Why Do Renewable Energy Prices Change with the Price Cap?
Published date: February 2025
Understanding the Link Between Renewables and Energy Prices
You've probably heard about the energy price cap and seen how it affects your household energy bills every quarter. But have you ever wondered why energy prices fluctuate, even with renewable energy sources here in the UK?
The Basics of Supply and Demand for Energy
Like any other product, energy is subject to the commonly known laws of supply and demand. When the demand is high, like in the colder months and supply is limited, prices tend to rise. Conversely, when demand is low in warmer months, and supply is plentiful, prices decrease. This is a significant factor in seasonal changes to the price cap.
How do Generators, Suppliers & Support impact Energy Prices
In the energy market, we have two main players that influence price and a third minor player:
- Generators: These are companies that produce electricity, that can use a mix or just one of the following: fossil fuels, nuclear power, renewable sources like wind and solar.
- Suppliers: They buy electricity from generators and sell it to consumers.
- Support: The market regulators and various organisations that oversee the buying and selling of energy, provide platforms for trade and build and maintain the UK's energy infrastructure. (This includes bodies like National Grid and Ofgem).
How the Energy Price Cap Works
The energy price cap is a government-imposed limit on the maximum amount suppliers can charge for standard variable tariffs. It's designed to protect consumers from fluctuating prices. However, it doesn't directly control the cost of generating electricity.
Believe it or not, suppliers don’t want to increase their energy tariff prices. Rising bills can create negative publicity, damage reputation and weaken customer confidence, ultimately pushing people away.
However, the cost of wholesale energy is a major expense for suppliers, so when it increases, the price for customers must unfortunately also increase. The Energy Price Cap safeguards customers from large increases, but it is regularly updated to mirror the direction of wholesale energy prices.
How do Generators & Suppliers Interact with the Price Cap
The price cap limits retail prices but doesn't directly control wholesale prices, which is the price of energy from generator to supplier. If wholesale prices rise above the cap, suppliers may face losses and risk survival, so some costs are passed on to consumers. If wholesale prices fall below the cap, suppliers might offer better deals but aren't obligated to pass on savings.
The price cap offers some protection, but factors like global energy markets and the mix of energy sources still impact prices. Increasing renewable energy can help stabilise prices and reduce reliance on fossil fuels.
Why Renewable Energy Tariff Prices Can Fluctuate
Even with the price cap in place, renewable energy prices can still be influenced by various factors:
- Global Energy Markets: Global events, such as geopolitical tensions or economic instability, can impact energy prices worldwide. This can indirectly affect the cost of renewable energy if it crosses borders to reach consumers.
- The Grid: Maintaining and upgrading the UK Grid infrastructure is costly and impacts the cost of energy, even for renewable tariffs.
- Weather Conditions: Renewable energy sources like wind and solar are heavily dependent on weather conditions. For example, if there's an abnormal period of sustained low wind or reduced sunlight, generation may decrease, and prices in theory could increase.
- Market Dynamics: The complex interplay between generators and suppliers can also lead to price fluctuations. For instance, if a major generator faces unexpected costs or issues, it may impact the overall supply and, consequently, the price.
- Taxes and levies: 20% VAT is the current standard rate for energy (including renewables tariffs) and a variety of levies apply. These levies often help to fund environmental initiatives across the UK and support those who are most vulnerable to energy poverty.
- Hedging: Suppliers buy energy months in advance to match predicted demand and protect against price surges.
Only 30%-40% of an energy bill is made up of the actual cost of electricity. So, whilst the production costs will come down with more renewables, there may be times when other costs counteract the price reduction. This has been a reoccurring theme over the last few years in the UK.
Renewables are cheaper than Fossil Fuels
According to the International Renewable Energy Agency (IRENA), renewables are the cheapest form of energy in the world. The cost of renewable energy technologies has been reducing rapidly and for consumers, it is a much cheaper and more sustainable source of power, in comparison to fossil fuels and other non-renewables. For example, the cost of electricity from solar power fell by 85% between 2010 and 2020, and the price of coal was nearly 40MWh more expensive than renewables in 2023 and this gap is only growing.
In contrast, fossil fuel subsidies reached a record $7 trillion dollars in 2023, which is one of the clearest indicators that fossil fuels are unsustainable in terms of their cost and for our planet. Fossil fuel subsidies are measures taken by governments to artificially lower the high price of coal, oil or natural gas.
Subsidies are not necessary for renewables as unlike fossil fuels, the more solar, wind, hydro, tidal power we use, the cheaper, more advanced and efficient they will become. Fossil fuels are only becoming more finite, expensive and no-more efficient as time passes.
Without renewables having the largest share of the UK fuel mix at 43%, energy would be more expensive for all, no-matter the tariff.
The United Nations have stated that renewable energy is on track to provide as much as 65% of the world's total electricity supply by 2030 and decarbonise 90% of the global power sector by 2050.
The Solution: More Renewables
One of the most effective ways to mitigate these price fluctuations and stabilise the UK energy market is to increase the proportion of renewable energy sources across the UK.
By simply reducing our fossil fuel use, the £13 billion pounds the UK Government spends on subsidies could instead be diverted to renewable energy investment, which was only £1.5 billion pounds in the October 2024 budget, a UK record amount (increase of £500 million pounds).
By increasing our renewable energy use, we can:
- Reduce vulnerability to global price shocks: By generating more energy domestically, we become less susceptible to international market volatility.
- Have a healthier economy: Job creation is a fundamental benefit of the UK’s “green economy” and the investment and return of renewables outweighs costly fossil fuels from abroad.
- Create a sustainable future: Transitioning to renewable energy sources is crucial for combating climate change and hitting the UK's NetZero target.
- Long-term energy security: With domestic energy supply, we are in control of our power and no longer rely on other countries that may not necessarily offer the best possible prices or supply the UK with energy long-term.
- Weather the storm: A more diverse energy mix that is further spread across the UK (wind, solar, hydro, tidal etc) can help us better cope with fluctuations in weather conditions that may affect renewable generation.
While the energy price cap provides some protection for consumers, it's important to understand there are a variety of factors influencing energy prices. By investing in renewable energy and embracing a sustainable future, we can work towards a more stable and affordable energy market for all.
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