While not the only factor, economics is one of the dominant drivers of the anti-renewables shift in the conservative movement. It follows data showing the UK has the highest industrial electricity prices in the developed world. High electricity prices are corrosive both for political support for net zero and for the electrification of the economy, a key element of decarbonisation. With Ed Miliband’s policies likely to increase bills further through his inefficient central planning approach to net zero, a focus on lowering costs is essential and a wise dividing line that conservatives can draw with the government.
The case for renewables is often based on their favourable position in levelised costs of energy rankings. Under figures published by the last government, for projects commissioning in 2025, new gas would cost £114/MWh, offshore wind £44/MWh, onshore wind £38/MWh, and solar £41/MWh. The 2023 report didn’t include updated estimates for nuclear, but pointed back to the 2016 report which costed new nuclear at £95/MWh. This broadly matches the cost rankings of different energy sources by Our World in Data, whose research also shows the huge cost reductions in renewables because of experience curves.
These ‘levelised cost of energy’ metrics have long been criticised on the grounds they exclude balancing costs and therefore overstate the attractiveness of renewables. This critique has gained traction in recent months and led some on the UK centre-right to raise concerns about the economics of renewables. Some of these are legitimate, but some miss important nuances. This blog will look at four principal worries and suggest ways to lower costs.
The first worry relates to the fact UK industrial electricity prices have tripled in the past couple of decades. There is an understandable impulse to ascribe a causal link between this rise and our increased renewables capacity. After all, the main change in our energy system over that period appears to have been the buildout of renewables. But assuming causation from this correlation isn’t so straightforward. Gas prices set the wholesale price of electricity over 97% of the time in the UK market. And wholesale prices are the biggest single element of electricity bills. The shift from coal to LNG and rising carbon prices are likely a more plausible explanation for high electricity prices, as Adam Bell has argued.
Retiring old coal plants and pricing carbon are two of the most efficient actions governments can take to mitigate climate change and so were good policies to adopt. But we now need to reduce our reliance on gas. Building more clean power will mean gas will set electricity prices less frequently, helping to lower wholesale electricity prices. Now that coal has come off the system, we could also review our top-up carbon tax, the Carbon Price Support (CPS), which generators pay in addition to the carbon price in the Emissions Trading Scheme (ETS). The CPS was designed to encourage the coal to gas shift in the UK electricity market when the ETS carbon price was low, but has now served its purpose.
The second worry is about the legacy renewables subsidies sitting on people’s bills, which cost around £10 billion a year. The biggest of these - Renewables Obligation and Feed-in Tariffs - are paying for renewables projects that were financed well over a decade ago under the last Labour government when technology costs were much higher. The Labour government decided to fund early-stage development of renewable energy through bill levies, rather than general taxes, despite the impacts on industrial competitiveness and fuel poverty. This was a mistake. These historic subsidies should be taken off bills and funded out of general taxes until the contracts expire, which will start later in the 2020s.
But this is not a reason to stop building new renewables which are much cheaper than those early projects. Moreover, renewables are now supported by a cheaper, more efficient market-based mechanism, Contracts for Difference (CfD), which uses auctions to drive down prices and unlocks lower financing costs for developers by guaranteeing a minimum power price for 15 years. Developed under Conservative governments, this mechanism has slashed strike prices by 54% from £117/MWh in 2014 to £54/MWh in the most recent auction round. These contracts also provide greater stability in energy prices, paying back to consumers when gas prices spike. The government should continue with CfDs, but avoid setting overly generous budgets. This will ensure they don’t squeeze out competition from the auctions in their haste to subsidise every shovel-ready project to meet the 2030 clean power goal.
The third concern is based on recent cost rises for new renewables projects. In 2023 no offshore wind projects submitted bids to the CfD auction, as they couldn’t afford to finance projects at the prices offered by government. While offshore wind projects were awarded contracts in 2024, the strike price rose relative to 2022 (from £37/MWh to £54/MWh). Some renewables projects awarded contracts in 2022 at low strike prices delayed final investment decisions due to mounting costs.
The economics of new renewables have undoubtedly become less favourable than at the height of the gas crisis. Gas prices have fallen back from the peak. At the same time, renewables costs have risen due to higher interest rates and supply chain crunches. Renewables are much more exposed to interest rate changes as they are capital intensive but zero marginal cost, while much more of the costs of gas are operational from buying the fuel. For example, the cost of new offshore wind is 57% capital spending, whereas the cost of a new gas turbine is 7% capital spending. As interest rates continue to fall, and as supply chain capacity expands in response to price signals, new renewable prices will fall back. However, the front-loading of renewables deployment to hit the 2030 clean power goal risks locking in higher CfD prices while interest rates remain high and supply chains are still constrained.
New renewables are not alone in requiring government support. There are subsidies embedded across the energy system for different technologies. New gas needs a subsidy from the Capacity Market, which has already subsidised 0.5-2GW of new gas capacity in each of the last four years. And during the gas crisis prompted by the Russian invasion of Ukraine, the Treasury was forced to spend over £94 billion subsidising our existing gas-dependent energy system. New renewables need Contracts for Difference, which provide 15 year revenue guarantees once projects are operational. And new nuclear needs multiple subsidies - both co-financing of capital costs and operational subsidies during construction and for 30 years of generation.
As an aside, while it has been expensive recently to build new nuclear plants in the UK, Korea can build them at around a quarter of the price, thereby providing hope that we can drive down the currently high costs. Uncomfortably for free marketeers, Korea has achieved such low nuclear costs through a very centrally planned and statist approach. They were built by a state-owned company, with state financing, and with a single reactor design (i.e. without competition) deployed many times. And even Korean nuclear economics aren’t so overwhelming that they have stopped building renewables: their government plans to raise renewable capacity from 9% to a third of their power mix by 2038.
Just as every form of new energy generation requires a subsidy, there is also significant potential to reduce costs for all new clean energy technologies. The Foundations essay, written by Sam Bowman, Ben Southwood, and Samuel Hughes, rightly proposed a variety of ways to cut regulatory and planning red tape for new nuclear projects. The government should implement their proposals as quickly as possible. But they were bearish on the potential for renewables to cut their costs. Yet renewables are also susceptible to many of the same lengthy planning and regulatory delays afflicting nuclear, including the cumbersome Nationally Significant Infrastructure Project (NSIP) process, the risk of judicial review, and lengthy Environmental Impact Assessments.
The last government began important work reforming legacy EU environmental rules to enable a cheaper, more strategic approach to mitigating harm to sensitive habitats and streamlining the NSIP process, which will also help to lower long-term renewables costs. The creation of renewable energy zones in areas of low environmental sensitivity, where planning and regulatory barriers can be safely lowered, as the campaign group Britain Remade has advocated, could help further bring down renewables costs. So too could implementation of Lord Banner’s recommendations for reforming judicial review, which bog down new renewables projects in costly legal action.
The final concern is that the costs of balancing variable renewables on the grid are increasing. These costs include both back-up capacity to keep the lights on when the wind doesn’t blow and sun doesn’t shine, and payments to curtail generation when there is too much wind and sun to avoid overloading the grid. Balancing costs last year were around £2.5 billion and are set to rise further in the coming years.
These are inevitable costs of a system dominated by variable renewables, but there is potential to reduce them. Although they require investment, building more storage and grid infrastructure is critical. Enabling more voluntary demand flexibility services would lower costs by reducing back-up requirements and constraint payments, better matching up supply and demand, and harnessing the growth in EVs and home batteries. More accurate price signals in the wholesale market - which take account of both time of use and location - could also minimise balancing costs by incentivising more efficient generation and consumption of power. The arbitrary 2030 clean power target risks adding more renewables to the grid before these reforms have been made, pushing up balancing costs in the near term.
But externalities and system costs are not unique to renewables. Other energy technologies also have costs, whether it’s climate change and air pollution costs from gas fired power stations, nuclear decommissioning and waste storage costs, or balancing costs associated with matching nuclear’s inflexible, constant output against variable demand patterns. When making comparisons between technologies, we have to take account of all of these as well as the headline strike price.
Obviously, costs are not the only reason conservatives worry about renewables. There isn’t space to go into all these other factors here, but they include local opposition, food security, biodiversity loss, and reliance on Chinese supply chains. There are solutions to these concerns - e.g. community benefits, planning protections for farmland and important habitats, biodiversity net gain, local content requirements, ‘ally-shoring’ - but they all involve trade-offs against cheap energy. We should strive for a balance of all these goals, but must also be clear that in doing so we are pushing up costs.
With the Conservatives now in opposition and a new leader in post, this is an opportune moment to review the party’s energy policy. We have to get energy costs down, to strengthen our industrial competitiveness, to make levelling up a reality, to tackle fuel poverty, and to support electrification which is vital for net zero.
Having a clear plan to bring down electricity costs will also enable the Conservatives to hold the new government to account. Labour has shown little regard for affordability in its policies and pursued instead ideological projects like GB Energy which will do nothing for bills. But we must be careful not to throw the baby out with the bathwater by blocking renewables. We should focus on using our free market principles - tax cuts, competition, and regulatory reform - to make them cheap.
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