At the turn of the year, the amount of low-carbon generation in the energy mix broke records (again), hitting 87.6% of the total. But if the wind isn't getting more expensive, why is the price of energy for consumers higher than it has ever been? Why is it that it hits the poorest the hardest? Can we not club together to find a solution?
These are questions that have rarely been so important, but also have rarely been answered so poorly, both by governments through their policies, and the media through their reporting. After all, we’ve never had so much solar and wind on the grid - the wind blows and the sun shines for free! Indeed, converting energy from renewables is fundamentally different than from fossil fuel sources in more than just carbon emissions, it’s also different in cost structure. To be able to answer these questions, it’s worth comparing the economics of renewables with fossil fuels.
First, fossil fuels. Every barrel of oil drilled from the ground costs the oil company money in labour and resources, with more costs for every tanker which transports it, and again to burn the oil for electricity in the power plant. In economics-speak, these are all “marginal” costs - meaning it costs something for every unit you produce. To recover these costs, you pay for the energy in your bills for each unit of electricity you use.
Let’s compare this to renewables. You first need to spend a fair amount upfront to install a solar panel or turbine (these capital costs are also incurred for fossil fuel production, for building the oil burning power plant, or the oil rig). Then, when the sun shines or wind blows, that energy is essentially free, as it's already plugged into the electricity network. In economics-speak, this is a “zero marginal cost” product. This simple fact should completely change the energy industry and indeed already is. But before getting to that we must mention the fun topic of how we set electricity prices. Despite energy being headline news most days, some crucial facts are seldom talked about.
In the UK, as in most western countries, we have what’s called “merit order pricing” for the electricity market. This is a complicated term for a simple system where the price of electricity is set by the most expensive provider. In the largest market, the wholesale market, every generator of energy (whether wind, gas or oil) makes a bid for what they need to be paid in order to produce energy across hourly increments during the next day. These bids are lined up from lowest to highest, with the bid of the cheapest generator required to meet the last portion of energy required, setting the price for everyone. For example, on a particularly windy or sunny day, even if 99% of our electricity needs could be met by low bidders like renewables, who bid £0-£50 for producing 1 MegaWatt hour (MWh), because that last 1% is also needed, merit order pricing means we take the bid of, for example, a gas generator. Accepted bids from gas generators are as high as £600! That sky-high price is the price paid to all the generators, whether they bid high or low. This filters straight through to your bills. As long as one form of energy in the mix is expensive, it is all expensive.
This “merit order pricing system” may have worked well during the fossil fuel age, where there wasn’t that much of a difference between bids. But this system is broken for the age of renewables - and its taking a cost of living crisis for people to take notice. What is breaking the system is the “zero marginal cost” phenomenon explained earlier, an economic phenomenon that has had industry transforming effects before.
For example, the music industry was happily producing vinyl, then tapes, then CDs, and charging people for every additional unit. After all, every additional product on the production line costs the company in labour and machinery. Then the digital revolution happened, and music became a zero marginal cost product, just like wind and solar. Every additional download of music was effectively free for the company. For a while, they carried on with the old system of charging people £10 for a downloaded album, but that couldn’t last. Streaming services transformed the industry - once you’re part of that streaming club (e.g. Spotify) you’re no longer paying for every song or album you listen to - you play a flat fee on a subscription basis, to listen to as much music as you want.
So what is a possible solution for energy consumers? One immediate solution is to cut out the middleman of this broken system. When you own or have access to your own source of renewable energy, whether through a solar panel on the roof or supply from a community turbine, for all that power, you’re no longer paying the price level of the most expensive form of energy on the grid.
Of course, not everyone can afford to put a solar panel on their roof - far from it. Only 35% of the population own their own homes for a start. And the problem of intermittency means batteries can be an expensive addition if you’re wanting to use your self-produced energy when the sun isn’t shining, or when you aren't home. At the moment, this means the “zero marginal cost phenomenon” of renewables is only profitable for larger scale producers, and wealthy homeowners.
However, these problems can be overcome through a community energy club model. In Carluke, Scene is helping to set up a pilot community energy club. Under this club model, homes and businesses in the club will be able to pool their renewable sources. When the sun is shining on the solar panel-roofed St. Athanasius community centre but they don’t require any electricity, it can be used by Ramsay the Butchers, across the road, or by tenants in the nearby social housing association homes. Everyone who becomes a member of the club would be able to start saving on their bills from day one.
Our vision is for a community energy club where you don’t have to produce your own electricity to be a member. Clubs would be run with a social ethos, with non-producing club members included so they too can benefit from reduced energy prices. Indeed, pooling this electricity demand is as important as pooling the renewables supply - so that as much of the renewable generation can be used within the club as possible. By making use of the ZUoS energy services platform which Scene has been developing, the Carluke community energy club can schedule energy demand and storage for when the panels are generating - maximising savings club members and system benefits for the local electricity network.
With some changes to regulations, such as the Local Electricity Bill which Scene is supporting, this club model can be expanded across Great Britain. As part of work we've been doing with Scottish Power Energy Networks, we have modelled the potential benefits in bill savings and income. If just 5% of electricity users had a community club available to them in their area, and that club only had 10% of those available members, the savings be £156m compared to the current electricity price cap.
What’s more, once you own your own cheap electricity source, you are incentivised to use it! Community energy clubs can accelerate the uptake of electric vehicles and heat pumps, to cut the cost of travel and heating too, as well as our carbon emissions.
With community energy clubs, it's Scene who is behind the new club scene.