Get used to sky-high energy prices – that’s the cost of going green

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In recognition of this reality, the European Union has amusingly seen fit to class natural gas as a “green” energy source for investment purposes. Just as well, for the political pressures to go green are now so intense that few would otherwise bother to sustain it.

Continued use of carbon, then, is unavoidable, but the demands of the energy transition require that it comes at an ever greater cost. Modelling by the IMF suggests that carbon prices are going to have to be considerably higher still to force the level of investment in renewables required to meet net zero targets.

With improved technology and economies of scale, the cost of renewables, once almost prohibitively expensive, is admittedly coming down in leaps and bounds. Recent auctions of offshore wind have achieved strike prices far below that currently charged for hydrocarbon-based generation. But there is a long tail of persistently high carbon prices before these gains are recognised in what people actually pay through their bills.

The main environmental component in the average UK bill is still the Renewables Obligation, which forces licensed suppliers to source an increasing proportion of their electricity generation from renewables. But already also making a sizeable impact are so-called “contracts for differences” of the type agreed for Hinkley. Developers agree a fixed price for future generation over a period of time. 

This gives certainty on future revenue and helps secure financing. If the market level is below the strike price, the generator will receive a top-up from consumer bills. But the operator must pay back the difference if the market price is higher. As it happens, the Government is changing the system by which future new nuclear is financed to one based on a regulated rate of return rather than strike prices. This will transfer the risk of cost overrun from developer to consumer.

But contracts for difference remain for renewables. Today’s very high wholesale prices means that some wind farms are already relinquishing profits. Theoretically then, we’ll eventually reach a point when renewable energy becomes a disinflationary force, rather than an inflationary one.

Yet it will be a long wait before we get there. The eventual prize is that of a more secure, more dependable, more environmentally friendly and yes, eventually a less costly form of power generation, one moreover which is not constantly hostage to the likes of Vladimir Putin.

It’s getting from here to there that is the problem. The idea that it would be cost-free was always for the birds, and so it is proving. The famous Juncker curse has it that the politicians know what has to be done; they just do not know how to get re-elected afterwards. Quite so.

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