What is affordability?
The cost of using a certain energy source to generate electricity is referred to on this site as that energy source's affordability, measured in UK pence per kilowatt-hour of electricity generated (p/kWh).
In June 2011, according to an Ofgem review of the wholesale electricity costs that make up a typical electricity bill, the cost of generating electricity from the UK's existing mix of energy sources was £225 per customer per year. An average customer consumes about 4,000kWh of electricity per year, so the average affordability of UK electricity is about 5.6p/kWh.
New power stations required by 2020
However, a significant proportion of the UK's existing power stations are scheduled to close in the next 10 to 15 years, so new generating plants will be needed to replace them around the year 2020. The affordability figures given on this site for these new plants encompass the cost of fuel and the cost of constructing, operating, maintaining and decommissioning the infrastructure required to turn that fuel into electricity.
Some generating technologies currently under development – such as offshore wind turbines, marine power plants and fossil fuel-fired power stations fitted with carbon capture and storage (CCS) technology to reduce their emissions – should become significantly cheaper as more are built and the UK's experience with the technology grows.
These 2020 figures are all taken from a May 2011 report by the Committee on Climate Change (CCC), which advises the Government on achieving its climate change targets.
Power stations are a long-term investment, so it's necessary to think this far in advance in order to make the right decisions now.
Ofgem's figures take into account the electricity needed to transmit power from generators to customers, while the CCC's figures do not, so any comparisons between these two sets of figures must be drawn with care.
Pros and cons of energy sources
Every energy source has strengths and weaknesses, such as its inherent affordability. If the cost of generating electricity rises too high it increases the likelihood of consumers and businesses being unable to afford the energy they need.
Broadly speaking, energy sources fall into one of two categories. The first is made up of free or inexpensive fuels that must be harnessed using relatively costly machinery. This category includes nuclear power and renewable energy sources like wind and sunlight. The second is made up of costly fuels that can be harnessed using relatively inexpensive machinery. This category includes fossil fuels like coal, oil and gas.
The cost of generating electricity using fossil fuels like gas and coal in the future will fluctuate depending on the cost of buying these fuels on world markets. Additionally, incorporating CCS technology into fossil-fired power stations is expected to make them more expensive to build and operate.
Nuclear power is the cheapest large-scale, low-carbon generating technology, closely followed by onshore wind. Offshore wind is predicted to be more expensive.
Solar photovoltaic (PV) cells are a very expensive way to produce electricity in the UK, and marine generating technologies are still at the research and development stage, so their costs have yet to be proved.
A diverse mix of generating technologies is needed to help the UK manage the uncertainties surrounding the future cost of producing electricity.
What does it mean for the UK?
Each energy source has its affordability challenges and possible solutions, all with important impacts for the UK and energy prices.
The Energy Sources
By 2020 the cost of generating electricity using onshore wind should be about 8.3p/kWh, and for offshore wind 12.5p/kWh. Wind farms have high upfront construction costs but once running, the fuel is free. Adding more wind to the energy mix also carries hidden costs associated with energy storage and flexible backup power generation.
By 2020 the cost of generating electricity using household solar photovoltaic panels should be about 25.3p/kWh. Production costs make solar expensive for generating electricity, but costs are reducing as solar technology is developed and commercialised.
It is not considered economically viable to build new hydropower stations in the UK. The affordability challenges facing hydropower are minimal and well-established but the possible new sites in the UK are limited.
It is estimated that in 2020, generating electricity using tidal turbines would cost about 18.8 pence per kilowatt-hour (p/kWh), and using wave power would cost about 26.8p/kWh. Marine technologies are still in the early stages of development, but may become more affordable as the UK gains more experience manufacturing, constructing and operating them.
By 2020, the cost of generating electricity using nuclear power should be about 7.8p/kWh. Construction and decommissioning costs can make nuclear energy look expensive but once running nuclear power stations have relatively low operating costs and the capital expenditure is spread over a long lifetime of high levels of output.
By 2020 the cost of generating electricity using natural gas should be about 8p/kWh, or 11p/kWh for plants fitted with carbon capture and storage technology to reduce emissions.
By 2020 the cost of generating electricity using coal with carbon capture and storage (CCS) technology to reduce emissions should be about 11.3p/kWh. CCS is coal's biggest affordability challenge, but the technology should get cheaper as more plants are built.
Oil is unlikely to play a major role in future electricity generation.