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UK Getting Concerned About Renewable Subsidies

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Institute for Energy Research

Many people have been led to believe that renewable forms of energy such as wind and solar must be very affordable since their energy sources – wind and solar – are free. In truth, these sources exist because of government policies, including subsidies and mandates, and increasingly, governments are moving to reduce the subsidies because consumers are objecting to higher and higher energy bills.

For example, the United Kingdom recently announced that beginning August 1, renewable power generators would no longer receive the climate change levy (CCL) exemption. The exemption acts like a subsidy and is worth about £5 per megawatt hour ($7.80 per megawatt hour) for renewable generators. It represents about 6 percent of current revenues for an onshore wind farm. With relatively low wholesale power prices, the loss of the CCL will cause many renewable power projects to struggle to cover their cost of capital, and some will likely face financial stress. The change to the CCL payments was a surprise to investors in renewable energy and has brought down the stock prices of renewable companies.[i] For example, Drax Group Plc, the utility converting the biggest UK coal station to burning wood pellets, had its shares drop 28 percent—to its lowest point since starting trading in 2005—after the government made the announcement.[ii]

The UK government also introduced a new energy bill to parliament that will end subsidies via the Renewable Obligation certificate to onshore wind farms a year early—by April 1, 2016. The law will also ensure that local authorities have the final say as to whether or not projects can go forward. Because of the change, it is expected that several projects currently under development will be scrapped. As such, future onshore wind projects are not expected to be financially viable without a subsidy unless the wholesale power price doubles. Last year, onshore wind generated 5 percent of the UK’s electricity with over £800 million of subsidies($1,250 million) paid for through consumer bills. The renewables obligation is already closed to large scale solar farms and is due to close to all new renewables in 2017.[iii]

Despite the UK subsidizing the construction of thousands of wind turbines and solar panels, the country is expected to miss its European Union target of generating 15 percent of its energy from renewable sources by 2020. If the UK is to meet its target in 2020, the total subsidy needed will increase dramatically.

Renewable Subsidies Impact Consumer Bills

As mentioned above, subsidies to fund green electricity projects such as wind and solar farms are paid for through levies on consumer energy bills in the UK. Official government estimates indicate that these subsidies cost a typical household £68 a year in 2014, or 5 percent on an annual energy bill of £1,369. They are expected to increase to £141 a year in 2020, or 11 percent of a bill, and £226 by 2030, or 15 percent of a bill.[iv]

Wind turbine owners (onshore and offshore) received £1.2billion in consumer subsidies in 2012 ($1.88 billion). They employed 12,000 workers that year, which means that the subsidy was equal to £100,000 per job. In some cases, the level of support from subsidies was so high that jobs were effectively supported at £1.3 million ($2 million) each. Scotland has 203 onshore wind farms with 2,235 people directly employed and an annual subsidy of £344 million, which means each job is subsidized at £154,000 ($240,000).[v]

Greater Gabbard, for example, is a wind farm consisting of 140 turbines located 12 miles off the Suffolk coast. The wind farm received £129 million in consumer subsidies in one 12 month fiscal year–double the £65 million it received for the electricity it produced. It employs 100 people, receiving effectively £1.3 million for each worker. The farm cost £1.5 billion to build.

Another example, The London Array, Britain’s largest wind farm with 175 turbines, employs 90 people and is located 12 miles offshore. It became fully operational in the spring of 2013. It is expected that its Renewables Obligation subsidy in its first year of full operation will be £160 million, or £1.77 million per job.

The wind industry indicates that without price and subsidy guarantees, a “green collar” jobs boom will not materialize in the UK; and wind manufacturers indicate that they need price guarantees.

UK Renewable Subsidies Will Escalate

The UK is taking action on these subsidies because the Office of Budget Responsibility (OBR) found that renewable subsidies will escalate higher than originally thought. The OBR now expects that total environmental levies on consumers to fund the transformation of the power sector to renewable energy will cost £13.6 billion in 2020/2021 ($21.25 billion), which is a £10 billion increase from the £3.6 billion ($5.6 billion) that they cost in 2014/2015. In 2013/2014, UK consumers (domestic and industrial) spent £34.1 billion ($53.3 billion) on electricity. The forecast shows that the government is likely to exceed its cap on costs by about 31 percent by the end of the decade.

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