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.