Why the energy price cap is crucial to making sure renewable energy saves money for consumers

Don’t let yourself be fooled by energy companies complaining that the consumer energy price cap is against free-market principles. That is because the price cap is an essential tool in making sure that the energy suppliers pass on savings from cheap renewable energy to consumers in the form of lower energy bills.

As discussed in an earlier blog post, since 2015 in the UK major renewable energy developers have been given fixed-price contracts (small developers were given them for a time after 2010). That means that they will only receive the price for each MWh that is stated on their contract with the Government agency, the Low Carbon Contracts Company (LCCC).

The LCCC administer the so-called ‘contracts for difference’ (CfDs) that have been awarded since 2015 in auctions organised by the Government whereby prospective developers compete to supply a given amount of electricity. The contracts are awarded to developers who fill the required power production according to who bid the cheapest prices.

The renewable energy operators will be able to sell their electricity production for the currently sky-high prices on the wholesale power markets. However, under the contracts with the LCCC the operators have to pay back to the LCCC any money they receive over and above the contracted price. This cash is then first taken off any so-called ‘green levies’ that were originally assigned to cover any extra costs for that renewable energy production, and money on top of this is returned to the electricity suppliers.

According to a blog published by the Low Carbon Contracts Company (LCCC) which administers the CfD schemes for the Government, an estimated £468 million has been saved for the electricity consumer in the final quarter of 2021. They say: ‘With more CfD generation capacity in the pipeline, which has lower strike prices, the effect of the CfD payment mechanism will increase proportionally, contributing towards stabilising the costs of the electricity system and making energy bills more affordable for end-consumers’.

Now here’s the rub, because without the Government’s price cap there would be nothing to stop the energy companies simply swallowing the savings and not returning it to the consumer. However, under the price cap system, as regulatory expert Nigel Cornwall explains, OFGEM  ‘just takes them (the savings) into account when resetting the cap every six months. That’s why its called a price cap’.

As the proportion of energy generated by renewables increases then the price stability offered by renewables will increase, and in circumstances like the present when natural gas prices are very high (and which could remain high for quite a long time) then the amount of savings for the consumer will rise by very large amounts. This will keep electricity prices down, and as a consequence make electricity-based energy efficiency devices, especially heat pumps, all the more price competitive with gas-fired boilers.

Of course, against this we hear all sorts of gaslighting from the big energy companies and their friends about how the price cap distorts competition. Certainly the price cap has to be set at levels that can ensure that well run energy companies can survive and make a bit of money, but otherwise the price cap does not stand in the way of competition. What it does ensure, amongst other things, is that the energy companies do not use increasingly cheap renewable energy to rip us off! This is, unfortunately, happening with older renewable energy generated under the ‘Renewables Obligation’ (RO). This allows the big energy companies (who own the bulk of windfarms) to sell the renewable energy for the currently bloated market prices and keep the equally bloated profits. The RO was originally fashioned because it was claimed it would reduce prices through market based competition. It did no such thing – quite the contrary. See our earlier blog post for more details.

So, in amongst our campaigns we must maintain suspicion of the energy industry when it starts talking about sweeping away regulation in the name of free-market competition. They really want a free market rip-off for their benefit!

By the way: Sign the petition for mandatory solar pv and bans on fossil fuel boilers in new buildings! Register for the green buildings webinar on March 16th and hear Jonathon Porritt and others talk about the campaign. See our page here for information on this.


David Toke

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