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UK Government Proposes Backdoor Subsidies to Onshore Wind and Solar

Dr John Constable, GWPF Energy Editor

The UK’s Renewable Obligation and Feed-in Tariff have now, thankfully, closed. Unfortunately, the Department of Business, Energy and Industrial Strategy has announced an attempt to restore subsidies in a covert form, via the mysteriously named “Smart Export Guarantee” (SEG).

On the 9th of June BEIS released documents relating to upcoming secondary legislation, The Smart Export Guarantee Order 2019, a proposal to amend the Electricity Supply Licence to require large electricity suppliers (i.e. retail providers of electricity with more than 150,000 domestic consumers) to offer specifically designed off-take tariffs to renewable electricity generators up to 5 MW in capacity. This has been mistakenly reported by the British media as relating principally to “small scale” generators, with the Telegraph, for example, illustrating its story with a photograph of PV panels on the slate roof of a country cottage.

However, 5 MW is sufficient for 20 acres of ground-mounted solar panels, or 2 wind turbines of 150 metres in overall height, and in fact it is such far-from-micro generators that are the most probable beneficiaries of this scheme.

Examination of the government’s detailed proposals shows that the SEG is designed to establish a camouflaged backdoor route by which subsidies to onshore wind and to ground-mounted solar can be restored.

This contravenes the Treasury’s ruling that there should be a moratorium on new subsidies for the sector until the total consumer cost starts to fall, which is not expected until the mid to later 2020s. The Chancellor and his colleagues should be furious at this attempt to evade stated public spending limits.

Superficially, the level of the tariff offered is left to individual suppliers to decide, although it must be positive at all times, meaning that renewable generators will never have to resort to negative pricing, whereby a generator pays to dump their unwanted electricity on the markets.

However, in spite of the absence of a mandatory tariff level, the Department’s “Consultation Response” makes it very clear that government will be applying pressure to ensure that the rates are “appropriate”. Ofgem is to provide “guidance” (see p. 18 of the Consultation Response), and in a thinly veiled threat BEIS writes that “Government will consider reviewing these tariff setting arrangements, if it becomes clear that small generators are not able to access a competitive range of export tariff options.” (p. 15, and also see p. 13).

Indeed, at one point BEIS observes that:

“We will consider reviewing the tariff setting arrangements if we consider that offerings are not reflective of market values or unreasonable discounts are being factored in.”

In other words, the SEG proposal forces suppliers to offer a positive tariff to renewables, leaving them free to set the tariff at any level they like so long as Ofgem and BEIS agree that it is “rational”. They can offer any tariff they like so long as it is above the market rate, or “reflective of market values” to use BEIS’ euphemism. Of course, given the uncontrollable output of wind and solar, the actual merchant value of their electricity is low, well under that of the wholesale price commanded by dispatchable, generators responding to market demand, so even a guarantee of the wholesale price would constitute a subsidy of a significant kind.

BEIS repeatedly refers to the SEG as a “market-based solution” or “market driven” instrument. In truth, the real-world result of the Smart Export Guarantee will be to put suppliers under pressure to offer above market rates to renewables. The Department of Business Energy and Industrial Strategy, not the market, will decide what price is reasonable.

BEIS will deny it, but this is obviously a veiled market coercion backed up with the threat of punishment if suppliers don’t do what, with a wink and a nudge, they are told. The Smart Export Guarantee is a support mechanism, a subsidy under another name. Indeed, it is State Aid.

Strikingly, there is no closure date for the SEG programme (p 18), so without a clear decision from a future government it will apply in perpetuity. In some ways this makes the Smart Export Guarantee worse than the Renewables Obligation or the Feed in Tariff which, though foolish, were at least time limited. A generator had a limited number of years of entitlement to subsidy, and the schemes delivering those entitlements had clear closure dates. The SEG tariffs, on the other hand, will probably be available to a generator for as long as they wish to stay in the market, and the SEG itself would remain a mandatory regulatory requirement on suppliers until a future government decided to cancel it.

In spite of the powerful market distorting character of the intervention, BEIS has decided (pp. 7, 37) that there will be no central and public register of the SEG contracts, the spurious justification offered being that it would “create additional burdens while offering limited benefits” (p. 7). The convenient outcome of this decision is that the consumer cost of the SEG policy will be almost impossible to calculate. Her Majesty’s Treasury, for example, will have no idea how much the SEG is distorting the market, and the costs will not appear in the Office for Budget Responsibility’s calculation of the burden of environmental policies. Futhermore, the general public will be unable to determine how much the SEG is costing consumers through increased prices and bills.

In point of fact, as the Impact Assessment itself admits, it is not possible to estimate the cost of the policy since the tariffs to be offered are not known and the market response is “uncertain”. The policy is uncosted and uncostable. That is surely unacceptable.

However, the Impact Assessment does present some estimates of the policy’s consequences, but these are misleading. Without any justification, the department predicts (in Table 2) that net effect of the tariffs will be to encourage the construction of only trivially, small quantities of new capacity, 1.6 MW per year of wind, one medium sized wind turbine, and 11 MW per year of solar, a handful of sites. These are ludicrous estimates, and if they were true, then the SEG would be an absurdity, a heavy bureaucratic imposition on energy suppliers for, in effect, zero benefit.

In fact, and BEIS surely knows this, with favourable tariffs uptake could be very high, as it was with the Feed-in Tariff (FiT), which delivered 6,000 MW of capacity in few years. The SEG could easily encourage solar and wind capacity as rapidly and on a comparably large scale, and if it does there will inevitably be significant consumer costs. The FiT is now adding £1.5 billion per year to consumer bills. The Impact Assessment does not address the clear possibility, indeed likelihood, that the SEG will result in similar or even greater consumer burdens.

Indeed, it appears that this entire scheme has been expressly designed in order to conceal the probable costs and subvert any reasonable public oversight of and control over the scale and allocation of these new subsidies for renewable generation. Mr Clark, Secretary of State at BEIS, has made many questionable decisions during his tenure. The Smart Export Guarantee could easily prove to be one of his worst.