British Gas are reportedly planning to put the cost of energy to households by around £100 a year. It follows similar move by rival Scottish and Southern Energy which will put up bills by 9% from Monday.
The bill rises are driven by increases in the cost of gas on international markets.
But the rises have prompted some politicians to call for a cap on investment in renewable energy - through the Treasury's 'Levy control framework".
That only reduces bills, however, if the power we are buying from non-renewable sources, mostly gas, is actually cheaper.
“If you forgot about carbon momentarily, look at European gas price projections. They all disagree on the number, but they all agree on the direction – up. - John Cridland, CBI.
The CBI's director general, John Cridland, has already warned that the price of gas is set to rise:
Analysis
“If you forgot about carbon momentarily, look at European gas price projections. They all disagree on the number, but they all agree on the direction – up. European shale will help, but not on a US scale. Imports from the US will need to factor in liquefaction and transportation costs, and demand from the BRICs is set to increase."
It all depends on your assumptions. If you think the world will be flooded by cheap gas, and we’ll give up charging for carbon dioxide, then gas is likely to be quite cheap. But nobody we could find has published credible projections which assume this, at least not for Europe.
Wind competitive by 2020
We started by drawing on all the available estimates for the future cost of gas and wind using data published by the Guardian/UKERC.
The only things we left out were projections for shallow water offshore wind (so-called Round 2 only) and any data beyond 2030 - which is too far into the future to be reliable.
The data isn’t perfect, the gas line stops a little early (we could not find a data point beyond 2023) and the rate at which the cost of gas is rising is unlikely to continue. It is also a little dated.
However the trend is clear enough. Whilst offshore wind is expected to get cheaper as the growing industry becomes more competitive and efficient, the cost of gas is set to increase due to a combination of rising fuel and carbon prices.
Onshore wind is cheaper than gas by 2017, and the graph suggests offshore will be at least competitive by 2025.
More recent analysis by the Crown Estate and DECC have suggested that with a favorable policy environment the cost of offshore wind may fall to about £100/Mwh by 2020 - about the same as the cost of gas by that date.
Their research suggested, for example, that every 1% fall in the cost of capital could lead to a 6% fall in the cost of offshore wind.
That’s because offshore wind farms cost billions to build, but the cost is spread out over the 30 year lifetime of the project.
When you work out its cost, you do it on the basis of how much it costs to build, and the discount rate applied to money used to build it, similar to the cost of a mortgage.
Carbon cost
Gas costs much less to build, so borrowing money isn’t so relevant, but you have to buy the fuel and pay for carbon credits to offset the emissions of carbon dioxide.
The predictions for the gas price are therefore based on assumptions about the gas price and carbon price because they were calculated before the Treasury introduced its carbon floor price.
Using 365 grams of CO2 per kWh for an efficient gas-fired power station, then using the carbon floor price, the central projections would be increased by about 8 £/MWh.
Equally, if the gas price does not rise in line with DECC’s central assumptions - used by most of the reports - then gas may be cheaper.
Intermittency
At very high levels the cost of wind may also be higher than forecast.
Wind power is intermittent, which means it requires systems to either store power or provide electricity when the wind is not blowing such as smart grids, pumped storage and interconnectors.
A UKERC report suggested that up to 20% of electricity generated from wind power may result in a modest increase of £3-5 per MWh.
For higher levels the UK’s Committee on Climate Change has concluded backup and grid changes could add £10-20 per MWh perhaps balancing out the cost of the higher carbon price on gas power.
Global picture
Globally, the cost of onshore wind has decreased from an average of £200/MWh in 1984 to a current low of £50/MWh but with large variations.
This record low in the cost of onshore wind is most pronounced in projects located in high wind areas, which have been developed in the US, Mexico, Brazil and Sweden. Lower finance costs, more policy certainty, cheaper turbines, and increased efficiency due to new technology have all brought down costs.
An IEA report in 2010 found the US brought down the price through sheer scale whilst Sweden’s and Denmark’s costs are reduced by the provision of cheap finance as wind farms are seen as low risk investments.
In short, wind is only costly if you make it so and gas is only cheap if the price of gas falls.
