Have renewables decreased electricity prices: European edition
Just like in the U.S., the answer is yes
We’ve been posting a lot recently about how renewables lower electricity costs. Last week, Zeke posted about the impact of renewables on U.S. electricity prices. In response to that, several people pointed us to a figure that seems to show something different:
anytime someone shows you some version of this figure, share this post with them!
The plot shows a clear correlation between retail cost of electricity and the fraction of renewable energy for many countries around the world.
So does this mean that renewable energy actually raises the price of electricity?
confirmation
First, I wanted to verify the figure, so I downloaded the data for Europe and plotted retail price vs. renewable fraction (the fraction of electricity produced by wind and solar):
This closely resembles Figure 1, confirming that the legitimacy of the correlation in the original plot.
But … the world of science is littered with the corpses of scientific analyses that assumed correlation proves causality. It does not.
a better calculation
Figs. 1 and 2 plot the retail price, which includes many things besides the cost of generating power. It also includes network costs (transmission and distribution) and taxes + fees.
A better analysis would use the cost of generating power in order to isolate the impact of renewables. We can get a better estimate of that by using the wholesale price of electricity:
The plot shows that the correlation between price and renewable fraction has entirely disappeared. To the extent that a relation exists, increasing renewable fraction decreases the wholesale cost of power.
The plot also shows that the cost of generation is generally a small part of the total cost of electricity.
it’s the price of natural gas, stupid
This lack of correlation is expected given how wholesale energy markets price electricity. In countries that utilize wholesale power markets, it is the most expensive generator that sets the wholesale price. This is almost always a natural gas generator.
Thus, the wholesale price of electricity is mainly determined by the price of natural gas. This relationship can be illustrated by plotting Germany’s wholesale electricity prices against natural gas prices over the past decade:
Next time someone says, “Germany installed a lot of wind and solar and it’s electricity prices skyrocketed,” you can let them know that was a consequence of increases in the price of natural gas.
Every country in Europe has a similar regression, as do many other markets, such as ERCOT.
why do we see a correlation between retail price and renewable fraction
Given this, why is there a correlation in Figs. 1 and 2 between cost and renewable fraction? We know it’s not due to the wholesale price, leaving network costs (e.g., transmission) and taxes + fees.
My hypothesis is that the correlation stems from wealthier countries having both higher renewable adoption and higher tax rates on electricity.
Consider Denmark, for example. It plays a key role in the regression in Figs. 1 and 2 by having both very high price and also high renewable fraction, thereby anchoring one end of the regression.
But Fig. 3 shows that its wholesale price of power is the same as everywhere else. The explanation is that Denmark’s high electricity costs stem primarily from taxes, which comprise 41% of the retail price.
Conversely, countries with very low retail prices are typically developing nations or major oil producers, which have few renewable generators and also heavily subsidize electricity costs.
conclusions
tl;dr: Climate misinformers want you to believe that correlation shows causality, but a deeper investigation shows that renewables do not appear to be increasing the cost of energy generation.
This makes sense since electricity costs on today’s grids are mainly set by the price of natural gas. Taxes also can have a big impact on retail prices.
All of the actual evidence we have is that adding renewables reduces the cost of electricity.
notes
Misinformers also want to blame subsidies for this. Claims about subsidies distorting this analysis require quantitative evidence and must include comparable data on fossil fuel subsidies. Show me your analysis.
Zeke’s post last week shows that there is no correlation between renewables and retail price. You might be wondering why the U.S. see the same correlation seen in Europe (Fig. 2). My hypothesis is that U.S. states are homogenous enough in the taxes they charge that the correlation does not appear.
The U.S. energy markets show the same thing:
Code and data for this post can be found here.
Other stuff
I had an oped in the San Antonio Express-News and Austin-American Statesman on the Texas July 4 floods. Non-paywalled version.
I’m a huge fan of Saul Griffith. He has a new Substack and is already turning out fantastic posts. This one, where he talks about how to make electricity cheap again, is particularly good.
Missing from that very first graph appears to be New Zealand. Our electricity price is probably on par with US cents per kwh, and we're at 85% or more renewable... that would just about put us down in the "No Cheap Renewable" portion of that deluded lying graph.
I appreciate your attempts to link energy prices to renewables. However, prices are often misleading or incomplete as indicators of total cost. There have been significant periods when European wholesale prices have been negative - when generators paid someone to use their electricity. Julien Jomaux has written about this extensively (most recently https://gemenergyanalytics.substack.com/p/what-has-been-the-impact-of-solar). This certainly doesn't mean that consumers are seeing negative prices - it reflects the fact that public policy requires utilities to buy all available "green" power; for hours with more green power than total demand, this leads to grid operators paying other generators to go off line. Julien Jomaux has also documented this topic, but focuses mainly on the impact on business cases for investors. The cost of operating the grid also includes "ancillary services" of several types, including load balancing; systems with a lot of renewable generation require more of these ancillary services - Julien Jomaux has written extensively about this as well.
About 75% of German electric bills comes from levies, charges, and taxes (https://www.germanledtech.de/en/news/electricity-bill-simply-explained/). These are all charged as cents per kWh, which explains why German retail electric prices are so high. These charges include fees of about 7.5 cents per kWh explicitly for green energy.
Portugal has about the same renewables percent as Germany and much lower retail prices. In Portugal, the only parts of the bill that vary with consumption are the generating charge and VAT (https://www.realestate-algarve.info/posts/electricity/). Other fees and charges are fixed amounts per customer; I can't tell from my ten minutes' research whether these fixed prices include any green energy charges, but the point is that they don't go into the cost per kWh, which goes a long way toward explaining why Portugal's retail prices are lower than Germany's.
I respect your abilities and credentials as a climate scientist. But it might be better to leave explorations of the cost of energy to people more familiar with electricity markets and pricing, or at least to people willing to spend some effort researching the topic.