By Paul Homewood
https://obr.uk/efo/economic-and-fiscal-outlook-march-2020/
I have been asked to write an dummies’ guide to describe how the system for subsidising renewable energy works. It’s doubly pertinent as I saw comments on Guido’s site just the other day repeating the mantra that wind power is now the cheapest form of generation.
As the name suggests, it will be necessity be a simple description, so please forgive if I gloss over some of the technical detail!
The above table was published by the Office for Budget Responsibility, and summarises the cost of Environmental Levies which are added to energy bills each year as a result of government policy, as opposed to being recovered through taxation.
All of these costs are incurred because of the government’s renewable energy policy.
Renewables Obligation
Renewable Obligation certificates (ROCs) are issued to operators of accredited renewable generating stations for the eligible renewable electricity they generate.
Energy suppliers have an obligation to source a certain proportion of their electricity from renewable sources each year, and therefore need to purchase these certificates to demonstrate that they have met their obligation.
Different renewable technologies are awarded varying numbers of certificates for each MWh. Typically onshore wind farms get one ROC per MWh, offshore 1.8 ROCs and solar farms 1.4 ROCs.
The value of ROCs rises year on year. The buy-out price for the 2019-20 obligation period is £48.78 per Renewables Obligation Certificate (ROC). This is the amount suppliers will need to pay for each ROC they do not present towards compliance with their 2019-20 obligation.
On average therefore onshore wind receives an ROC subsidy of £48.78/MWh, offshore £87.801/MWh and solar £68.29/MWh. This is on top of the revenue from actually selling the electricity generated, which has fluctuated between about £20 and £50/MWh in the last year.
The Renewable Obligation system was closed to new applicants in 2015, but generators already registered prior to that date will continue receiving subsidies for the life of their assets.
As all energy suppliers have to source ROCs, either by buying from a renewable generator or by buying ROCs on the market, customers end up footing the bill.
Contracts for Difference (CfDs)
These were introduced to replace the RO mechanism. Auctions are held typically on an annual basis for new renewable projects, and successful bidders are given index linked, guaranteed prices for all of the electricity they generate. These contracts run for 15 years, except for Hinkley Point which has a contract for 35 years.
The scheme is administered by the Low Carbon Contracts Company (LCCC), owned by the government, and the register of contracts to date can be seen here. Although prices have been coming down over time, some offshore wind projects earn £173/MWh.
Whatever price the generator earns in the market for the electricity it sells is topped by the LCCC to the guaranteed price, which is inflation linked each year. If the generator sells at a higher price than the guarantee, it must pay back the difference to the LCCC.
However, if market prices were consistently higher, there is nothing to stop the generator from reneging on the contract, albeit on payment of a relatively small penalty, and thereby take advantage of the higher market revenue.
Currently onshore wind and solar farms are excluded from the CfD auctions, though there are moves afoot to change that.
The LCCC’s outlay is recovered from all electricity suppliers via The CFD Supplier Obligation, charged per MWh of demand. In turn of course, suppliers this from customers.
Capacity Market Mechanism
Given the inherent unreliability of wind and solar power, the Capacity Market was set up to buy standby capacity. On an annual basis, auctions are held and generators can bid to supply a certain amount of capacity, which the National Grid can call on when needed.
These are held on a Reverse Auction basis, to weed out the more expensive offers.
Currently most of this contracted standby supply is from existing operators, who can afford to contract at low bids. This tends to keep out of the market new build generators, particularly CCGT, as they need much higher standby payments to justify new construction.
Again, the LCCC recover this cost from suppliers.
While Capacity Market costs are not a direct subsidy to renewable generators, they are the direct result of the intermittency of wind and solar power. Costs that should of course be borne by the them.
Feed in Tariffs (FITs)
FITs do not appear in the OBR table above, and I have queried this with them.
It has always appeared in previous years, and the cost last year was £1.6bn a year.
FITs apply to smaller generators, including small wind farms and solar parks.
The scheme was closed to new entrants in 2019, but will continue to run for those previously registered.
Renewable Heat Incentive (RHI)
Note that this is shown as a memo item, as it is funded via general taxation. Nevertheless it is yet another subsidy for renewable energy, designed to encourage private households, communities, and businesses to install renewable energy technologies for heating purposes.
Such technologies typically include biomass, heat pumps and solar panels.
Other Subsidies
Other costs associated with the deployment of renewable energy are not included by the OBR.
These include the costs incurred by the National Grid for balancing services, including constraint payments, likely to be well over £1bn this year. While the National Grid has always had to pay balancing costs, they have risen drastically with the growth of renewable power.
There is also the cost of upgrading transmission networks and constructing new interconnectors.
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