Are Renewables Cheap or Expensive?

The narrative surrounding renewable energy costs has become increasingly important as we transition toward a low-carbon future. Many sources, including respected energy analysts¹, suggest that renewables are now the cheapest form of electricity generation. This would be excellent news if true – affordable clean energy could accelerate industrial electrification and help maintain the UK’s competitive position in energy-intensive industries.

However, to make informed policy decisions and ensure a sustainable energy future, we need to carefully examine the actual costs based on existing contracts and commitments. The discussion around renewable costs often focuses on Levelised Cost of Electricity (LCOE) calculations, which while useful, involve numerous assumptions and don’t necessarily reflect what consumers will actually pay.

Instead, this analysis looks at something more concrete: the UK’s Contracts for Difference (CfD) scheme. These contracts specify exactly what generators will be paid for their electricity over the next 15 years. Unlike LCOE calculations, these are binding commitments that will directly affect consumer electricity prices.

Why This Analysis Matters

The cost of electricity isn’t just an academic concern. It directly affects:

• The viability of industrial electrification
• The UK’s ability to compete in energy-intensive industries
• The cost of living for households
• The broader economic implications of our energy transition

While the public discourse often focuses on whether renewables are “cheap” or “expensive,” the reality lies in the details of how we actually pay for this electricity. By examining the CfD contracts, we can understand the real financial commitments we’ve made and their implications for future electricity costs.

What This Analysis Covers

This examination focuses on three key renewable technologies that have CfD contracts:

• Solar PV installations
• Onshore wind projects
• Fixed offshore wind installations

To keep the analysis focused and manageable, I’ve deliberately excluded several important but separate considerations:

• Biomass generation
• Renewable Obligation Certificate costs
• Capacity Market costs
• Balancing Mechanism costs
• Transmission system upgrade requirements
• Gas generation costs
• Negative-pricing events leading to zero-payment for CfDs

Each of these excluded elements deserves its own analysis, and I may examine them in future pieces. For now, focusing on these three main renewable technologies allows us to understand a crucial part of our electricity system’s costs.

Understanding the Data

The data for this analysis comes from the Low Carbon Contracts Company (LCCC), the government body responsible for managing electricity contracts. You can find all of this data yourself at : https://register.lowcarboncontracts.uk/downloadfiles

The key information in these contracts includes:

• Strike prices (in 2012 prices)
• When projects start operating
• How much power they can generate
• What type of technology they use

The Critical Role of Inflation

One aspect of these contracts that often gets overlooked in public discussion is that they’re linked to inflation. The strike prices increase each year with the Consumer Price Index (CPI). This might seem like a technical detail, but it has enormous implications for the final cost to consumers.

To understand how sensitive these costs are to inflation, I’ve analysed several scenarios with different annual inflation rates:

• 0% (as a baseline)
• 1%
• 2% (Bank of England target)
• 3%
• 4%
• 5%

High inflation in the early years of a contract has a particularly significant impact due to compounding effects. For example, 5% inflation in year one affects all subsequent payments for the entire 15-year contract term.

The Analysis Process

To understand the true costs embedded in these contracts, I followed several steps:

1. First, I gathered all the basic data:
   • Details of every CfD project
   • Historical inflation rates from 2012-2023
   • Technology-specific capacity factors based on UK averages:
     • Offshore Wind: 40.58%
     • Solar PV: 10.2%
     • Onshore Wind: 26.34%
2. Next, I calculated how the strike prices change over time:
   • Starting with the original 2012 prices
   • Applying actual inflation up to now
   • Projecting forward under different inflation scenarios
   • Using historical CPI rates where available
3. Then I analysed generation patterns:
   • Looking at actual capacity
   • Applying realistic capacity factors
   • Calculating expected annual generation
4. Finally, I examined the payment implications:
   • Calculating payments under different scenarios
   • Looking at total costs over contract lifetimes
   • Normalizing costs per MW of capacity

Please rotate your phone screen for best viewing experience.

In the plots below you can adjust the interest rates with the toggle in the top left corner

What The Data Reveals

The data shows a complex picture of future electricity costs from renewables. While headlines often focus on falling costs, the reality embedded in these contracts tells a different story:

1. Price Trajectory
   • The average price paid per MWh for offshore wind does show an initial decline over the next few years as newer, cheaper contracts come online
   • However, this decline is highly sensitive to inflation, and even modest inflation rates significantly impact final costs
   • A notable price cliff occurs around 2032 when the first round of CfD contracts expires – these early contracts carry substantially higher strike prices
2. The Impact of Inflation
   • At the Bank of England’s target 2% inflation rate, strike prices won’t fall below £85/MWh
   • In higher inflation scenarios (4-5%), the promised cost reductions effectively disappear
   • This matters because these contracts are explicitly inflation-linked, meaning consumers bear the full inflation risk
3. Historical Context
   • These contracted prices are roughly double the long-term wholesale average cost of electricity before the Ukraine conflict
   • Even compared to current wholesale prices, these contracted rates remain higher
   • While some argue these should be viewed in “inflation-adjusted” terms, this assumes inflation itself is inevitable and desirable – a complex economic discussion beyond this analysis
4. Expiration of Contracts
   • Over time the capacity under contract will fall. This is due to CfDs having a 15 year lifespan. When they expire the generators will no longer be paid the initially contracted strike price.
   • What happens when they expire is not clear at the moment, they might be able to reapply for CfDs.

You can verify the wholesale price trends through Ofgem’s data portal: https://www.ofgem.gov.uk/energy-data-and-research/data-portal/wholesale-market-indicators

What The Future Holds

The Government is expected to tender significantly more renewable contracts over the coming years. However, several factors suggest that strike prices are unlikely to decrease further:

1. Crown Estate Leasing Auctions impose substantial initial costs on developers, which inevitably flow through to electricity generation costs.
2. The Crown Estate takes a percentage of each wind farm’s operating revenue, creating an ongoing cost burden that directly increases the price developers must charge for electricity.

These structural costs, combined with other development expenses, suggest that strike prices will likely stabilise or potentially increase rather than continue falling. This challenges the common narrative about continuously declining renewable energy costs.

What Needs To Change

The strike price and cost of the CfD is primarily determined by two factors: the upfront cost of development and the length of return on investment. Both need to be addressed to achieve meaningful cost reductions. Here are some potential solutions:

Immediate Policy Changes

1. Eliminate Crown Estate Payments
   • Current system creates a circular flow of money: developers take loans to pay Crown Estate, which pays Treasury, while increasing consumer bills
   • Crown Estate assets are meant for public good – their fee structure actively works against this by increasing costs for working people
   • This is not just another cost – it’s an unnecessary financial burden that compounds through the financing structure
2. Reform Financial Support
   • Provide government-backed interest-free loans for development
   • Consider bonus payments upon successful wind farm completion
   • Restructure CfDs to front-load payments (higher in early years, lower later) to better match developer cost profiles

Fundamental Reform Option

The most straightforward solution would be a complete structural change:

• Build and operate all generating capacity under a GB Energy umbrella
• Remove external investors from the equation
• Finance projects through Bank of England interest-free loans
• This would eliminate the need for complex CfD structures and remove the profit margin currently built into strike prices

This approach would significantly reduce costs by:

• Eliminating the need for private financing premiums
• Removing the Crown Estate cost burden
• Streamlining development and operation
• Allowing for longer-term planning and integrated system development

The key insight is that current high costs aren’t inevitable – they’re a product of our chosen financing and ownership structures. A simpler, publicly-owned model could deliver the same infrastructure at substantially lower cost to consumers.

I will be making the code available at a later date.

The data is downloadable below

Does my data follow what the LCCC has published?

This link shows the installed capacity by generating source, and the projected capacity from the LCCC. My numbers match theirs. So I’m fairly confident in my analysis.²

1. https://www.carbonbrief.org/analysis-record-low-price-for-uk-offshore-wind-is-four-times-cheaper-than-gas/ ↩︎
2. https://www.lowcarboncontracts.uk/resources/scheme-dashboards/cfd-portfolio-dashboard/ ↩︎