IEA (2023), Renewable Energy Market Update - June 2023, IEA, Paris https://www.iea.org/reports/renewable-energy-market-update-june-2023, License: CC BY 4.0
EU electricity consumers are expected to save an estimated EUR 100 billion during 2021-2023 thanks to additional electricity generation from newly installed solar PV and wind capacity. Low-cost new wind and solar PV installations have displaced an estimated 230 TWh of expensive fossil fuel generation since Russia’s invasion of Ukraine, leading to a reduction in wholesale electricity prices on all European markets. Without these capacity additions, the average wholesale price of electricity in the European Union in 2022 would have been 8% higher.
Following Russia’s invasion of Ukraine, Russian natural gas deliveries to the European Union by pipeline decreased by 80% from 2021 to 2022. This sharp drop coincided with multi-year lows in European hydro and nuclear power output. Between January 2021 and August 2022, the average monthly natural gas price increased ten-fold and the price of hard coal quintupled. As a result, the cost of power generation from natural gas, which usually sets the electricity price in most EU wholesale markets, increased to unparalleled levels, reaching almost 800 EUR/MWh for open-cycle gas turbines (OCGTs) and 500 EUR/MWh for combined-cycle gas turbines (CCGTs).
In the European Union, the wholesale electricity spot market is the benchmark for most electricity supply contracts, driving prices up for all consumers. The price is set by the most expensive generator needed to fill demand at any given moment. Due to the steep increases in natural gas and coal prices in 2021-2022, consumers in the wholesale market such as retailers or large companies with limited fixed-contract energy portfolios and without strong hedging positions had to purchase electricity at rates of up to 15-20 times the averages of 2015-2020.
In 2021 and 2022, the European Union added nearly 90 GW of PV and wind capacity. This capacity has displaced almost 10% of hard coal and natural gas generation, pushing the most expensive power plants out of the market and effectively reducing the price for all consumers. In addition, another 60 GW of solar PV and wind is expected to come online in 2023, increasing displacement to almost 20% this year.
Based on the historical relationship between hourly generation from hard coal and natural gas, and wholesale electricity spot prices for several large EU economies in 2021 and 2022, we modelled a scenario for 2023 to estimate the further savings possible with additional wind and solar PV capacity. The results show that without PV and wind capacity growth in 2021-2023, average wholesale electricity prices would be higher by about 3% in 2021, 8% in 2022 and 15% in 2023, raising the cost of electricity supply for the entire European Union by roughly EUR 100 billion.
For instance, new renewable energy capacity in Spain offers saving of 60% more than the country’s allocated budget of EUR 6.3 billion for an EC-approved temporary intervention to reduce wholesale electricity prices. For Germany, savings gained through new renewable generation capacity would pay for the government’s recent proposal to support electricity prices for energy-intensive industries until 2030.
Accelerating annual renewable energy deployment since 2021 has provided a cost-effective solution to the energy crisis’ economic challenges. Long-term contracts secured through policy mechanisms and regulations provide stable prices for most wind and solar PV power generators in Europe, limiting their exposure to volatile electricity prices. They can also help shelter consumers from rising electricity prices. The total investment cost of deploying PV and wind capacity over 2021-2023 is expected to amount to about EUR 200 billion. Almost 50% of this investment cost will likely be returned in the form of savings on power consumers’ bills by as early as the end of 2023, while these power plants will continue to provide benefits for the next 20-25 years.
According to the IEA accelerated case forecast, savings could have been about 15% higher if EU capacity had been increased more rapidly, through quicker implementation of policies supporting the deployment of technologies with short lead times (i.e. distributed solar PV) and a reduction in red tape for projects at the advanced stages of permitting.