Talking sense on wind subsidies

Among the more bizarre statements from last week’s Conservative party conference was from the new DEFRA minister Owen Paterson, in a tirade against that conservative bug-bear, wind power. “If you start having subsidies you end up with a Soviet-style system,” he told his audience, “where politicians make decisions that might actually be better made by the market.”

Hmm, I wouldn’t repeat these comments to your farmers, Mr Paterson. Britain’s farmers receive around £3.5 billion in subsidies every year.

Renewable energy received £1.3 billion last year, of which £396 million went towards onshore wind power, but the government didn’t decide that. Renewable energy subsidies in Britain are a market-based system. The energy companies claim the subsidy payments as they build capacity, and they are free to pick whichever renewable technology they think is most appropriate. (For an example of politicians picking winners, see the £500 million tax break extended to ‘brown field‘ gas earlier this year.)

Unlike agricultural subsidies, which are a giveaway from the EU, renewable energy subsidies aren’t out of the government purse. The subsidies are paid by the energy companies, who have renewable energy targets. If they don’t meet those targets, they have to make up the difference by purchasing Renewables Obligation Certificates from companies with a surplus. They may then pass those costs on to their consumers – see below for how much this affects the average bill. The graph below shows the average, but the less renewable energy your supplier generates, the more they have to pay in to the system.

Which means, somewhat ironically, that if you resent contributing to wind subsidies through your bills, you should switch to a green energy supplier. The best ones meet their quota with plenty to spare and are net recipients of subsidies.

There are good subsidies and bad subsidies. Bad ones create perverse incentives that reward the wrong thing (see fossil fuel subsidies), or the wrong people (the Queen receives agricultural subsidies). Good ones work within the market to channel investment towards best practice. If we want an intelligent debate about energy security and decarbonisation, we’re going to have to do better than Owen Paterson’s scaremongering nonsense about ‘Soviet-style’ systems.

Graphic from Greenpeace, with figures from Ofgem.

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6 Comments on “Talking sense on wind subsidies”

  1. Neil October 15, 2012 at 3:46 pm #

    Good one cannot disagree, posted a link to it on FB.

  2. Gareth Richards October 15, 2012 at 10:12 pm #

    A more appropriate graphic may be subsidy per unit of energy produced?

    • Jeremy October 16, 2012 at 10:43 am #

      Not sure how you would present it in a graphic, but Renewables Obligation Certificates are granted at the rate of one per Megawatt hour of renewable energy production. (It’s banded by technology, so some earn less than one per Mwh, some more than one)

      Companies that don’t produce enough ROCs have to buy them from those that do, at a cost of £40.71 each. The pot is then redistributed back to the energy companies in proportion to the number of ROCs contributed – if you put in 10% of the ROCs, you get 10% of the money in return.

      Cost per Mwh is actually very difficult to calculate and there are too many variables to put a single figure on it with any confidence, but some estimates for DECC last year had onshore wind at £94 per Mwh, offshore wind at £157. Gas plants were £80 and nuclear £100.

      http://www.decc.gov.uk/assets/decc/statistics/projections/71-uk-electricity-generation-costs-update-.pdf

      The subsidy looks expensive at those prices – and it is. The reason it’s necessary is that renewable energy has a very high capital cost and then low running cost thereafter, because you haven’t got fuel costs to worry about. The subsidy gets you over the hump. It allows energy companies to invest, and as they do, the cost of renewable energy comes down. As cost per Mwh of renewable energy comes down and the price of gas pushes up the main alternative, those subsidies will be less and less relevant – the scheme closes to new generation in 2017.

      Ultimately, whether you think subsidising renewable energy is a good idea or not depends on your views on climate change. If, like me, you think we need to transform our energy sector to low carbon alternatives, then it is worth the investment. If you don’t agree with climate science, then you’re likely to disapprove of subsidies – although you might want to consider supporting them on the basis of rising fossil fuel prices.

  3. Dustinn Zahnn January 9, 2013 at 5:17 am #

    Green technology is a growing trend amongst a lot of people in first world countries. A lot of people are realizing at just how much we as humans are effecting the environment, yet they are also realizing at just how much we can contribute and help. There are many ways you can aid the environment from doing things like buying an electric car, changing the light bulbs in your house, or investing in solar panels for your home.

Trackbacks/Pingbacks

  1. One thing we’ve learnt this week | The oil lamp – shining God's light on peak oil - October 19, 2012

    [...] website. The increases in energy prices are largely due to the increase in energy prices not “renewables”.  In addition the grid needs expanding and renewal (this is the same in the [...]

  2. A record year for wind power | Make Wealth History - February 12, 2013

    [...] So no, there’s no clean energy revolution on the horizon just yet. “The world is still failing to put the global energy system onto a more sustainable path” says the IEA. “Fossil fuels remain dominant in the global energy mix, supported by subsidies that amounted to $523 billion in 2011, up almost 30% on 2010 and six times more than subsidies to renewables.” [...]

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