Monday, 1 August 2011

Give feed-in tariffs to renewable energy not electricity suppliers!

I have just written to the Environmental Audit Committee asking them to launch an inquiry into the Government's proposals for a renewable energy feed-in tariff which appear in the Government's recently published 'Electricity Market Reform' (EMR) White Paper. Essentially, rather than use the well tried and tested German system of feed-in tariffs they are adopting a scheme that will be used by electricity suppliers to earn windfall profits and heavily penalise all but the very largest renewable energy developers. The Government's proposals will, according to an analysis written by a Cambridge Economics Professor, lose the electricity consumer upwards of £250 million a year compared to a scheme which involves a German-style 'fixed' feed-in tariff .

See my letter below, written to the Chair of the Environmental Audit Committee, Joan Walley MP:

Dear Joan,

I am writing to encourage you to press for the Environmental Audit Committee to study the issue of feed-in tariffs for renewable energy as discussed in the EMR White Paper. I fear the Government is about to get it wrong on renewable incentives yet again and, according to an independent analysis, waste over  £250 million of electricity consumers’ money every year (and rising as offshore wind is connected) for the likely amount of renewable energy generation output. In addition, medium sized renewable developers (under 100 MW) are likely to lose at least 20 per cent of their income to electricity suppliers.

Essentially the Government is sidelining the well trodden continental style so-called ‘fixed’ FIT idea for silly political reasons and adopting a 'contract for differences' (CFD) proposal that will simultaneously increase consumer costs, reduce the income stream for developers (especially ones under 100MW) and (yet again) hand windfall profits to the electricity majors. What is described (in the EMR White Paper) as a ‘fixed FIT’ is a tried and tested system used on the continent (such as Germany), and this can be adapted to British conditions without undue difficulty to produce much lower costs for the consumer than what the Government is proposing. This judgement is supported by an independent analysis performed by a leading Cambridge Economics Professor, a copy of which a copy of which can be seen at

I do know a lot about feed-in tariffs, and also about the loss of income that developers who cannot, unlike electricity suppliers, trade on wholesale electricity markets, will suffer. I ran the British end of an EU project on CHP and electricity wholesale markets and looked at the pitfalls for smaller generators (by ‘small’ I mean here anything up to 100 MW). Of course I also was the person who helped to open up the discussion originally in 2007 on feed-in tariffs in the UK (working with the World Future Council) which led to the system of feed-in tariffs for the smallest generators. Unfortunately, under the EMR proposals, it is the small to medium sized generators who will fall into a rather big crack in between the electricity suppliers themselves and the small FIT that has now been established.

I would certainly look forward to making a submission to the EAC on the subject. There is also the issue of auctions for FIT contracts of course, although there are signs that the Government is accepting that these are not a good idea to start off with at least. As already mentioned, Prof David Newbery has produced a paper on FITs - I agree with his conclusions on this issue (that a fixed FIT is better) - and the independent analyst Nigel Cornwall believes that a fixed FIT is necessary at least for projects under 100MW. He knows that you need to be a big company with a high credit rating and also employ people specifically to trade on the markets, which is mainly viable for only for electricity suppliers and large power stations.

In fact a fixed FIT is very simple to operate. A body, say the System Operator, can issue contracts at a fixed price according to the technology, and the electricity that is produced then becomes the property of the System Operator who sells it on to the electricity markets. This saves consumer’s money compared to the Government proposals because, put simply, it is much more cost-effective to balance fluctuating wind power output on a national basis than it is for individual renewable energy developers to buy what is known as ‘imbalance’ risk. This requires a Fixed FIT, not a CFD FIT as espoused by the Government. In their analysis the Government simply assumed that in the case of a fixed FIT the monetary value of electricity generated to was lost to the markets - it may be with the current small FIT scheme, but in fact it does not have to operate this way, and certainly should not be the case in a scheme organised for medium to large scale renewable energy projects.

The Government's proposals have definitely lost the plot, in pursuit of some idea of making it difficult to tell where subsidies are going (to renewables or nuclear) in a system supported by electricity majors who will be able to earn a premium themselves. Part of the problem is that historically, OFGEM, in a desire to incorporate a FIT system into market trading arrangements, have overlooked the fact that it is relatively simple to devise a system whereby a fixed FIT system can reclaim the market value of the electricity generated by renewable electricity schemes – as Professor Newbery outlines in his paper on the subject. Indeed this is a much more cost effective way of organising a FIT system. In doing so, upwards of £250 million a year will be saved for electricity consumers compared to the scheme that the Government are proposing.

I am sure lots of independent renewable companies will support the fixed FIT idea when they realise what is going on. An inevitable danger with the Government’s proposals is that anti-windpower campaigners will seize upon the inefficiencies of the system to support their position. So the EAC could be ahead of the game here and save the system a lot of wasted time, money and argument by helping to get it right from the start. We ought not to repeat the experience with the Renewables Obligation and realise some years later that a badly designed system is leading to electricity consumer’s money going into the hands of the electricity majors rather than the developers.

Best Wishes,

David Toke, Senior Lecturer in Energy Policy, University of Birmingham

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