Why are my energy costs rising if I am on a green tariff?
20 September 2022
Why are my energy costs rising if I am on a green tariff?
Is green energy not independent from gas, and other fuel prices? Why are my bills climbing on a renewables tariff? The UK energy grid explained.
HOW ARE ENERGY COSTS CHANGING IN THE UK?
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On Friday 26th August, Ofgem announced that the price cap would go up to £3,549 per year from October, almost triple the cost of the same time last year, meaning that average household bills would increase by 80%. However, Liz Truss, the new Prime Minister, has since announced that there will be a price freeze on bills so that the average household energy costs will be £2,500 per year for two years. She has also announced that businesses and public organisations will receive equivalent financial support over the next 6 months.
Ofgem is the government regulator for gas and energy markets who had set the price cap, which is a legal maximum price per unit of energy that suppliers can charge to customers. This increased to reflect high wholesale energy prices, which suppliers (such as British Gas, Eon, Octopus, etc.) buy before selling to the public. Recently, the wholesale price has been so high that some suppliers have gone bust or are not making a profit. The wholesale price has risen because of increased activity after the pandemic which has led to higher demand for energy, as well as the political turmoil following Russia’s invasion of Ukraine, which has resulted in a reduced supply of gas from Russia to Europe. The new price cap (£2,500) means that household energy bills will be cheaper than the wholesale price, so the UK government will pay energy suppliers £150bn to cover this difference.
Some people are confused why renewable energy tariffs would be affected by the current energy crisis since it would, in theory, be independent from gas prices. This article explains why renewable energy prices are affected by the energy crisis and what people can do to cope with rising costs.
HOW IS MY ENERGY GREEN?
In the UK 9 million households (1/3 of the total UK households) have green tariffs, many of which are even more expensive than non-green tariffs. The first thing to understand is that all UK household energy comes from the national grid (apart from homes with their own energy generation, e.g., via solar panels). Energy from the grid is sourced from a mix of energy types, of which renewables were 43% in July 2022, and average to around 40% annually.
Green energy suppliers calculate the percentage that their energy makes up of the total energy in the grid and pay the wholesalers the cost for this specific amount. Suppliers can sell green tariffs in different ways, firstly they can generate their own renewable energy or buy 100% from renewable sources. Secondly, suppliers can use a percentage of renewable energy and offset the rest by investing in solar or wind farms. Thirdly and most controversially, suppliers can buy green energy certificates called REGOs (Renewable Energy Guarantees of Origin) which are issued with each megawatt hour of renewable energy produced, and they can be traded so that suppliers selling non-renewable energy can buy these certificates and brand their energy as 100% renewable.
WHY IS GREEN ENERGY AFFECTED BY THE CRISIS?
As explained above, many green tariffs include at least partly non-renewable energy, which explains one reason why their prices are rising in line with the energy crisis. Additionally, even suppliers who only use renewables are affected by the price of non-renewables due to the way that wholesale energy is priced in the UK. Currently, the price of the most expensive energy type is the price for all energy types. Gas is more expensive than other energy, due to decreased supply from Russia, so other energy prices have to match this. For example, let’s say that gas is 38p/kWh and that off-shore wind (as the second most expensive energy type) is 13p/kWh, that means that off-shore wind and all other cheaper forms of energy are sold at a wholesale price of 38p/kWh. Gas is the ‘marginal unit’ because it sets the price of other energy. Some are calling for a decoupling of the price of renewables and non-renewables, and the UK Department for Business, Energy and Industrial Strategy (BEIS) is currently reviewing the way in which energy is priced in the UK.
Furthermore, household energy costs are also subject to higher standing charges, not just the energy price itself. Standing charges are additional fixed payments that customers are required to pay irrespective of energy usage. Such additional charges are rising because inflation increases the cost of materials and wages for suppliers. The rise is also due to the ‘supplier of last resort’ phenomenon whereby the cost for suppliers of taking over other energy suppliers that have gone bust is effectively shifted onto the customers. The increased standing charges also act to reduce financial risk for suppliers due to the current volatile energy prices.
WHAT CAN BE DONE TO MITIGATE THE ENERGY CRISIS?
In the long term it is vital that the UK generates its own sustainable energy which will decrease reliance on gas coming through Russia, as well as reduce the overall energy price and contribute to achieving net zero. However, setting up wind and solar farms is a lengthy process, and therefore investment must continue to secure the UK’s energy future. So, what can people at home do to mitigate the energy crisis?
Find out what support is available to you from the government and charities on the citizens advice website here
Find out if you are eligible for energy grants here
Find out if you are eligible for the boiler upgrade scheme here
Install a heat pump, which transfers heat rather than generates heat, so uses less energy. Find out if this could be suitable for your home here and read about where to get a heat pump and how to apply for government funding here
Get in touch with your energy provider or search their website to discover the schemes that they are offering
Get in touch with your local council to see if you are eligible for the Local Authority Delivery Service Green Homes Grant
Set your boiler flow between 55-60 degrees – this is the temperature of water leaving your boiler and it is often set higher than it needs to be
Install a jacket for your boiler
The rising cost of energy is a crisis affecting all. ESGmark® will be keeping a close eye on how policy and practice develops, and what support is available for individuals, and businesses.
Click here to read about why SDG#7 Affordable and Clean Energy is ever so relevant, and here for our guide on switching to green energy.