Read the following extract from a booklet for the GWPF by Professor John Constable:
The current cost of renewables subsidies
The low and much-publicised offshore wind bids for Feed-in Tariffs with Contracts for Difference (FiTs CfDs) continue to confuse many analysts, even those from whom one might expect clear-eyed caution. A writer for the CapX website, to select an example almost at random, quite correctly takes issue with the Labour Party’s reckless plans for major public investment in further offshore wind, but does so on the mistaken ground that ‘offshore wind is a big success story…delivering ever more clean energy, at ever lower prices, for a fraction of the price of Labour’s plan’.
However, and as a matter of fact, none of the low-bidding wind farms have actually been built, and the 8.5 GW of operational offshore wind capacity that is ‘delivering’ is, without exception, very heavily subsidised. Indeed, the most recently commissioned offshore wind farm, the giant 588 MW Beatrice, off the north-east coast of Scotland, which only became fully operational in the summer of 2019, has a CfD strike price of £140/MWh, now worth £158.73/MWh, roughly three times the wholesale price, and indeed about three times the almost certainly unrealistic strike prices bid in the most recent CfD auctions. It is obviously premature to say that the observed fall in CfD prices bid is a ‘success story’.
The CfD contracts are very far from firmly binding, and the penalty for abrogation is trivial. It seems likely, bordering on certain, that they are a sly and low-risk publicity gambit, intended to secure a market position, and inhibit competition, in the hope of obtaining a better price by whatever means at a later date. And of course the cost of electricity from existing offshore wind power has most certainly not fallen; it continues to be very high, like all the other renewable generators in the UK fleet.
Perhaps it is worth reminding ourselves just how much that subsidy currently amounts to, and how much it is costing British households. Apart from the Contracts for Difference (CfDs), there are two other systems of subsidy: the Renewables Obligation (RO), and the Feed-in Tariff (FiT). The costs of these systems are recorded in the Office for Budget Responsibility’s Economic and Fiscal Outlook, the most recent issue of which was published March 2019. This reports the current and projected costs of these subsidies amongst other environmental levies
The cost of the Feed-in Tariff in 2017–18 was £1.4 billion, which when added to the cost of the Renewables Obligation (£5.4 billion) and the Contracts for Difference (£0.6 billion) gives a total of £7.4 billion. Government forecasts give a total for the years 2017 to 2024 of nearly £70 billion.
These costs are recovered from the prices per unit of electrical energy (kWh) sold and thus the bills paid by all types of consumer: domestic, industrial, commercial and public sector. Consequently, about 30–40% of the total cost is recovered directly from household bills, because retail consumption typically comprises 30– 40% of total consumption in a year.
In truth, the impact is likely to be slightly higher than the proportions suggest, firstly because industrial and commercial consumers can buy closer to the underlying wholesale price, and secondly because some intensive energy users have partial exemption from these costs, meaning that the burden is transferred to other consumers, including households. It is worth noting also that VAT is charged on these subsidy costs too, and domestic consumers cannot recover that cost.
The current cost of renewables subsidies
The low and much-publicised offshore wind bids for Feed-in Tariffs with Contracts for Difference (FiTs CfDs) continue to confuse many analysts, even those from whom one might expect clear-eyed caution. A writer for the CapX website, to select an example almost at random, quite correctly takes issue with the Labour Party’s reckless plans for major public investment in further offshore wind, but does so on the mistaken ground that ‘offshore wind is a big success story…delivering ever more clean energy, at ever lower prices, for a fraction of the price of Labour’s plan’.
However, and as a matter of fact, none of the low-bidding wind farms have actually been built, and the 8.5 GW of operational offshore wind capacity that is ‘delivering’ is, without exception, very heavily subsidised. Indeed, the most recently commissioned offshore wind farm, the giant 588 MW Beatrice, off the north-east coast of Scotland, which only became fully operational in the summer of 2019, has a CfD strike price of £140/MWh, now worth £158.73/MWh, roughly three times the wholesale price, and indeed about three times the almost certainly unrealistic strike prices bid in the most recent CfD auctions. It is obviously premature to say that the observed fall in CfD prices bid is a ‘success story’.
The CfD contracts are very far from firmly binding, and the penalty for abrogation is trivial. It seems likely, bordering on certain, that they are a sly and low-risk publicity gambit, intended to secure a market position, and inhibit competition, in the hope of obtaining a better price by whatever means at a later date. And of course the cost of electricity from existing offshore wind power has most certainly not fallen; it continues to be very high, like all the other renewable generators in the UK fleet.
Perhaps it is worth reminding ourselves just how much that subsidy currently amounts to, and how much it is costing British households. Apart from the Contracts for Difference (CfDs), there are two other systems of subsidy: the Renewables Obligation (RO), and the Feed-in Tariff (FiT). The costs of these systems are recorded in the Office for Budget Responsibility’s Economic and Fiscal Outlook, the most recent issue of which was published March 2019. This reports the current and projected costs of these subsidies amongst other environmental levies
The cost of the Feed-in Tariff in 2017–18 was £1.4 billion, which when added to the cost of the Renewables Obligation (£5.4 billion) and the Contracts for Difference (£0.6 billion) gives a total of £7.4 billion. Government forecasts give a total for the years 2017 to 2024 of nearly £70 billion.
These costs are recovered from the prices per unit of electrical energy (kWh) sold and thus the bills paid by all types of consumer: domestic, industrial, commercial and public sector. Consequently, about 30–40% of the total cost is recovered directly from household bills, because retail consumption typically comprises 30– 40% of total consumption in a year.
In truth, the impact is likely to be slightly higher than the proportions suggest, firstly because industrial and commercial consumers can buy closer to the underlying wholesale price, and secondly because some intensive energy users have partial exemption from these costs, meaning that the burden is transferred to other consumers, including households. It is worth noting also that VAT is charged on these subsidy costs too, and domestic consumers cannot recover that cost.
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