I am sometimes asked whether one should change one’s household electricity supplier to a green company that promises to source 100% of its supplies from renewable generators. This post addresses this question, hopefully in a clearer and more successful way than I normally manage in conversation.
The first point to make is that electricity is a commodity: assuming you do not have solar panels on your roof and are not connected directly to your own personal windfarm, there is no way of distinguishing the electricity that flows into your house from the electricity that flows into mine. Our electricity flows through a common grid and it is impossible to source it back to different types of power station.
The second point is that once a windfarm or solar PV power plant is developed, then it generates as long as the wind is blowing or the sun is shining. This is slightly simplistic – outages may be caused by problems on the local network or maintenance of the turbines themselves; but crucially the output from these renewable generators does not depend on the actions of householders, or their choice of supplier. This means that whether you choose a “brown” supplier or a “green” supplier makes no difference to the way in which electricity is actually generated in the near term, or indeed for the next few years given the time it takes to plan, obtain permits for, and develop new generation capacity.
The categorisation of suppliers into “brown” and “green” is simplistic, as the large supply companies such as EdF, e.on and npower are predominantly brown but also provide the most green energy. However, some of the small niche suppliers source all of their power from renewable generators. For simplicity, this post users the terms “green” and “brown” but for most suppliers a shade somewhere between the two would be more appropriate.
You might think that by choosing a green supplier, you are encouraging the development of new renewable capacity. Well, you are contributing to the profits of the green supplier. These profits will probably not affect the profits of the renewable generators themselves. This is because of the manner in which renewable generation is supported in Britain.
Most renewable generation is supported by something called the Renewables Obligation (RO) which was set up in 2002 and will last until 2037. Under the RO, electricity suppliers have an obligation, set annually by government, to procure a minimum percentage of their total supplies from renewable generators. The process by which this happens is as follows: the generators are given Renewables Obligation Certificates (ROCs); the suppliers obtain these ROCs if they buy their power from renewable generators, in proportion to how much they buy; and the suppliers submit ROCs at the end of each year to demonstrate compliance with the obligation. If a supplier fails to submit enough ROCs to meet its requirement, then it pays a penalty price, called the “buyout price”, multiplied by its volume shortfall. (So for instance if a supplier was required to submit 100 ROCs, and only submitted 85, it would pay the buyout price for 15 units.) Under this mechanism, renewable generators receive a level of support, for each unit of electricity they produce, which is approximately equal to this “buyout price”.
The level of support – the ROC price paid to renewable generators – does not vary much depending on how many customers choose green suppliers. Suppose no-one opts for a green supplier. All of the successful brown suppliers still need to meet their obligations under the RO, or pay the buyout price for each unit of shortfall. This means they will still be willing to pay roughly the buyout price for purchasing ROCs from renewable generators. (In practice, they might be willing to pay a little more. This is because of what happens to the penalty payments. These payments are recycled within the industry, with suppliers receiving back recycle payments in proportion to how many ROCs they have. So if a supplier which is ‘short’ buys one more ROC before the submission date, it not only avoids paying the buyout price for that ROC, but also gets a slightly higher recycle payment at the end of the year. In consequence, the supplier is willing to pay slightly more than the buyout price for the extra ROC. This is a nuance though, which does not affect the general argument.)
Now suppose the opposite: that every household tries to buy from a green supplier. At a certain point, the green suppliers would be unable to source any more electricity from green generators – and be forced to buy further supplies from brown generators. They would either have to say to customers “sorry, I don’t have any more green power to sell you” or “sorry, I have decided not to be completely green”. But they would not pay more than the buyout price (plus the modest top-up associated with recycle value) to renewable generators. Why? Because they can always pay the penalty buyout price at the end of the year for any shortfall in their obligation under the RO, and this caps the price they are willing to pay renewable generators for their output.
How is new renewable generation supported in Great Britain?
In 2016, the government ended support for new onshore wind and solar projects under the RO. In 2017, the government ended support for all other forms of new renewable electricity under the RO. This just affects new projects; existing projects will continue to be supported for a maximum of another 20 years.
In future, new renewable generation projects will be supported by a mechanism known as Contracts for Difference (CfD). The government decides centrally on the amount and type of renewable capacity that is eligible to participate in CfD auctions. Projects that are successful in the auctions receive support via “difference payments”; in essence, this means they get a long-term fixed price for their output, based on the results of the auction. The difference payments are recovered from electricity suppliers by a central body known as LCCC, and the electricity suppliers in turn pass the costs on to electricity consumers.
The point here is that individual consumers cannot affect the CfD auctions and hence cannot affect the development of new renewable generators.
So all of this means that if you buy your power from a green supplier, you are increasing the profits of that supplier, but you are not affecting the generation of electricity in Great Britain – at least not in the near term (the next few years). It is conceivable that a green supplier would put a portion of its profits into research and development for new renewable generation – and that the increased R&D might lead to cost reductions in the manufacturing process; but it is unlikely that the supplier, whatever its level of profit, would directly spend money developing a new renewable power station unless it thought that station was going to be profitable in its own right.
In summary, buying green power is not necessarily green. It is definitely not green in the near term; and only possibly, indirectly, and immeasurably, green in the longer term.
But what else can we do? Well, we can use less electricity. Because renewable generation of its nature is not demand-sensitive, fluctuations in demand are picked up by flexible thermal power stations, which in Britain are fuelled by natural gas and coal. So if we reduce our demand, we are definitely reducing (other things being equal) the demand on natural gas-fired or coal-fired power stations – the very stations that emit greenhouse gases when they are used.
We can also lobby our politicians and sign petitions in support of renewable energy and decarbonisation. This is more direct, and probably more effective, in terms of supporting green power than buying from a green supply company.
Finally, we can take matters into our own hands and install solar photovoltaic panels on our house. The difficulty here is that in 2016 the government ended the attractive support scheme for doing this – so it is no longer cost effective, even if you happen to have a large south-facing roof. In the fullness of time, it may again become financially attractive to do this – either because solar panels are automatically incorporated in the design of new houses, or because the costs of retrofitting solar panels fall relative to the price of electricity.