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Current Costs of British Renewables Subsidies per Household

Dr John Constable, GWPF Energy Editor

The total annual renewables subsidy impact on UK household cost of living is £9 billion — which comes to £340 per year per household.

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 CapX (“What is the point of Corbyn’s nationalised wind farms?”), 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 which is “delivering” is without exception very heavily subsidised. Indeed, the most recently commissioned offshore wind farm, the giant 588 MW Beatrice of 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 abrogration 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 (CfD),  there are two other systems of subsidy, the Renewables Obligation (RO), including the Feed-in Tariff (FiT). The costs of these are recorded in the Office for Budget Responsibility’s Economic and Fiscal Outlook, the most recent issue of which was published March 2019 (a new release is due shortly). reports the current and projected costs of these subsidies amongst other Environmental Levies, a screenshot of which is reproduced below:

Figure 1: Actual (2017–18) and forecast (2018–2024) consumer cost of environmental levies. Source: Office for Budget Responsibility (OBR), Economic and fiscal outlook – March 2019, see “Economic and fiscal outlook – supplementary fiscal tables: receipts and other”, Table 2.7.

Note that the Outturn column on the left is incomplete and has to be filled in by reference to Footnote 1, where we learn that the cost of the Feed-in Tariff in 2017–18 was £1.4 billion, which when added to the cost of the RO (£5.4 billion) and the CfD (£0.6 billion) gives a total of £7.4 billion. Adding the FiT the RO and the CfD projections we can calculate the forecast renewable subsidy costs for the following years as follows:

2018–19: £8.6 billion

2019–20: £9.2 billion

2020–21: £10.2 billion

2021–22: £10.8 billion

2022–23: £11.2 billion

2023–24: £11.6 billion

The current annual subsidy will be about £9 billion, and the grand total for the years 2017 to 2024 will come to 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 to 40% of the total cost is recovered directly from consumer bills, because household consumption typically comprises 30% to 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 and domestic consumers cannot recover that cost. However, for the purpose of a general estimate we can ignore these details.

In 2017 domestic consumers accounted for about 38% of GB electricity consumption, and we can assume that this is approximately correct today. Thus, the direct impact on British household electricity bills is 0.38 x £9 billion = £3.4 billion.

There are about 26.5 million households in Great Britain thus the mean annual renewables subsidy impact on a GB household electricity bill is £3.4 billion / 26.5 million = £129 per year per household.

However, this is not the end of the story. While the other 62% of the renewables subsidies are paid for in the first instance by industrial, commercial, and public sector consumers, these costs are obviously passed through to households in the costs of goods, services and general taxation. If a supermarket is compelled by policy to pay more for electricity to refrigerate milk it must recover that additional cost at the checkout. Of course, those companies with overseas customers could in theory pass on some part of that extra electricity cost to their consumers abroad, but given the intensity of international competition that is unlikely to be a strong effect.

Consequently, it is reasonable to assume that the vast bulk of these costs are recovered domestically, in Britain, meaning that we can calculate a total “cost of living” impact of the renewables subsidies by simply dividing total subsidies by number of households.

Thus, the total annual renewables subsidy impact on household cost of living is £9 billion / 26.5 million households = £340 per year per household, of which about £129 a year is recovered directly from electricity bills and the remainder, over £200 a year, from increased costs of goods and services.

Given the scale and regressive nature of these impacts it is high time that the Department of Business, Energy and Industrial Strategy (BEIS) resumed publication of its formal estimates of the total impacts of policies, of which the direct subsidies to renewables are only part, on both gas and electricity prices. These figures were last published in 2014 (Estimated Impacts) and discontinued, many of us suspect, because they were so embarrassing. At that time the department calculated that in their central scenario for 2020 domestic household electricity prices (NB, prices per unit, not bills) would be some 37% higher than they would have been in the absence of policies, and that prices for a medium sized business would be some 62% higher. Future projections out to 2030 were equally disconcerting, and it is thus imperative to know whether government attempts to contain the costs of energy and climate policies are having any significant effect. Judging from the OBR forecasts the answer is clearly no. The public needs and has a right to see the details.

Dr John Constable: GWPF Energy Editor.