The impact of renewable energy on electricity costs
Sometimes, the push against the rise of renewable energy can take on bizarre forms. Over the last couple of years, I have seen the occasional report that the rollout of renewable energy has led to higher electricity prices. Nothing could be further from the truth.
In the US, the infamous Project 2025 has claimed that Biden’s “anti–fossil fuel agenda has led to a sharp spike in global energy prices” (page 257). The boss of oil & gas major Total said in an interview with the Financial Times that the energy transition will lead to higher electricity prices because the investments needed have to be recouped from customers. And a 2024 study on the energy transition in Europe was taken out of context when it said that electricity costs in Europe are at risk of being much higher than in other regions in the year 2050. Never mind that the report also said that this price gap can be resolved by massively increasing the rollout of renewables and other forms of clean energy like hydrogen.
So, let’s look at the impact of renewables on electricity prices in Spain as an example of how a country that has increased its renewables capacity massively in recent years has fared. Javier Quintana from the Bank of Spain has looked at the rise of wind and solar from 26% of total electricity supply in 2019 to over 40% in 2024 and how that influenced electricity prices in the country.
Share of electricity generated by wind and solar in Spain
Source: Quintana (2024)
He analysed wholesale electricity prices in Spain and compared them to theoretical electricity prices if the demand would have to be covered only with fossil fuels at the time. Here is what he found:
Reduction in electricity prices attributable to wind and solar generation
Source: Quintana (2024)
He estimates that electricity prices in Spain were between 45% and 58% lower in 2024 than in a world without renewables. Even in 2022 at the height of the energy crisis, the supply generated by wind and solar reduced electricity prices by some 20%.
This is of course no surprise because wind and solar are the cheapest forms of energy in Spain and all over Europe. Even in the US the cheapest energy sources are wind and solar, not gas or coal.
No, the energy transition does not increase electricity prices and is not to blame for the energy crisis of 2022. That’s natural gas which skyrocketed and without wind and solar, the spike in inflation would have been even higher than it was at the time. What is a problem with the energy transition is the intermittency and volatility of energy supply from wind and solar. But this can be fixed by investing in energy storage and other forms of low emissions energy like nuclear power. Stopping the energy transition is not going to fix the problem. It is just going to increase our electricity bills even more and create higher inflation for all of us.
Hi Joachim, Allow me to disagree with you. Your comment is flawed because it focuses on wholesale costs when surely what matters to society and the consumer is the total costs.
I wrote a White Paper on this a year ago.
"The total cost of electricity is only marginally affected in
the early phases of the rollout of renewables. The system
can accommodate the marginal new production without
significantly reducing other production sources. However,
as intermittent renewable energy becomes a larger share
of electricity, other generative assets must step back to
give room for renewable electricity. However, since the
renewables are intermittent, their capacity factors are
low and very volatile, so the large incumbent baseload
capacities must be on standby to compensate for when
the sun is not shining, or the wind is now blowing. This
adds to system costs.
Beyond a certain point, usually around a share of 30%,
the cost to a nation’s electricity system always increases
with higher shares of variable renewable energy, such as
wind and solar8
. The reasons include but are not limited
to low power density and efficiency, intermittency and
thus backup/storage requirement, low-capacity factors,
interconnection costs, and material and energy costs. The
IEA confirmed in December 2020 that “…the system value
of variable renewables such as wind and solar decreases
as their share in the power supply increases”"
The paper can be accessed here: https://www.cworldwide.com/media/vpqccp4a/the-struggle-to-achieve-net-zero-emissions.pdf
In principle, I agree. In practice, the principle is flawed.
But I mean this specifically as referred to Germany, my country. Here, we not only have charming phenomenon called Dunkelflaute. Meaning, those weeks in winter when neither the sun shines, nor the wind blows. We also have the equally ominous Hellbrise where there is too much solar and wind energy being generated.
The problem for the latter is sub-zero market costs for electricity, reducing equipment ROI to minus, or (and this is how Germany did it, to a cost of over €20 bn in 2024), handing the bill to the taxpayer.
And a Dunkelflaute means sky-hi costs, unless you can import cheap nuclear power from abroad.
The crucial word is system costs. They're all that matter, because they include transmission and storage. Please don't discuss the costs of power generation if you're not including the system costs.