gas supplies. Given their dependence on gas (hence why they are so keen on renewables!), they have to spend a lot of money building and maintaining large gas storage facilities. Ultimately phasing out nuclear at the same time they are adding lots of renewables is pushing up prices in the short term. Although it still only represents a small portion of bills, typically about a quarter of an average bill. But that said, doing the opposite (as the UK proves) isn’t going to help keep prices low, indeed over time it will likely result in even higher prices.


Figure 4, Gas storage by country, Germany’s stockpile represents 80 days of supply at normal winter withdrawal rates [Source: BMWI, 2014]

Also there is the reliability of the grid to consider. Germany has a very reliable electricity grid, with significantly less brown outs or black outs than other countries. This incidentally counters another anti-renewable argument, that more renewables equals more blackouts. The Germans, being notoriously risk averse, spend a lot more money backing up and reinforcing their grid. As a result, they’ve build an energy grid not unlike the way they design their cars, very reliable, high tech, but perhaps a bit over engineering and a little on the pricey side.


Figure 5, Grid Reliability by selected country [Source: CEER & Energy Transition.de, 2015]

So whether you think this is a good deal or not boils down to how dangerously you are willing to live. The Germans, unsurprisingly, don’t want to live dangerously and are happy to pay high prices and conserve. But customers in other countries, who are willing to accept that the odd black out will happen from time to time, get to benefit from cheaper electricity. This is an important point in the context of renewables roll out. If we are willing to accept that the odd hour or two here and there without power isn’t going to be the end of the world, we can end up making some significant savings. And in a renewable heavy, distributed grid model, many will have their own means of power generation independent of the grid and hence a black out is less likely to impact on them.

So the key point here is that the devil is in the detail, one has to put any set of statistics in the proper context. But here’s the problem, most people and in particular those on the right want short snappy right or wrong answers, not a longer (but ultimately more accurate) analysis that weights up the different arguments. And policy makers can be very prone to taking short answers that the believe can be easily sold to voters over longer winded but accurate facts.

About daryan12

Engineer, expertise: Energy, Sustainablity, Computer Aided Engineering, Renewables technology
This entry was posted in CHP, clean energy, economics, efficiency, energy, fossil fuels, France, Global warming denial, nuclear, Passivhaus, politics, power, renewables, subsidy, sustainability, sustainable and tagged , , , , , , , , , . Bookmark the permalink.

2 Responses to Electricity prices – its complicated

  1. Pingback: Taxing the Sun | daryanenergyblog

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