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Green energy prices and fossil fuels

We’re currently seeing some of the cheapest green tariffs in a long while, and all because of falling fossil fuel prices. It sounds counter-intuitive, doesn’t it? So, what links green energy prices and fossil fuels? 

How green tariffs work

We need to start with the golden rule underpinning every green tariff: every unit of electricity used by a household must be matched by an equivalent unit of green energy going into the National Grid. If that happens, and every home and business is on a green tariff, all the power in the Grid should be green.
To ensure suppliers can prove their tariffs are green, the government issues every generator of renewable power with a certificate when they supply a unit of green electricity to the Grid. These certificates are known in the UK as ‘REGOs’ (or ‘renewable energy guarantees of origin’). You can read a lot more about REGOs and why we like them in our earlier blog, here: Are REGOs a good thing? – Big Clean Switch
When suppliers sell energy to a business or household, they are usually reselling energy they have already bought from someone else. That might be directly from the generator of the energy, but more often they purchase it on the wholesale market – a bit like a convenience store might buy their stock from a cash and carry. This enables them to access more competitive pricing and take advantage of economies of scale.
Because it’s difficult to know where energy bought on the wholesale market originated, suppliers will go to renewable generators and buy enough REGOs to match the power they sell to you. These are then retired, to ensure no-one can claim the same unit of green power twice.

Green energy prices and fossil fuels

Around 35% of the UK’s electricity is still generated by burning gas. While this has a lower carbon footprint than the coal that used to make up a large part of UK power generation, it is still much worse than renewables, which is why we want to get to a place where gas no longer has to play a part in our electricity mix. But, while it still does, the price of gas has a direct impact on the wholesale price of electricity. And because most green suppliers are buying their power on wholesale markets and using REGOs to ensure it’s matched by genuine renewable energy, the price of those tariffs continues to be influenced by the price of fossil fuels like gas.

What will happen to prices as we move to 100% renewables?

As more and more of us switch to REGO-backed tariffs, demand for green power will mean that a greater percentage of UK electricity comes from renewable sources (and a smaller percentage from fossil fuels). As that happens, the influence of fossil fuels on energy prices will reduce. In the main, that’s good news for prices as well as for the planet, because the cost of renewables – and in particular, wind and solar – is now below that of fossil fuels in most countries, and continues to fall.
But, before we go dancing to the bank, we have to remember that the price we pay for energy is influenced by many factors, not just the cost of generating the energy. An increasing proportion of household bills is actually accounted for by the cost of maintaining and upgrading the UK’s energy infrastructure. From smart meters to the switch to renewables, our energy system is going through a dramatic transformation. Ultimately it will guarantee our access to affordable, green energy, but in the meantime, the cost of the transition means we’re unlikely to see the falling cost of renewables reflected in our bills any time soon.