Wednesday, 9 October 2013

Why the Government's planned renewables programme is mostly fantasy

Publicists at DECC and the Treasury deserve credit for convincing people that renewable energy will continue to build up at much the same rate as at present, because close inspection of the plans reveals that behind the smoke and mirrors the incentives for renewable energy planned under Electricity Market Reform (EMR) are being severely cut back. Indeed the Government plans really do deserve the description of fantasy since the public debate about the alleged impact of so-called renewable 'subsidies' on energy prices has very little real connection to what Government policies will actually produce.

The bulk of the incentives that are alleged to help new 'green energy' will be bound up with the 'carbon floor price' mechanism, which, since it is really a carbon tax, will serve as a revenue raising device for the Treasury and a cash cow for EDF's old nuclear power stations, but will have no discernable impact on developing new renewable energy schemes. The rest of the incentives will only be spent at a low level since they are set at such a puny level that little development will take place. The Government's 'green deal' for energy efficiency is practically a joke (with a miniscule uptake) whilst the incentives for renewable energy will be sharply reduced compared to the incentives currently available under the 'RenewablesObligation' (RO). On top of this the Government continues with a pantomime presentation about how 'community renewable' schemes will be given extra support whilst the reality is that the incentives on offer amount to much less than schemes organised by the Big Six and, incidentally, barely half the headline rate that has been suggested that nuclear power should receive (with nuclear power getting loan guarantees and much longer contracts to boot).

You might ask how the Government is able to get away with this. I wonder too. The renewable trade associations are the obvious candidates to shake the tree about what is happening (or not happening) on the renewables front, but they are probably worried that a more aggressive stance will lead to the disappearance of even the meagre incentives that are already on the table. Certainly some of them are funded through membership subscriptions by companies associated with the Big Six who are anxious to hang on to the excess profits they make from onshore wind power under the Renewables Obligation. They may see it as compensation for losing the income from their power stations that results from having more renewables online.   But it is notable that the quiescence of the renewable trade associations stands in contrast to the aggressive and well-resourced campaigns by EDF to push their case for ever-more types of support for the proposal at Hinkley C.

As I commented in the previous blog post, the proposals under EMR will mean that renewable energy subsidies are cut by around 15 per cent under the guise of having more cost-effective contractual arrangements using a feed-in tariff. The headline figures for the incentives are much the same as in the case of the RO, but the terms are very inferior, with less allowance for inflation and the contract length during which the premium prices will be paid reduced from 20 years under the RO to 15 years under EMR.

But as explained in the previous blog post, this will simply mean that the onshore wind developers, who are beholden to the Big Six to get power purchase agreements, will get their income stream reduced by large amounts compared to what happens under the RO. The point is that the RO implicitly gives the Big Six  a substantial 'creamed off' incentive to give contracts to supply electricity to the actual renewable developers. The Big Six will still want their cut under EMR, so, in effect, the developers will get their real income stream considerably reduced. This will mean a lot fewer projects going ahead even onshore, and there are unlikely to be many (if any) offshore wind projects going ahead. The Big Six seem to work within tighter margins in the offshore sector, so reductions in support there simply mean that very little development will take place under the incentives available under EMR.

The only way that the feed-in structure could work, for onshore schemes, given the incentive levels offered, would be to offer the contracts directly to the independent renewable developers (including the community projects). But Ed Davey has flagrantly failed to come up with a scheme to do this. Instead he appears to be allowing a system that will continue to allow the Big Six to cream off their excess, unearned, 'economic rent' from the onshore wind sector. The feed-in tariff scheme is effectively only available to the major electricity companies. It amounts to a cruel political joke to compare this contorted so-called feed-in tariff to the German feed-in tariff mechanism scheme when the whole point of the German scheme is to give rights to independent developers rather than the utilities. The ugly British version does the precise opposite! We should call the system something else. I shall call it the 'Big Six Utility tariff'. I encourage all readers to follow suit.

The Government is currently pushing proposals to expand the remit of the small feed-in tariff schemes up from 5 MW to 10 MW, in doing so giving the impression that all is well with community renewable interests. But this is an even worse piece of fantasy than the claim to be funding larger scale renewables. Under the current scheme the rates set for schemes larger than 1.5 MW are so derisory that nobody would ever bother using this mechanism for a project of this size. Extending the remit of the small feed-in tariff scheme is nothing but a smokescreen for a complete failure to incentivise the community renewables sector on a commercial basis.

At the end of this blog post I paste below some links to the tariff structures for pv and non-pv feed-in tariff rates to demonstrate what I mean.

Perhaps the scale of the Government deception is obscured partly because, under the RO, wind power deployment has been booming over the last 2 years. But that fact is itself largely explained by the knowledge among the industry that the good times are coming to and end. EMR will be phased in from next year until 2017, and advance power purchase agreements available for developers are becoming scarce even during the phase-in period. But whereas some renewable energy development has been growing at over 2 GW a year in the recent period, it is difficult to see how development will be more than 500 MW per year after 2014.

We do hear tales of tidal schemes being given planning consent in the Pentland Firth. But there is a lot more fantasy here, because the banks are unwilling to lend to these still innovative projects without loan guarantees. So unless they get the same sort of 'underwriting' loan guarantees that Hinkley C will need to go ahead, none of the substantial wave or tidal schemes will go ahead.

When David Cameron implies that renewable incentives can be cut, far from overstating the case he is actually understating it. The incentives are being cut back drastically, and the Lib Dems are proving to be little more than alibis to provide cover for this reality.

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