Hidden Costs of Renewables Going Up

Grid balancing/expansion plus backup costs set to rise to double the price we pay for gas used to generate electricity.

Introduction

The Government has decided not to proceed with plans to introduce zonal pricing after completing its Review of Electricity Market Arrangements (REMA). Effectively the outcome of REMA is to create a plan for a plan to reform national pricing. Ed Miliband claims these decisions will “lay the foundation for a fair, affordable, secure and efficient electricity market.”

However, new information from National Energy System Operator (NESO), the Low Carbon Contract Company (LCCC) and Ofgem demonstrates that grid balancing, backup and network costs are all going up. In other words the hidden costs of renewables, in addition to the subsidies we already pay, are going to rise sharply. When you do the maths, the balancing and backup costs are set to rise so much that those costs will be double what we pay for all the gas used to generate electricity. Our bills are going to be far from stable; they are going up and up and up. Hardly fair, affordable, secure or efficient.

Grid Balancing Costs

NESO keeps track of grid balancing costs through monthly and annual balancing cost reports, called MBSS. The electricity grid must balance supply and demand every second of each hour of each day of the year. This task is made more difficult by the addition of variable renewables like wind and solar, where output may vary because the wind blows harder or suddenly drops, or the sun goes behind a cloud. Sometimes wind farms have to be turned off because supply is greater than demand, or because the grid cannot handle their output. In these situations, we pay to turn them off and these are called “curtailment” charges. Sometimes we need to pay even more to turn on gas-fired power stations to keep the grid in balance.

The MBSS reports track the volume of energy balanced each month and the cost of doing so. By compiling all the data back to 2018 we can look at the trend in volume and cost by financial year, see Figure 1.

Figure 1 - Annual Balancing Volume (MWh) and Cost (£m) by FY

Volumes rose steadily from FY2018/19 to 2020/21 and then fell back in FY2021/22 and remained stable until rising again in 2024/25. Despite volumes falling in 2021/22, the cost of balancing spiked, probably as a result of the extra costs of turning on gas-fired generators during the energy crisis. The costs fell in 2023/24 but rose again in 2024/25 to £2.7bn.

Looking forward, NESO projects (p31) that balancing costs will either double or triple to £6.3-8.2bn by 2030 depending upon which of their Future Energy Scenarios is followed (see Figure 2).

Figure 2 - NESO Balancing Cost Projections

Cost rise much more slowly if their “Counterfactual” scenario (black line) is followed. The counterfactual basically means no more spending on Net Zero. Costs then fall out to 2035, but that fall in costs is predicated upon spending £118bn on the transmission network, which as we shall see below, will also push up bills.

Balancing costs already make up about £37 of our electricity bills (see Annex 3, tab 2c BSUoS). The hydrogen Evolution (blue line) would see balancing costs rise to ~£6.3bn in total. Scaling up the existing £37 on our bills would push the costs up by £49 to £86 by 2030. The Holistic Transition (green line) would scale up balancing charges on our bills from £37 by £75 to ~£112.

Network Costs

Ofgem has realised that constraint costs are rising and will rise further as more wind and solar are added to the grid. This has led them to approve an initial £8.9bn of spending on the high-voltage electricity network. They claim this is the first step of an £80bn programme to boost the electricity network capacity. Note that this figure is considerably lower than the £118bn assumed by NESO in their forecast for constraint costs. Extra spending is also planned for the gas network. Ofgem estimates the total spending will add £104 to our bills, of which £74 will go on to our electricity bills. It is not clear whether they a referring to the initial £8.9bn or the £80bn spend when calculating the impact on our bills. It is clear that the cost of expanding the network to reduce constraint costs is at least as much as the forecast increase in constraint costs.

By way of comparison, according to DUKES Table 5.6 we used 205.7TWh of gas for electricity in 2023 (2024 numbers not available yet). At today’s price of 85.3p/therm or £29.11/MWh, the cost of that gas would be £6bn. We are set to spend more on constraint or network costs than the bill for all of our electricity generated from gas.

Capacity Market Backup Costs

The LCCC publishes regular data on the costs of Capacity Market backup and also makes short term forecasts. Figure 3 shows how capacity market costs have gone up since the scheme started in 2016.

Figure 3 - Capacity Market Costs by Calendar Year (£m)

2016 was only a part year; the cost of the Capacity Market in the first full year, 2017 was £117m. Even though there have been some downward moves, overall the annual cost rose to £1,256m in 2024. In the latest price cap, the Capacity Market cost ~£20 on our electricity bills.

It is clear the trend is up and this is confirmed by the LCCC forecasts, see Figure 4.

Figure 4 - Monthly Forecast vs Actual Capacity Market Costs (£m)

In their forecasts, monthly costs double from about £75m to over £150m from October 2025, the start of the new Capacity Market delivery year. However, there is reason to believe this forecast may be understating the cost increase because since October 2024, the actuals have been significantly above forecast. We can therefore estimate that the Capacity Market costs on our electricity bills will go up from about £20 to £30-40. And this is not the whole story, because by 2030, the OBR forecasts (Tab 3.8) the annual cost of the Capacity Market to rise to £4bn by 2027/28 (see Figure 5).

Figure 5 - OBR Forecast for Capacity Market Costs (£bn)

We can therefore expect the Capacity Market part of our bills to go up to by about £44 to £64 by 2027/28 and remain there until 2029/30.

Conclusions

Renewables already cost us dearly. We pay about £7.6bn for Renewables Obligations, another £2.4bn on Contracts for Difference and a further £1.9bn on Feed-in-Tariffs. These add up to about ~£12bn/yr of explicit costs of renewables before we even consider the significant hidden costs that add about £32/MWh to the costs of intermittent renewables today.

The latest figures from NESO, LCCC and Ofgem show that these hidden costs are set to explode higher in the coming years to up to £8bn on balancing and another £4bn on backup. Even if they manage to spend the money on the grid, we will be trading constraint costs for network costs and our bills will rise substantially, by up to £75 compared to today. We can expect Capacity Market costs to go up by about £44 by 2030. This represents a total increase of ~£119 by 2031, if we are lucky, plus the extra costs of renewables subsidies by that date.

The total of grid balancing/expansion plus backup costs are going to rise so much we will end up spending twice as much on these hidden costs as the whole bill for the gas we use to generate electricity. The way to avoid these costs is to stop building unreliable wind farms hundreds of miles away from the source of demand. Then we will not need to pay them to switch off, we won’t need back up and we won’t need to connect them either. That would be fairer, cheaper and more efficient.

Labour and Miliband’s promise to cut bills by £300 lies in tatters. It is time to Stop Net Zero.

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