Dr Angela Needle FEI, Director of Strategy at Cadent

Allocation Round 7 is finished, with results that generated upbeat headlines, a record-breaking number of solar projects, and the highest ever capacity awarded under the Contracts for Difference (CfD) scheme. Millions of homes powered by clean electricity is a major step forward for the energy transition and should be celebrated.

But that is not the whole story. Press releases supposed that the strike prices of new onshore wind and solar generation are both under half the cost of building and operating new gas power stations. This statement was clearly articulated by Ed Miliband in the DESNZ press statement:

'These results shows once again that clean British power is the right choice for our country, agreeing a price for new onshore wind and solar that is over 50% cheaper than the cost of building and operating new gas'.

But there are additional costs associated with renewables that avoided mention, and consumers will have to pay. These additional costs stem from electricity grid upgrades and a changed role for gas-powered generation. The headline grabbing strike prices exist to help renewable projects secure finance by guaranteeing a price for the electricity they generate. This encourages investor confidence in renewables projects. These prices do not capture (and these projects do not pay) the resultant costs of running the electricity system that makes it all work. These costs are real, and they are rising. They do not appear in the auction results but they do show up consumer bills.

Often the energy generation is compared though a measure called the levelised cost of electricity (LCOE), which includes construction and operating costs. By these measures, renewables look highly competitive – after all, wind itself is almost free. They tell us the cost of producing power, but not the cost of making that power reliably available on demand. Those costs are shifted elsewhere, onto gas generators, electricity networks, and ultimately consumers.

In the past then-BEIS and the OBR have used an improved measure - enhanced LCOE (eLCOE) - to include the additional costs of connections, backup generation, curtailment and balancing costs, and upgrading and reinforcing electricity networks.  In 2023, eLCOEs showed the impact of rising fuel costs on gas-generated electricity. Today eLCOEs show, and for the foreseeable future will show, the impact of electricity network costs on renewables-based generation. Consumers pay the eLCOE but only the LCOE part of that cost is communicated. Analysis of today’s eLCOEs suggests that solar has additional system costs of £75.6/MWh, onshore wind of £83.2/MWh and offshore wind of £83.8/MWh. Considering these additions, gas-powered generation is comparable to solar and cheaper than wind.

That is part of the reason why there is value in enduring use of gases and the gas networks (and yes, I would say this, but the point is still valid). On cold, dark winter evenings as energy demand rises, it is gas that reduces our electricity demand peak and gas generation that maintains our energy security. The reliability of gas is the foundation on which to build a renewables-heavy energy system. One reason that gas generation appears expensive is precisely because it is used to keep the system stable. As gas plants run fewer hours, their fixed costs are spread over less output. And so, gas generation bears the costs and negative reputation which stems from the intermittency of renewables, even though in truth it is simply stepping up to fill the gap to make a resilient energy system.

Because of our widespread gas network, gas power stations can be built almost anywhere in the country. For example, there are 192 power generation sites on Cadent’s network – generating power locally to meet demand, without requiring extensive energy system buildout. They provide flexible power, and could be fuelled by biomethane or hydrogen to meet Clean Power 2030 goals and to generate electricity when and where it is needed.

Renewables are essential to decarbonise Britain’s power system and CfDs provide a useful certainty to future prices. But we should not make consumers sign up to the future without explaining all the costs, or we undermine public trust in the transition. The government should explain the benefits to wholesale prices and the impact of networks costs and capacity market charges. And future Allocation Rounds should require generators to contribute to the system costs their project incurs or to pay an annual fee sized to their historic intermittency. That is a fairer and more transparent approach, which puts costs where they come from rather than burden consumers with hidden charges.