Reducing electricity tariffs based on renewable energy

José Campos e Sousa
José Campos e Sousa, Business Developer

Population growth, industrialisation and urbanisation have continuously contributed to a significant increase in the demand for energy on a global scale. One of the consequences of this increase is the pressure exerted on traditional fossil resources such as coal, natural gas and oil which, in addition to being finite, also have very high extraction costs, contributing significantly to global climate change, since according to data from the European Union’s Directorate-General for Climate Action, fossil fuels will be responsible for over 75% of global emissions of greenhouse gases and almost 90% of all carbon dioxide emissions.

It is therefore crucial to reduce greenhouse gas emissions in order to mitigate the serious impacts of climate change confirmed by the scientific community. To achieve the goals set by the European Union (EU), namely, to reduce emissions by 55% by 2030, it is imperative to reduce dependence on fossil fuels and increasingly channel investment into alternative energy sources that are clean, economical, reliable, accessible and sustainable.

Around 80% of the world’s population live in countries highly dependent on imported fossil fuels, vulnerable and subject to geopolitical instabilities and crises that can quickly shake their foundations. Now that we have reached the third anniversary of the event that introduced us to a “new normal ” and still in the aftermath of the war in Ukraine, the impact of these two events on the unprecedented derailment of energy prices is there for all to see. If I may be so bold as to contradict the famous maxim of pandemic times, everything will not be alright unless we first aim to make things different, and it will be up to all decision-makers, individual and collective, to ensure that important conclusions and lessons for the future are drawn from these experiences.

Energy from renewable sources offers a means of reducing import dependency, allowing nations to diversify their economies and foster growth while safeguarding themselves from the unpredictability of fossil fuel prices. The International Renewable Energy Agency (IRENA) suggests that renewable energy could provide 65% of the world’s energy needs by 2030 also having the potential to contribute to around 90% of the decarbonisation of the energy sector by 2050. Energy production based on renewable sources is, in fact, the cheapest production solution in most of the world. According to data from the same agency, the price of renewable technologies has fallen sharply, with the cost of electricity produced from solar energy, for example, showing a drop of approximately 85% between 2010 and 2020, and 56% and 48% for onshore and offshore, wind in the same period. Although, according to the International Energy Agency (IEA), solar and wind energy costs are expected to remain higher than pre-pandemic levels in 2023, largely due to the general rise in commodity and maritime freight prices, their competitiveness is expected to progressively improve in the face of sharper increases in gas and coal prices.

If in terms of compliance with the targets set by the EU the case in favour of renewables is clearly winning, from a strictly economic point of view the scenario is no different. According to IRENA data, the transition to renewable energy sources requires significantly lower investments in terms of infrastructure compared to the construction of new nuclear or coal plants, which require high capital costs associated with their construction, maintenance and operation. In a recent study on the energy transition and energy prices in Europe, the International Monetary Fund (IMF), also states that renewable energy production is associated with a significant reduction in electricity prices in the European wholesale market, with an average impact of 0.6% for each 1 percentage point increase in the share of renewable energy. According to this document, if the incorporation of renewable sources in electricity generation in Europe were to increase from the recorded average of 14% over the period 2014-2021 to 30%, there could be a decrease in the wholesale electricity price of around 9%, with the possibility of this figure easily rising to 20% if the incorporation of solar and wind power represents 50% of the energy mix.

However, an ungoverned increase in the incorporation of renewables could also lead to greater fluctuations in electricity generation, resulting in higher wholesale prices. It is therefore of the utmost importance for the health of the energy system that policymakers seek to implement measures that promote the modernisation and integration of electricity grids across Europe, directing investment towards reducing transmission line congestion and introducing solutions such as storage to minimise volatility and maximise the benefits associated with the transition to a more sustainable energy system.

Opinion article by José Campos e Sousa – Business Developer, published in Notícias ao Minuto on the 7th of April 2023.