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Why negative subsidies don’t mean lower bills

Andrew Montford

Since Christmas, the renewables lobby has been loudly trumpeting the news that windfarms are now paying back to the Contracts for Difference (CfD) scheme. This is less impressive than the Green Blob would have you think, because the CfD scheme is dwarfed by the Renewables Obligation, which continues to hose down windfarms with consumer cash. Nevertheless, it’s true that most CfD generators are currently paying back. That’s because market prices have risen so high that they have overtaken even the most absurd sums promised to windfarm operators.

However, windfarm advocates like to say that the negative subsidy is means that consumer bills are benefitting as a result. While this is possible, it’s unlikely.

That’s because of the way the CfD scheme works. The underlying legislation specifies a levy on electricity suppliers, the funds being passed to a middleman – the Low Carbon Contracts Company (LCCC) – who distributes them to renewables generators as a subsidy. However, it says nothing about how suppliers should get the funds to pass down the chain to the generators; it is simply assumed that market forces will compel them to pass the cost on to consumers via their bills. This is fair enough – where else would they get the money from?

But at the moment, with market prices so high, the whole chain is reversed: generators are having to pass money back up to the LCCC, who pass it on to suppliers. But how do we know that these funds will then find their was on to consumers? The answer is that we don’t. There is simply the same reliance on market forces.

The painful reality for electricity suppliers is that they are dire financial straits, stuck between, on the one hand, surging wholesale prices and, on the other, price caps and fixed price sale agreements. As we all know, they have been going bust left, right and centre. So while the funds raised from generators as “negative subsidies” will pass up to the LCCC and then onwards to the suppliers, don’t expect it to go any further. The supply industry has a big job of balance sheet rebuilding to undertake.

And you are going to pay for it.