How do green energy tariffs work? The experts explain everything to you

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  • You may also be wondering if you can cut costs and avoid the energy crisis by switching to a renewable energy deal.

    Soaring gas prices have resulted in exorbitant energy bills for millions of households. Bills are expected to rise further when regulator Ofgem raises the price cap.

    However, even if your energy supplier says it avoids fossil fuels and helps fight climate change, unfortunately that doesn’t mean you’ll escape high gas prices and benefit from lower costs.

    We answer how green energy tariffs work, common misconceptions and how to find the greenest and cheapest deals.

    What is a green energy tariff?

    About nine million households have signed up for green energy contracts, and more than half of all electricity tariffs launched now carry the “100% renewable” or “green” label.

    Many major energy providers claim to provide “100% renewable electricity” or “carbon-free electricity”. There are also smaller specialist green energy providers, including Good Energy, Green Energy UK and Ecotricity.

    For electricity, green energy sources generally come from the sun (solar panels), wind (wind turbines) and water (hydro, tidal and wave power).

    Green electricity is much more common than green gas. Green Energy UK is the only supplier of 100% green gas, which is biomethane from agricultural, food and landfill waste.

    Image credit: Future PLC/ Polly Eltes

    How do green energy tariffs work?

    One of the big misconceptions about green tariffs is that the electricity you receive in your home comes only from renewable sources, without coal, gas or other fuels.

    It’s not correct. Everything from your fridge and washing machine to your children’s game consoles and long showers will be powered by the national grid – and you and your supplier have no control over that. It will be the same energy that your neighbors receive, regardless of the tariff at which you are.

    Around 40% of the national grid’s electricity comes from renewable sources (wind is the biggest contributor), 30% comes from gas, with the rest coming from nuclear, biomass and coal.

    So how is it possible to qualify an energy contract as “green”? Energy companies can achieve this in several ways. The first is to use 100% of the income they receive from their customers to invest in the development of renewable energies. Another way is to enter into an agreement with a solar panel or wind farm to buy the electricity they produce.

    Suppliers can also match the electricity customers use with Guaranteed Renewable Energy Origin (REGO) certificates. These are issued by Ofgem to prove the origin of clean energy. For a tariff to be badged “green” or “100% renewable”, a supplier must be in possession of enough REGO certificates to cover the energy consumed by customers on this tariff.

    How can I find the greenest rate?

    Given the different ways green pricing works, it can be difficult to find a truly green company.

    Three-quarters of consumers think suppliers should be more transparent about their green pricing, according to a government-commissioned poll last year.

    There have also been allegations of “greenwashing” in the industry.

    According to Energy saving trust, the greenest tariffs are those where the energy supplier buys the renewable electricity and the accompanying certificates directly from the producers, such as wind farms. He says this offers a clear advantage to the renewable energy industry.

    The trust places Ecotricity, Good Energy and Green Energy UK in this category. The trio provide 100% renewable electricity, while some or all of their gas supply is also green.

    Then there is the “moderately green” category. These are often large energy providers who own or have partnerships with renewable and fossil fuel producers. Standard tariffs deliver electricity from a mix of sources, while green tariffs are backed by REGO certificates from their low-carbon electricity sources.

    Finally, there are energy companies that are not green at all. Energy Saving Trust explains that some electricity providers who claim to supply 100% renewable energy simply buy excess REGO certificates. “These certificates are available at lower cost in times of excess generation in the EU and these tariffs do little to encourage renewable energy generation in the UK.”

    Take a look at how green pricing works and make sure you’re comfortable with how the parent company fulfills its promise to be environmentally friendly.

    Utilities are legally required to publish details of their ‘fuel mix’, so be very careful of this. Think about what “green” means to you – for example, are you happy that nuclear is included as a renewable energy?

    Living room with wood burning stove

    Image credit: Future PLC/ Polly Eltes

    Are green tariffs cheaper than standard energy offers?

    Green tariffs are currently not cheaper than standard offers – and at the moment some are much more expensive.

    The high cost of gas affects the price of renewables as renewable energy providers increase or decrease their rates depending on the broader energy market.

    Good Energy, which backs all the electricity it supplies with electricity purchased from a community of generators, says it is affected by wholesale gas and electricity prices. “Firstly, because the prices we pay to generators are influenced by the wider market, but also because we still have to wholesale electricity.” This occurs when customer demand exceeds the renewable energy purchased by Good Energy.

    Buying REGO also costs suppliers money, driving up the price of green energy.

    Gareth Kloet, energy expert at comparison site GoCompare, points to another reason why green tariffs are currently expensive. “In my opinion, the biggest influence of green tariffs is that suppliers who generally favor green/sustainable energy sources [such as Bulb and Pure Planet] ceased their activities.

    Does the Ofgem price cap apply to green tariffs?

    The price cap applies to most variable green tariffs. It is priced at £1,277 per year on average for a typical household paying by direct debit, and will increase to £1,971 from April 1, 2022.

    However, three green suppliers – Good Energy, Green Energy UK and Ecotricity – have a permanent exemption from the price cap, as they contribute to the growth of renewables.

    This means that their prices can be higher than the ceiling price. For example, Ecotricity’s standard electricity tariff is around 34p per kWh – compared to the current price cap average of 21p.

    How to find the cheapest green tariffs?

    Suppliers withdrew their cheapest tariffs due to the exorbitant price of gas, and until there is more clarity on how the price cap will change in April.

    Some price comparison sites have also frozen their switching services due to the energy crisis.

    So unfortunately there are no decent green energy deals on the market right now.

    According to GoCompare, which reviewed the cheapest green tariffs on January 24, So Energy has the cheapest deal, with So Grape Two Year – Green. It has an average annual bill of £2,053. The one-year version is next on the list at £2,098.

    Ovo Energy’s Better Smart offer of January 11, 2022 is the third cheapest, at £2,350.

    What should I do if my green tariff is about to end?

    Desk in a navy blue bedroom

    Image credit: Future Plc

    If your fixed rate is about to end, the usual advice is to choose another fixed rate as this will be cheaper than falling on a variable rate.

    But these are not normal times. Many flat rates have been removed, and those available are usually much higher than the ceiling price. So, by doing nothing, you’ll switch to a variable rate, protected by Ofgem’s price cap.

    “Most vendors advise customers to do nothing at this time,” Kloet notes.

    Joe Malinowski, founder of comparison site The Energy Shop, agrees. “For now, do nothing, just sit back and see what comes out of the price cap announcement in February.”

    Can I produce my own green energy?

    If you want to boost your green credentials and go further than switching to a green energy tariff, you can consider generating your own renewable energy. For example, you can install solar panels on your roof or a micro-combined heat and power (micro-CHP) system in your home. The latter produces heat and electricity simultaneously. It is similar in size to a boiler, but the crucial difference is that it can generate electricity at the same time as heating water.

    Other options are to install a wind turbine, depending on the size of your land, or hydroelectric power if you live near a river or lake.

    The Smart Export Guarantee (SEG) program pays you for any excess renewable electricity you export to the national grid.

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