Zerocarbonista

Why green electricity prices go up when brown prices do

Filed under: Energy Sector, Renewables — dale April 9, 2008 @ 9:30 am

I often get asked to explain why the price of green electricity rises when the price of brown electricity does. I realise it’s counter intuitive. To understand it you need an understanding of how the market works. Here’s my attempt to explain:

The price of oil and gas go up together, it’s a fact of the energy markets. Coal is also linked to both – because all three are primary fuel sources for our world. They are also primary fuel sources for brown electricity generation, and so brown electricity prices rise and fall with the costs of these raw materials. But why should the price of green electricity follow that of fossil fuels and brown?

Electricity is bought and sold in a ‘free’ market, as far as any are in fact totally ‘free’ – the price of electricity is linked to that of gas and oil and coal and carbon, and it is also driven by supply and demand – it gets dearer in the cold weather when we use more (generally speaking).

The percentage of green electricity in the UK is about 5% of total electricity need. It is a tiny proportion. And the dominant fuel sources in the market set the price. The tail can’t wag the dog.

The market makes no distinction between green and brown electricity. There are pieces of paper known as ROCs (Renewable Obligation Certificates) and LECs (Levy Exemption Certificates) that are associated with green electricity and are traded and priced separately to the power, but the power itself is treated no differently.

It’s important to bear in mind that when building new sources of green electricity, it is difficult to compete on price with existing sources of brown energy – where the capital cost of the project has long since been written off (for brown) but needs factoring into the energy price for green. So when brown power prices go up, it actually makes it easier for green generation to exist financially and therefore to get built. The higher brown prices rise, the more green will be built.

And at some stage the percentage of green in our country will be sufficient that it drives the market price not the brown energy. That’s someway off but it’s coming.

Meanwhile when prices go up, it better enables new build green – it’s a market mechanism. Not the end of the world, more like the start of a new one.

7 Comments »

  1. We will stay with Ecotricity as long as:
    A) I can afford it.
    B) They keep investing 100% of their net profits in expanding their wind related infrastructure.

    Comment by Brown — April 12, 2008 @ 9:29 pm

  2. Thanks Brown, I appreciate the support. If you mean A or B (as opposed both together) you’ll be an Ecotricity customer till you’re old and grey, that I can promise you. Cheers, Dale

    Comment by dale — April 18, 2008 @ 10:19 am

  3. Hi all,

    My name is Zed (also known as Zak), I have been working for Ecotricity as an administrator since August 2007 and I thought I would share my thoughts on this matter with everyone.

    As far as I can see, a lot of the other main suppliers in the country charge about the same as us in the standard tariffs but will half the price when it comes to a dual fuel tariff. This means that when we finally achieve dual fuel we will be able to compete with the market at a stronger rate thus, increase our customer base at an incredible rate.

    Our prices are actually on the same price level as the other 6 large suppliers in the country but they will conceal their true price in different tariff options to actually make it seem a lot cheaper.

    I think we are still as competitive in the green/brown market as ever but we just decide to show our prices up front as opposed to part of a dual fuel tariff. We will also invest huge amounts of money into our green electricity, we invested 25 million in 2007 whereas NPower invested £15,000. Compared to the financial situation of both companies, I think that we are way ahead.

    Thanks
    Zed

    Comment by zed — April 18, 2008 @ 10:43 am

  4. Dual-fuel from Ecotricity? That will be interesting - I can see the financial advantage, competing with the other energy companies, but doesn’t that affect the carbon free image?

    Comment by Me — April 24, 2008 @ 2:57 pm

  5. @Me – Thanks Me, we’re not overly worried about our image. I hope that we’d be able to show people that if you scratch the surface of the issue there are good reasons to supply gas. Such as - Two out of three homes in the UK have it and are inaccessible to our green electricity if we can’t supply gas – that’s a large new audience to get our message to. It would give us a platform to promote the better use of gas, through efficiency measures and solar thermal. And we’ll get to take the money that gets spent on gas anyway and do something good with it - for example habitat re creation or planting more windmills. Gas is one of those things many people are stuck with right now, we’d like to green that up in any way we can. Zero carbon is a journey, for all of us – there’s no overnight magic. Cheers.

    Comment by dale — May 2, 2008 @ 8:22 am

  6. Dale - I am interested in the gas debate, as I am one of those in the minority who don’t have a domestic gas supply (we live at the top of a hill in a fairly isolated and small village - the gas company can’t justify the investment). It’s also a veeeeery windy hill - but it is in Gloucestershire so pretty much zero chance of that being exploited.

    The housing authority that owns most of the properties in the village has a sewage processing plant on site - I have been wondering whether to approach them to discuss CHP and Bio-gas production in the village. I wonder what everyone thinks about bio-gas from human ’sludge’ as a potential ‘light green’ energy source?

    Comment by paul — May 2, 2008 @ 8:54 am

  7. The challenge here is to change the business model of the energy sector. Unfortunately, beyond the conversion phase (power generation) wires do not distinguish between green and brown electricity. Is up to the market and a proper business model to do it. The solution is to redraw the whole business model for the life cycle (conversion –>generation –> distribution –> consumption)for green energy, the current merge into the brown energy life cycle is perhaps one of the biggest barriers for the predominance of renewable energy for the masses.

    Comment by REOldtimer — May 20, 2008 @ 7:31 pm

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