Wednesday, 31 December 2014

So why is renewable energy so much more expensive in the UK compared to other countries?

British renewable energy is a lot more costly compared to renewable energy in other European countries, according to a recently published report. You can see this on:

Now, I don't doubt the reports general findings. Indeed my own research prompts me to say that renewable energy in the UK is not only rather more expensive compared to the rest of Europe, but also most of the rest of the world! But, the question is, WHY? A colleague recently popped me this question and it is one I have been asked before. One German renewable energy official commented to me a couple of years ago: 'How do you (Brits) manage to make renewable energy so expensive ?'

I don't think it has anything to do with 'purchasing power parity', that is what a pound will buy here as opposed to somewhere else when converted into the local currency (just look at the comparisons to see what I mean), so other factors will be in play, and my own studies of the energy point me very firmly in one direction:

The system of financing renewable energy schemes in the UK is designed (whether by intention or otherwise) to give a very large proportion of the income stream, earmarked for renewable energy and financed by effective levies on consumer electricity bills, to the major electricity suppliers rather than pay the renewable energy schemes themselves.

Under the Renewables Obligation (RO) (to cut a longer story short) the renewable energy (RE) generators are dependent on the major electricity suppliers to give them the long term contract they would need to raise the necessary bank loans and satisfy equity investors. They (the Big Six) take a big cut for doing this 'service' - which can amount to around 30 per cent of the income stream dedicated to renewable energy. In other words, if we had a system of German style 'feed-in tariff' contract that was available to anybody the money needed to pay for a given amount of renewable energy would be up to 30 per cent less. Yes, if RE was financed this way RE would be at least 25 per cent cheaper. Well, certainly for onshore schemes. The offshore wind picture is a bit more complicated since there are more uncertainties involved in that (eg you don't know how much the ships you need are going to cost to hire in advance), but the Germans still manage to do this a lot more cheaply!

Ah, you might say, the Government, under Electricity Market Reform (EMR) is introducing precisely this sort of system now. But, if you said that, you'd be dead wrong (admittedly a common fallacy). The 'contract for differences' (CfD) system being introduced is only available to electricity suppliers, or companies who can effectively act like electricity suppliers by trading on the UK electricity markets. Even then banks will tend to lend money at reasonable rates only to projects that are backed by the biggest electricity companies.

So, in short, the new CfD system replicates the existing ability of the electricity majors to siphon off up to 30 per cent of the incomes supposedly paid by electricity consumers for renewable energy.

You would be very welcome to ask why this is tolerated. Perhaps the simple answer is twofold. First, in the UK the Government has, by design or at least in effect, allowed the major electricity companies to cream off what economists call an 'economic rent' from renewable energy in order to compensate for the lost production from their power stations. I mean 'lost' in the sense that the power stations would be generating more if it was not for the renewable energy production.  - A sort of Faustian bargain. I have heard it said that RE is practically the only thing the Big Six can earn profits from now. Quite. This doesn't happen in Germany of course,where the electricity majors, as we hear, are suffering very badly indeed!

This leads us onto the second reason why this is happening. Now one can write lots of stuff about interest group theory to explain how this happens without there being any public discussion, but, again, the short answer is that it does not serve any of the major interest groups to raise the issue. Obviously the electricity majors like it; the Government is happy so long as they are happy and nobody else is able to make a big enough fuss, and the renewable energy industry is tolerant so long as they can carry on with their projects. The anti-windfarm/solar farm lobby won't be very interested in going on about how windfarms/solar farms could be a lot cheaper if the Government organised things differently.

The only interest groups that have tried to do anything about this are some independent renewables companies and some environmental groups. To give them their proper due. Friends of the Earth (FOE) actually published (two years ago) a report I wrote calling for German style feed-in tariffs (available to all-comers) to be established. See

I am very grateful to FOE for doing what they could here (it was certainly worth a try), but the report actually got rather more interest from abroad than it did in the UK! Some independent renewable energy companies tried pushing the boat out in the direction of looking for a broadly comparable solution, but sadly, they have too little political clout to make a crucial difference in political competition with the Big Six.

You have to remember that in Germany the independent renewables sector runs the RE industry. There the political interest group pressure is almost 180 per cent different to the UK. In this country it is the Big Six, give or take a couple of other multinational energy corporations, who will influence contractual terms. They are not too keen on opening up the market to real competition; indeed much nonsense is spouted in support of the the CfD system in that it is integrated to the British electricity market. Preserved for the sole indulgence of the big companies you mean! The biggest prize of course is to pay whatever it takes to preserve the idea of nuclear power, hence the likely bottomless incomes stream that will be opened up for Hinkley C and which will wipe out RE funding in the future. You can read my other posts on this I am sure.

I am not going to be completely pessimistic though. Smaller suppliers are entering the market, maybe even some ones backed by local authorities under what OFGEM calls its new 'supplier lite' scheme. That might change things. If we get Labour in power we might get a dedicated 'community feed-in tariff' - although that wouldn't apply to all independents, just ones owned in some sense by a community. But change in the UK is likely to come only slowly, and then under the impact of people doing things on the ground and building up the pressure that way. Small projects can gain funding under the small renewables feed-in tariff (in effect up to a MW or so). But that's only a start.

See below for some links to various recent argument on the subject. Note that there are a couple of comments below on the Government's new capacity mechanism. This now looks ever much more like a PR device that does little more than give more money to the Big Six and conventional power generators to try to keep them afloat from the threat of RE and other new technologies for that little but longer...........
19th December Tom Greatrex, Labour’s shadow energy minister, welcomed the broad framework of the policy. However, he repeated his argument that existing nuclear power stations — which cannot vary output in response to short-term peaks and troughs in demand — were being unnecessarily subsidised by the scheme.

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