By now, you are probably aware of the Labour government’s Clean Power 2030 commitment. This is a bold ambition to generate 95% of the UK’s electricity from clean sources by the end of this decade.
It’s been well received by many keen to see a more proactive stance to reducing emissions and embracing a more sustainable pathway to energy generation.
But what does it actually mean for energy consumers – specifically, businesses who consume a lot of power - and what is the true cost of clean energy?
Rapid change ahead
The scale of the change proposed is unprecedented.
Currently, just over a third of the UK’s electricity is generated by gas-fired plant. By 2030, the government wants this to be less than 5%.
Filling the gap will require a massive increase in renewables capacity. And the lion’s share of this will come from offshore wind.
Right now, 15 GW of offshore wind energy has been deployed, and the goal is to hit 50 GW by 2030. This equates to contracting the same volume of new capacity in the next two years as we’ve had in the past six years.
Clean Power 2030 is also factoring in a trebling of our current solar energy capacity.
£60 billion infrastructure bill
To support such rapid expansion of renewable energy capacity, we will also need to see major infrastructure investment to generate these energy sources..
For example, about 5,500km of new grid capacity is needed in the next five years – which is double what’s been built in the past 10 years. This and other infrastructure investment is estimated to cost around £60 billion - although this cost will be recouped from customers over the course of many years.
The scale of ambition here is significant. Unsurprisingly, all this comes at a cost.
Rise in non-energy charges
When it comes to non-energy costs (also known as non-commodity charges) – the portion of energy invoices that pay for the network as well as green levies – there are three main charges that are most likely to be impacted:
1. Contracts for Difference (CfD)
This is the mechanism that provides a guaranteed price/MWh to renewable generators to ensure sufficient incentive to invest in new generation assets.
The Department for Energy Security and Net Zero (DESNZ) has confirmed that the new-build renewables needed to deliver Clean Power 2030 objectives will be funded through CfD.
As a result, we’re expecting to see the cost on energy invoices to increase from around £10/MWh today to nearly £30/MWh by 2030 (depending on wholesale prices).
2. Transmission system costs
This is also known as Transmission Network Use of System (TNUoS). As all this new renewable capacity comes online, the UK’s transmission network – the pylons that transport electricity across the country, from generators into the local distribution networks – will need to rapidly expand.
Indeed, it’s estimated that the network will need to grow at around four times the rate we’ve seen in the last decade to hit the Clean Power 2030 deadline.
As a result, the UK’s transmission operators are anticipating that investment in their networks will need to double. It’s therefore reasonable to expect that TNUoS charges could also double.
For example, we expect the TNUoS annual cost for a customer on the lowest high-voltage band to double from £2,200 in 2025/26 to £4,400 in 2030/31.
3. Balancing costs set to increase
These fund the cost of ensuring there is always enough supply to meet demand, e.g. by funding standby generation.
Currently, the largest element of the Balancing Services Use of System (BSUoS) charge is constraint costs. These are the costs involved in managing the impact of limitations in the transmission network and may include paying compensation to generators who cannot sell their power due to lack of network capacity to transport it – for example, offshore wind farms in the north of Scotland.
How well the transmission network’s expansion keeps pace with renewable capacity will determine how much balancing costs increase. But we anticipate we’ll see it jump from just under £12/MWh now to around the £20/MWh mark by 2030.
The knock-on to commodity costs
In terms of commodity costs, the increase in homegrown renewable power generation is sadly not going to equate to lower prices – at least, not in the short term.
The reality is that for some time, gas will continue to set the wholesale price but over time that influence will reduce as the energy mix evolves.
In addition, with more renewable generation coming online, reduced liquidity is going to become more of a challenge in the forward-time horizon, which is when businesses evaluate future energy investments for purchasing long term.
This is because, as more generators are allocated CfD linked to the day ahead price, there is far less incentive for them to sell volume in the forward markets. So we may well see more liquidity shift to the day ahead market.
Liquidity down, volatility up
This may make it more difficult and likely more costly to hedge further out on the forward curve, which is what many large businesses currently do.
Volatility will also still be a factor to navigate, especially with so much more generation becoming weather dependent – and more so from day-to-day throughout the year, rather than just during the traditional cold winter period.
Register for our free guide now
When it comes to buying and managing energy, understanding these non-energy and commodity drivers has never been more important.
You can find out more – including the practical steps your business can take to reduce your cost exposure and thrive in this new energy landscape – in our forthcoming Future Energy Costs guide. This will be published in early May, and you will receive early access by pre-registering.
You can also register for our upcoming Energy Insight webinar which will take place on Thursday 10 April between 1:00pm and 2:00pm, where we’ll be exploring this topic further.
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