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The United Kingdom’s Budget 2017 in Global Context

Dr John Constable: GWPF Energy Editor

The latest release of the International Energy Agency’s World Energy Outlook (2017), and the UK government’s Autumn Budget (2017) are recriprocally illuminating. The global context revealed in the WEO’s data, but not in its commentary, explains in part the Budget’s retrenchment on renewable electricity subsidies. The stern reluctance of the Budget to increase spending on renewables reveals the WEO’s upbeat headline message to be less than firmly connected to reality.

The United Kingdom’s Autumn Budget (2017), published on the 22nd of November, is an important watershed in the correction of errors in British energy policy. In effect it states that until spending on subsidies to renewables and indeed to other low carbon energy sources falls below current promised levels no further new subsidies will be introduced. This does not mean that spending cannot rise above current levels, since the existing Contracts for Difference may, in fact, result in higher subsidies if wholesale prices fall. The real news here is that the existing schemes are now of historical interest only. The Renewables Obligation, of course, has been closed to new entrants since the 1st of April 2017, the Feed-in Tariff for small scale renewables is now subject to deployment caps and is steadily winding down. The Budget announcement suggests that this wind down will now end in firm closure. Even the flagship of Electricity Market Reform (EMR), the much discussed Feed-in Tariffs with Contracts for Difference, is now, with the exception of the intention to honour a previous commitment to issue further contracts worth £557 million a per year, be closed to new entrants. In the context of the very low bid prices made for offshore wind in the last round of auctions that can hardly be regarded as surprising. – Government has every ground for saying that if the industry is willing to make such low bids then there would appear to be no further long term need for subsidy to the sector in general.

However welcome, and important, this reorientation is not of recent origin. The first significant signs that the penny had dropped appeared as long ago as 2010/11, when the Treasury moved towards a Carbon Price Floor (CPF), a shift initially intended to be offset by substantial cuts to subsidies under the Renewables Obligation. It was rumoured that Treasury wanted to see cuts of up to 25% for onshore wind for example to offset the CPF. These were successfully resisted by the then Secretary of State for Energy and Climate Change, Ed Davey, and reduced to 10% for onshore wind. Treasury did not, however, give up on the CPF, and as a result the consumer ended up shouldering the burden both of the Price Floor and high levels of subsidies.

However, as is well-known on the mean streets of Whitehall, inter-Departmental conflict over expenditure can be summarised as years of bickering that ends only when the Treasury wins. This year’s Budget confirms this view. The subsidies are now on hold, and no new ones are likely to be introduced until 2025 at the earliest, plenty of time for Treasury to ensure that it has taken complete control of this agenda, probably limiting it to carbon taxation at the most.

This long run commitment to the reduction of renewables subsidies is impressive, but also calls for an explanation. Why go to so much trouble? The answer is found in section 6.3.8 of the 2017 release of the International Energy Agency’s (IEA) World Energy Outlook. The IEA here describes its estimate that global income support subsidies to renewables totalled $140 billion in 2016, an increase of 20% on the 2015 figure. A striking 80% of that $140 billion in 2016 was received by the wind and solar industries.

But the aspect of global subsidies that would be troubling the cool heads in Treasury is the fact that, as the IEA says, “support for renewables remains concentrated in a small number of countries”. Indeed, 45% of global subsidy support for renewables is accounted for by the European Union, with the biggest subsidisers being German, Italy, France, Spain and the United Kingdom. The IEA does not provide an estimate of the UK’s share in global subsidy, but reference to the tables in the Treasury’s Autumn Budget text, “Control for Low Carbon Levies”, suggests that UK could be accounting for considerably more than 5% of the global total, significantly more than its share of global GDP. That alone is sufficient to suggest that the UK is doing more than its fair share, and given the need to reinforce competitiveness post BREXIT, needs to limit its contribution.

Furthermore, the IEA projects that in its New Policies Scenario global subsidy spending on renewables will rise to a peak of approximately $225 billion (in 2016 prices) in 2030, with the vast bulk of that increase being taken by offshore wind, bioenergy, and solar, the latter of which alone is expected to be in receipt of about $100 billion dollars a year in subsidy in 2030 (See Figure 6.23, which for copyright reasons is not reproduced here).

With subsidy on that scale it is not surprising that the IEA thinks the future of the renewables sector is one of very significant growth:

Renewables capture two-thirds of global investment in power plants as they become, for many countries, the least-cost source of new generation. Rapid deployment of solar photovoltaics (PV), led by China and India, helps solar become the largest source of low-carbon capacity by 2040, by which time the share of all renewables in total power generation reaches 40%. In the European Union, renewables account for 80% of new capacity and wind power becomes the leading source of electricity soon after 2030, due to strong growth both onshore and offshore. Policies continue to support renewable electricity worldwide, increasingly through competitive auctions rather than feed-in tariffs […]. (“Executive Summary”, World Energy Outlook 2017, p. 2 ).

But the Autumn Budget shows that the UK government is unwilling to be part of this subsidy boom. One imagines that it is not the only national government considering its position. This had to happen sooner or later. The only justification for subsidies to renewables is to accelerate cost reduction. If those cost reductions have materialised then the subsidies should be cut. If, on the other hand, after twenty years of major global support for this sector they are still not able to compete unaided, expectations should be revised downwards and subsidies at the very least be put on hold and probably cut altogether.