Different forms of energy have different costs per unit (1 kWh) of energy. Table 1 shows the typical cost to a domestic consumer of different forms of energy and also the cost relative to gas. Actual prices will vary depending on market fluctuations, supplier and quantities purchased. From this simple analysis it can be seen that coal is the cheapest form of fuel, followed by oil then gas. Electricity is significantly more expensive per unit of energy than the primary fossil fuels.
Fuel type Price p/kWh Cost relative to gas
Gas 2.71 1.00
Oil 5.63 2.08
Coal 2.10 0.77
Electricity 14.7 5.42
Table 1. Cost of 1kWh of various fossil fuels relative to gas (taken at its lowest possible price).
This is because the unit cost of any source of energy depends on both the extraction costs and any processing costs. Electricity might seem to be an ideal fuel; of every 100kWh of electrical energy used by a heating appliance, 100kWh of thermal energy is released. In other words at the point of use it is 100% efficient. However, we must not forget that electricity is generated primarily from fossil fuels in power stations and is therefore a product of further process.
The image below shows the energy flows in a typical power station. It can be seen that of every 100 kilowatt hours of energy input to the power station, in the form of fossil fuels, approximately 57% is lost jointly as hot flue gases and as steam in the cooling towers and a further 7% is lost during electrical transmission (heating up of wires whilst overcoming resistance). This results in a conversion efficiency which varies between 31.5% and 36% depending on operating conditions. This wasteful method of production makes electricity costs high in relation to other fuels, such as gas that is extracted, at some cost, from the North Sea and further afield, but with little further processing.
The generation of electricity represents a scandalous waste of energy that should really be captured and used for heating purposes. In the UK many fossil fuel power stations are just too large and sited near coal fields and away from large urban areas where the waste heat could be more readily used in a district heating scheme. Smaller, decentralised generation schemes make much better use of the waste heat energy arising from electricity generation by using it in local buildings or processes. Local generation also eliminates much of the transmission losses.
Green tariff electricity
It is possible to purchase electricity that has been generated from renewable sources such as wind farms and hydropower. This is known as green electricity because its generation releases no carbon dioxide or other products of combustion into the atmosphere.
In reality, the electricity you take from the grid may be from a nuclear or fossil fuel power station. However, the utilities are required to prove that they are buying and supplying the same amount of renewable electricity to the grid as is supplied to customers on green electricity tariffs. A new EU green electrical markets' directive will require electricity suppliers to hold a renewable energy guarantee of origin (REGO) certificate to validate their sources. Green electricity can cost the same as standard tariffs, or slightly more, but the excess is often collected in a fund for 'green' initiatives. The websites of suppliers will give individual costs and schemes. A list of green tariffs is available on the Energy Watch website www.energywatch.org.uk.
Fuel Price Competition
The relative unit energy costs shown in the table above are for domestic customers. Commercial users of energy are able to negotiate a contract price for fuels from competitive suppliers due to the large quantities they consume. This tends to make unit costs lower, although there may be a complex arrangement of additional standing charges associated with patterns of energy demand throughout the year. Fuel price competition is now available to domestic customers also and there are a number of price comparison websites available to do a crude comparison of costs based on previous consumption. One of the problems with lower fuel costs is that it is known to encourage greater consumption of energy. On the other hand higher prices are a disincentive to use fuel.
Energy conservation investments
The decision on whether or not to include an energy saving feature in a building is usually made by calculating and assessing a rate of return on the investment. The most basic way of calculating this is to use the simple payback period. This is the number of years required to recoup the initial capital cost from the value of energy savings made. The payback period is calculated from the formula:
Payback period (y) = Capital cost of energy saving feature (£)
Value of energy savings per year (£/y)
Industry usually requires a payback period of less than 3 years for expenditure on energy saving features to be seen as worthwhile. From the payback formula it can be seen that the payback period will decrease if the capital cost of the equipment decreases or the value of saved fuel increases. The biggest change in these two factors, over recent years, has been in fuel costs. Most recently these have increased due to global competition for diminishing supplies of energy. This has been especially noticeable in domestic gas and electricity prices, which have risen considerably. The recent increases in fuel prices have two effects. Firstly, as energy costs rise people tend to use less, secondly, it shortens the payback period of energy saving investments. Both factors eventually contribute to a reduction in energy consumption.