Subsidies tolerable during sustained economic growth look less so in harder times

The progressive development of renewable electricity generation has been settled public policy in Scotland since the establishment of the Scottish Parliament in 1999. Both the former Labour and Liberal Democrat coalition Scottish Executive and the minority and now majority SNP Government have relied on a narrow but powerful range of policy instruments to direct capital investment into schemes to meet the climate change and clean energy targets. After over a decade of experience, it is worth taking stock of emerging concerns and new evidence in the context of a potentially independent Scotland.

Foremost amongst these matters is the affordability of policy costs resulting from subsidy to renewable generators, and from the additional system costs entailed by those renewables.

Specifically, subsidies that might have seemed tolerable during a period of sustained economic growth look less so in harder times, and practical experience of managing a large wind fleet, in Scotland and elsewhere in Europe, confirms suggestions that grid integration is more expensive than anticipated. The scale of these combined costs is macro-economically significant, putting a downwards pressure on incomes because of reduced economic competitiveness at the same time as it strains household budgets through increasing energy bills. These costs, which are levied invisibly on electricity bills, are sharply regressive, being socialised across consumers, with a larger proportional effect on those with lower incomes.

This matter has only recently become salient, partly because the prospective system costs have been poorly understood, but largely because the impacts of the Renewables Obligation were heavily back-loaded, small at first but set to grow rapidly just beyond the political horizon. In the first year of the scheme, 2002–03, the cost to UK consumers was some £278m, but by 2009–10, this annual cost had risen to well over £1bn, with a total cost from April 2002 to March 2010 of £7.3bn.1 Striking though these numbers are, the probable on-costs are greater still.

It is important to recognise that notwithstanding domestic legislation, these expenditures are now driven by the 2009 EU Renewables Directive, which requires that the UK obtain 15 per cent of its final energy consumption from renewable sources in 2020. The bulk of this energy is projected to come from electricity, with over 30 per cent of consumption being renewable. The lion’s share of this energy is expected to come from wind power, with about half the capacity onshore and much in Scotland, a plan that is not free from significant technical and economic risks.

Our own databases at the Renewable Energy Foundation, which are derived from Ofgem records, show that there are already 115 onshore wind farms in Scotland (excluding sites of less than 250 kW) with a total installed capacity of 2.7 GWs, and a further 0.2 GWs of offshore generation. This is 60 per cent of the UK’s total of 4.4 GWs of onshore generation at about 300 sites. (There is an additional 2 GWs of offshore generation around England and Wales.) Moreover, the scale of projected growth is considerable. This total of over 7 GWs of potential additional wind generation in Scotland amounts to roughly 3,000 further wind turbines, of which consent has already been granted for 3 GWs (1,300 turbines).

Only artificial market conditions can encourage development at such a pace, and we estimate that in total, the subsidy anticipated by the industry, onshore and offshore, will add approximately £8bn a year to UK consumer bills in 2020, with the total subsidy draw from 2002 up to that year being around £55bn.2 If we assume that no attempt is made to meet higher targets than those currently in place but that the 20-year obligation to support pre-2020 generators is honoured, the total subsidy in the period 2002 to 2030 will be in the region of £130bn.

Wind power is also subsidised indirectly, since the grid expansion and management costs that it imposes are not charged to the wind generators themselves but socialised over the entire system. Such costs can only be estimated indicatively, but recent work for the Institute of Engineers and Shipbuilders in Scotland (IESIS) by Colin Gibson, former Power Networks Director for National Grid, has suggested that the additional system costs for onshore wind could be as much as £60/MWh in 2020, and £67/MWh for offshore wind. These costs include: i) Grid expansion (the need for which has been driven home by the nearly £13m in ‘constraint’ payments made to Scottish wind farms in 20113); ii) The cost of fast response plant to address the intermittency of wind in the operational timescale (minutes and hours); and iii) The need to maintain an underutilised conventional fleet equivalent to peak load, plus a margin, to cover periods when output from the wind fleet falls to very low levels.4 Assuming target levels as above, this would entail a total additional burden of around £5bn a year, bringing the total annual cost in 2020 to £13bn, as shown in Figure 1.

The subsidy portion of these costs is classified as tax and public expenditure and, necessarily in the present circumstances, the Treasury has instituted a Control Framework for DECC Levy-funded Spending (2011) to deliver some traction on the matter.

Partly as a result of this, DECC is consulting on a reduction in the number of Renewables Obligation Certificates (ROCs) that can be claimed per MWh of energy generated by certain technologies, with the current proposal being that onshore wind receive 0.9 ROCs rather than 1 as at present.

This would entail a 10 per cent reduction in subsidy (though only a 5 per cent income reduction, since roughly half of a wind farm’s annual income is subsidy, with the remainder coming from electricity sales), a modest change that is nonetheless an important indicator of future direction of travel.

However, the Treasury itself has yet to act to address the issue of VAT, which is charged on the Renewables Obligation, and indeed on the additional system management costs resulting from the policies.5 We estimate that in 2020, the annual VAT on the Renewables Obligation will amount to approximately £1.2bn, with that from system costs adding almost as much again.

While these costs are increasingly acknowledged, there is a tendency in government circles to claim that energy-efficiency measures will more than protect consumers, and it should be noted that DECC’s view that in aggregate, current policies will reduce bills in 2020 is almost entirely premised on that belief.6 Unfortunately, there is good reason for thinking that this will be difficult to achieve in practice. A recent answer to a Parliamentary Question tabled by Liam McArthur MSP illustrates the point. Asked about the energy rating of the Scottish Government’s own buildings, the response revealed that none of them achieved top rating, six were in the bottom two and the Scottish Government estate has been ranked 1,153 in the league table of major organisations in the UK. Energy effi ciency is highly desirable, but delivery is not straightforward, and it is unsafe to assume that even ambitious policies to support it will reduce consumption and insulate consumers from other policy costs.

In the current economic circumstances, these matters raise searching questions with regard to the sustainability of the programme even at UK level, and the constitutional situation in Scotland makes these issues still more pressing. Renewable electricity generation is, of course, just one of the many questions that will be debated in the forthcoming referendum, but it does pose problems of particular diffi culty. Assuming that all the capacity with planning consent is actually built, and, for the sake of argument, half of that in planning receives consent, this would result in a Scottish onshore wind fl eet of about 7.8 GWs. With a load factor of around 27 per cent, subsidy and system costs for this fl eet would amount to approximately £2bn annually, a heavy burden on the Scottish consumer base, not only for businesses already fi ghting for survival but also for private individuals. To put this in concrete terms, since roughly one third of consumption is domestic, and there are about 2.4 million households in Scotland, we can estimate that this wind fl eet would entail an annual bill impact of approximately £300 per Scottish household, of which about £140 would be for subsidy alone.

Only continuing support from English and Welsh consumers could mitigate the impact, but whether they would consent to this without some degree of ownership is open to doubt, a point that has signifi cant implications for Scotland’s ambitions to trade renewable electricity at a profi t across the interconnector.

John Constable is the Director of the Renewable Energy Foundation (REF), a UK registered charity publishing data and analysis on the energy sector.

REF is supported by private donation, and has no political affi liation.

Euan Robson is the Renewable Energy Foundation’s Scottish representative and a former MSP.

1 Parliamentary answer from Lord Marland to Lord Vinson, Hansard, 25 Oct 2011, Columns WA126-WA127. http:// www.publications.parliament.uk/pa/ld201011/ldhansrd/ text/111025w0001.htm.

2 See Renewable Energy Foundation, Energy Policy and Consumer Hardship (London, 2011), Available from www.ref.org.uk.

3 REF calculations from www.bmreports.com data.

4 Colin Gibson, A Probabilistic Approach to Levelised Cost Calculations for Various Types of Electricity Generation (Institution of Engineers and Shipbuilders in Scotland, 2011). The paper and the accompanying spreadsheet is freely available from http:// www.iesisenergy.org/lcost/.

5 See Lord Sassoon’s response to Lord Vinson, Hansard, 10 Jan 2012,, Column WA25.

6 DECC, Estimated impacts of energy and climate change policies on energy prices and bills (November 2011)