The Queen’s Speech: what is next for onshore wind farm subsidies?
By Andrew ZP Smith, on 8 June 2015
Following on from a manifesto commitment to “halt the spread of onshore wind farms”, the incoming Conservative Government has proposed in the Queen’s Speech that new subsidies would not be available to future onshore windfarms. This despite overwhelming public support for onshore wind: the DECC attitude-tracking survey of April 2015 found that just 12% of the public opposed the use of onshore wind, while 64% supported it.
What exactly is the proposal?
It’s not yet clear what that would mean in practice. Firstly, it may apply only in England: Scotland and Northern Ireland will be able to make their own decision for proposed windfarms within their jurisdiction; this may apply to Wales too (that’s yet to be determined). And secondly, there’s ambiguity around the definition of “new subsidies”, which gives the Secretary of State, Amber Rudd some flexibility to decide what’s best, based on the evidence. So let’s look at that evidence.
Why does it matter?
Importantly, all electricity is subsidised, one way or another. Coal and gas often receive explicit subsidies or generous tax regimes in their country of extraction. Additionally, their local and global pollution then goes untaxed: that’s an implicit subsidy paid for in poor health today and in the threat of catastrophic climate change in the future. Nuclear generation receives subsidies in many forms, both explicit – for example as loan guarantees, and as guaranteed income for 35 years in the case of the proposed Contracts for Difference; as well as the even larger implicit subsidies – for example the unlimited liability insurance that taxpayers must provide, as nuclear plant operators would never build or operate another reactor if they were to be held liable for damage to third parties resulting from their activities.
So the proposal is to single out onshore wind as the sole source of generation that will not receive new subsidies in the future. That’s particularly surprising, as Britain has a world-class wind resource. It’s like saying that we’ll compete in every event at the next Olympics except the one where it’s most likely to win a gold medal.
Is onshore wind expensive in Britain? If so, why?
The price needed for onshore wind to be viable in Britain seems very high compared to its neighbours; this seems hard to reconcile with Britain having a far superior wind resource to its neighbours’. There are several compounding factors. Many years of policy uncertainty and persistent meddling with the revenue schemes presents higher risks to investors. The planning regime in England and Wales created further uncertainty, with local decisions often being unpredictable; then being reversed on appeal; only to have the previous Secretary of State step in to reject the planning application, sometimes in contradiction to the Planning Inspector’s recommendation. And investors, faced with higher risk, will require higher rewards. Investors in windfarm supply chains can make a choice that is even more significant for British wind costs: they can choose to locate in jurisdictions which offer far greater long-term clarity and security: consequently, both Denmark and Germany have strong wind supply chains, and Britain’s is still nascent. Not only does that add additional transport costs onto windfarm development, it adds currency risk, and means that less of the money invested stays within UK plc.
So it is within the government’s power to remove part of the need for onshore wind to be subsidised, by removing the policy uncertainties.
Does onshore wind need subsidy?
The question is to what extent are the revenue-support schemes that provide top-up payments to onshore windfarm operators, above what they receive from selling their electricity in the wholesale markets, a subsidy for at all. Given that the payment represents a transfer over and above the market price, it might seem surprising that this is even a question. But the question has to be asked, due to a subtle effect, known as the merit-order effect. The merit-order effect is the reduction in wholesale prices that comes about when more wind is generated. Wind is never the most expensive fuel on the grid, because its fuel is free. When wind generates, it lowers the price across the whole market, because it knocks the most expensive generator out of the market. Previous research in Germany and Spain has found that these cost reductions outweigh the revenue support paid to wind: so wind is not subsidised there – indeed, quite the reverse, wind lowers total costs for consumers.
So what should the Secretary of State for Energy and Climate Change do?
There are three things that Amber Rudd can do to keep to the letter of the Queens’ Speech commitment, without impairing Britain’s exploitation of its global competitive advantages in onshore wind.
- Clarify that Feed-in tariffs, Renewable Obligation Certificates and Contracts for Difference are already-established schemes, and thus do not count as “new subsidies”
- Separate out, in the accounting of revenue-support schemes within government finances, into two separate numbers: first, how much reflects the merit order effect, or which merely levels the playing field for wind with regard to genuinely subsidised generators such as coal and gas; and second, how much of the cost is genuine subsidy.
- Give much greater long-term clarity and reassurance to windfarm developers and operators that the policy regime will be stable and supportive, thus lowering their risks and hence lowering the cost of onshore wind.
Doing all those will reduce the cost of onshore wind further; will give certainty to investors through decisiveness and leadership; and will show that the government is taking a pragmatic and cost-effective approach to tackling climate change.