Tuesday 8 October 2013

Will somebody tell the Lib Dems that the Tories have ALREADY cut renewable subsidies

Liberal Democrat ministers are anxious to say that they will stop Tory plans to cut renewable energy subsidies, but this is undermined by the fact that the premium prices paid for renewable energy have already been sharply reduced as a result of Electricity Market Reform (EMR). According to the Lib Dems the Tories cannot cut the rates payable to wind power and other renewables because they are being set in law under the EMR legislation and regulations. See http://www.theguardian.com/environment/2013/oct/07/lib-dems-tory-renewable-energy-subsidies

Well, that makes much less difference than it seems. The Lib Dem claims ignore the fact that the rates payable for wind and solar power are being slashed by large amounts under the EMR settlement - that is compared to what is paid (currently, and until 2017) under the Renewables Obligation (RO).

Under the RO the total income stream payable for onshore wind is around £95 per MWh and £135 per MWh for offshore wind, both payable for 20 years and at inflation adjusted rates according to the Retail Price Index (CPI). Although the EMR rates from 2018, at £90 per MWh for onshore wind and £135 for offshore wind look superficially similar to this they are undermined by three important factors.

The effect of these factors is to reduce the equivalent value to what is now paid through the RO to around £82 per MWh for onshore wind and around £117 per MWh for offshore wind (according to my spreadsheet calculations).

There are two principal reasons for this (about 13 per cent) reduction in the value of the income stream under EMR compared to the RO. First, the length of the period during which the premium price is payable is reduced from 20 years under the RO to 15 years under EMR. Second a different form of inflation adjustment is being used to calculate the future premium levels. The Consumer Price Index (CPI) is being used for EMP uprating which, because of its mode of calculation, fails to keep pace with price increases in the real world. The more accurate RPI is used under the RO.

Then there is the third factor. The story put about in defence of these reductions is that because of the 'firm'contracts available under the EMR, as opposed to the relatively greater uncertainty about future income streams under the RO, means that the EMR payments reduce 'risks' and therefore investment costs. So, it is claimed, the costs of developing projects are reduced.

But in reality this will not happen because of other elements of EMR. You have to remember that the RO has worked on the basis of giving a big cash handout to the Big Six electricity suppliers to give contracts (power purchase agreements) to renewable generators to supply them with electricity. In doing so the Big Six electricity majors could cream off a lot of the income stream under the argument that they were giving firm contracts to the generators (often owned in alliance with the Big Six themselves) and taking the 'risk' themselves. The renewable generators themselves would only get a portion of the total income stream available for renewable projects.

So what the Government has done, in effect, is to remove the 'cream' that was being absorbed by the Big Six. But the Big Six will still want to earn their own cut, but will do so by giving the renewable generators rather less than they were receiving before.

Of course if we had a 'fixed' feed-in tariff this problem would be reduced since independent renewable generators could access the premium price contracts directly, so avoiding having to pay the ''cream to the Big Six. But they cannot do this under EMR because the 'contracts for difference' (CfD) can only be accessed by major electricity companies. See earlier blog posts about all of this.

So, in effect, either the Big Six are expected to give contracts (power purchase agreements) to independent renewable generators and forgo the creamed-off-profits they are used to under the RO, or they will cut the value of the 'firm' contracts that they give to the independents. The outcome is likely to be that the Big Six will just cut the value of the PPAs that they give out to the renewable generators. This means that the annual rate of renewable energy deployment will fall considerably. Many projects that would be built under the RO  will now be uneconomic

Of course Ed Davey could have fought harder to ensure that the independent generators had a better mechanism for gaining PPAs, whether through a fixed feed-in tariff mechanism or through the 'green power auction market' (GPAM) proposal. But he has not done this. He has, after various signals suggesting he could do otherwise, come out with a proposal that will allow the Big Six to carry on making their unearned income out of renewable energy project. In effect, he has well and truly sold the pass while claiming to do otherwise.

Ed Davey, by the way, has been claiming that he will not agree to 'underwrite' investment costs Hinkley C. According to press reports, he is about to sell the pass on that one too. If he does will have the ugly prospect of a hamstrung renewables programme whilst a blank cheque being given for new nuclear power. But whatever happens, if Lib Dems claim to be able to stop Tory cuts to renewable funding, they are wrong. They have already not only sanctioned it but connived to see this change hidden behind Treasury smoke-and-mirrors.

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