Once a nascent power source, wind and solar energy are now significantly cheaper than gas, especially at peak hours.
Following Russia’s invasion of Ukraine, gas generation dropped this year, compensated mainly by increases in low carbon power, according to the Office for National Statistics.
Renewable and nuclear power picked up some of the slack from the erosion in the gas market, rising 10% and 14% respectively between February and April, as gas exports helped backfill reserves in Europe while it turned the taps off on Russian gas.
This made renewables the dominant source of power in the UK during the second quarter of this year.
The UK’s power mix comprised 41.5% renewable power, 37.2% gas power, and 17.7% nuclear between February and April, data from the Department for Business, Energy and Industrial Strategy showed.
While coal generation also surged as the government relaxed rules on coal plants, the amount that coal contributes to the energy mix is very low, comprising just 2.9% that quarter.
Many people were surprised when renewable power became Britain’s primary power source in 2020, keeping a majority of the lights on in British homes and businesses.
According to Lazard, wind power now costs as little as 26 dollars (US) per megawatt-hour, whereas gas—the cheapest available fossil fuel—costs 45 dollars or more. Gas is also more expensive than utility-scale solar, which costs as little as 28 dollars per unit.
Lazard examined the so-called “levelised” cost of power, the basic cost for each power source without any government subsidies.
The financial services firm's unsubsidised analysis suggests that the levelised cost of wind power undercut the cost of peaking gas, nuclear energy, coal power and gas combined cycle generation in 2020.
Gas used at peak times of the day, referred to as peaking gas, is even more expensive than regular gas, priced on average at US$151 per unit. The UK N2EX market price for baseload power crept up to as much as US$338.49 (€325.01) per MWh at certain times of day on July 1, according to Nordpool.
Wholesale gas prices have continued to rise since Russia invaded Ukraine. The National Audit Office estimated that gas prices rose sixfold last year as Europe and the US imposed strict sanctions on imports of Russian oil and gas. Energy companies such as SSE PLC (LSE:SSE) are expected to put up their gas prices further this year.
Meanwhile, the cost of renewable power continues to fall except for inflation, as the UK commits to locking in competitive prices through auctions for long-term power contracts.
Britain will announce winners from the latest auction for low carbon power capacity on 7 July, to lock in preferential rates amid the current energy crisis.
In other words, the country is banking on low carbon power to fill at least some of the deficit created by raging gas prices.
Spanish power utility Iberdrola, which is listed on the Bolsa de Madrid, and listed Danish energy company are among those competing to secure contracts for offshore wind projects in the government's latest round (for Hornsea 3 and East Anglia 3 respectively).
The latest power auction could deliver prices as low as £34 per MWh (US$41) in 2011 equivalent pricing, or from £54 per MWh in nominal terms, according to Credit Suisse.
Baseload power
So if renewable power is so cheap, why did the British prime minister pledge to build more nuclear power in the UK? The reason relates to its intermittency or “load factor”.
Baseload or continual power is required to stabilise the grid and is usually bought on the open market from fossil fuel or nuclear plants at a premium rate.
Without an uninterrupted power supply, the grid requires extra energy storage capability and smarter functioning to plug any gaps.
Hence the UK’s pledge last month to invest £20.9bn in smarter energy grids with a focus on regional distribution networks, following its smart meter rollout.
To solve the ongoing energy crisis, Britain is in the process of conducting an Electricity Market Review, aiming at securing future energy supplies and circumventing skyrocketing gas prices.
While the “contracts for difference” scheme for procuring cheap renewable power at regular auctions was due to end in 2027, the latest market review could see those auctions extended as an emergency measure to boost energy supplies.
Onshore wind and solar have operated virtually subsidy-free in the UK for the past couple of years, since feed-in tariffs were scrapped in 2019, which guaranteed installers a payment for the supply of excess renewable power to the grid.
“With record low auction prices of US$ 1.1 to 3 cents per kWh today, solar PV and onshore wind continuously undercut even the cheapest new coal option without any financial support,” the International Renewable Energy Agency said in a report in June 2021.
It’s not surprising then that many oil and gas companies are threatening to leave the UK, facing fresh sanctions such as the so-called windfall tax on oil and gas profits.
The younger and more agile sibling of the dinosaurs of the energy sector is competing on costs and distribution, while fossil fuels have come under greater scrutiny.
According to the International Renewable Energy Agency, 62% of renewable power generation in 2020 was cheaper than the cheapest available fossil fuel. That year alone, offshore wind costs fell 9% and onshore prices dropped 13%.
The agency estimates that offshore wind power prices have dropped 48% in a decade, with power prices for onshore wind and utility-scale solar falling 56% and 85% respectively.
Just how much farther they can fall depends largely on what further cost reductions can be made in the supply chain,and with inflation and supply shortages in many industries, for example, semiconductors, further cost savings in the near term might be limited.
Fossil fuel producers will also struggle to compete on price without costly subsidies. A little-known secret of the fossil fuel industry is its heavy reliance on international subsidies. Fossil fuels benefited from a combined US$5.6tn of subsidies globally in 2020, according to the International Monetary Fund.
Subsidies in Iran totalled more than US$29.7bn, most of which was injected into electricity subsidies, closely followed by China, where oil producers benefited from US$21.7bn of subsidies in 2020, while India shelled out US$17.1bn to the oil industry that year.
These government payouts have helped make oil and gas readily available throughout the world, but renewable energy is now reaching cost parity even after being incubated and nurtured by generous policies, and the share that sold for less money than fossil fuels doubled in 2020, according to a report by IRENA.
The energy agency estimates that poorer countries could save up to US$156bn a year by adopting renewables.
“Today, renewables are the cheapest source of power,” said IRENA’s director-general Francesco La Camera.