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Green energy cuts and subsidies

By Dave Elliott

‘Government support is designed to help technologies to stand on their own two feet, not to encourage a permanent reliance on subsidies. We must continue to take tough judgments about what new projects get subsidies’. So said Amber Rudd, the new UK Energy and Climate Change Secretary

Are the cuts to renewable energy support she is imposing sensible?

We are told that since renewables like wind and solar are getting cheaper they no longer need subsidies – hence the cut-backs imposed in the UK and similar cuts (for example to Feed in Tariffs) elsewhere. It is true that wind and PV costs have fallen and continue to fall, so is it now fair to expect them to stand on their own feet?

The starting point for any discussion of support systems for the new energy options must be that the existing energy options already enjoy massive subsidies. The Overseas Development Institute says that, globally in 2011, for every $1 spent to support renewable energy, another $6 were spent on fossil fuel subsidies:

Similarly, according to the International Energy Agency, governments pumped over $0.5 trillion into subsidies for oil, gas and coal in 2012 globally, six times more than for renewables (IEA, World Energy Outlook, 2012). The IEA’s more recent estimates show a slight improvement: subsidies for fossil fuels worldwide in 2013 totalled $548 billion, while renewables received $121 billion. Even so, the vast historical imbalance continues.

Nuclear power has, if anything, been even more heavily subsidized over the years, most obviously in terms of R&D spending, with, in the EU, around 78% of energy supply-related R&D funding in the period 1974-2007 going to nuclear. Historic investment support for nuclear projects in the EU has also been high, at up to €8 billion p.a., even compared with that for coal – €5 billion p.a.:

The global picture is similar. Although support for nuclear R&D has fallen off in recent years (as has most R&D), nuclear had the lion’s share of energy R&D funding in IEA member countries for many decades, up to 80% in the 1970s (IEA, Reviewing R&D Policies, 2007:

While subsidies like these have continued to outpace those for renewables, some of the subsidies renewables have received have been very effective at getting costs down and building up capacity. So it is tragic that there have of late been moves to reduce them. Launching its third annual Medium-Term Renewable Energy Market Report, Maria van der Hoeven, then IEA director, said governments should hold their nerve: ‘Renewables are a necessary part of energy security. However, just when they are becoming a cost-competitive option in an increasing number of cases, policy and regulatory uncertainty is rising in some key markets. This stems from concerns about the costs of deploying renewables. Governments must distinguish more clearly between the past, present and future, as costs are falling over time. Many renewables no longer need high incentive levels. Rather, given their capital-intensive nature, renewables require a market context that assures a reasonable and predictable return for investors’.

What does this mean in practice? While the IEA and many others, including the divestment movement, are pushing for reduction in subsidies to coal, and there is also pressure to halt nuclear subsidies, is it reasonable for support for the most developed renewables to also be cut, even if the playing field still remains far from level? There is certainly political pressure to do that, for a range of reasons, including short-term cash savings. The UK government’s decision to block new on-land wind projects from access to support via the Renewables Obligation and also via the CfD system, and similar blocks to solar farms, and possibly a cut to the FiT for smaller solar projects too, will only cut the relatively low annual cost to consumers of supporting these schemes (typically at present around £30 for the RO and £10 for the FiT, and maybe £30 for the CfD by 2020) by very small amounts, which will be lost in the larger increases longer-term, as fossil fuel prices rise:

As with the wider austerity policy, it can be argued that cuts are not the way forward. If we want to avoid rising fossil fuel and nuclear costs, and the climate and other environmental and heath costs associated with using fossil fuels, we need to invest in new technology. The UK Solar Trade Association’s ‘Solar Independence Plan for Britain’ proposes a scenario with an ambitious target of 25 GWof PV solar by 2020. That it says would cost households ~ £1 per month. By contrast, the currently proposed solar cuts may save 50p each year!

The cuts seem to be more a punitive attack than an economically or environmentally rational policy, as is indicated by the imposition of the Climate Change levy on all renewables (they were exempt before). That is estimated to be likely to raise £3.9 bn over the next 5 years. Meanwhile tax breaks are being offered for fracking projects and £1.3 bn tax breaks for North Sea oil and gas, along with long-term subsidies (35 years and around £17 bn via the CfD) and underwriting (£10 bn) in investment loan guarantees, for the proposed Hinkley nuclear project and possibly more for any nuclear projects that try to follow.

It is not hard to come up with a more rational approach, that is not based on protecting sectional fossil and nuclear interests, or partisan minority hostility to renewables :

That said, it is still going to be hard, given the UK political situation, with cuts across the board on the basis of the austerity agenda, to win acceptance of continued subsidies for renewables like on-land wind and solar. It is easy to portray the industry as subsidy hungry, and unable to wean itself off state support. The reality is that sudden cuts can be very damaging to investment confidence: a tapered programme of reduction would be less damaging. As a compromise. PV and wind will soon reach market price parity, in which case subsidies should not be needed. But, given the current market imbalance (including the subsidies for their rivals), they are needed for a little longer. Though not as long as for Hinkley!

Then again, the bottom line is why are we accepting the current market assessment? Why should renewables have to be able to compete with energy sources that have major social and environmental costs and risks not usually reflected in market prices? In the absence in the UK of proper environmental cost assessment, the weakness of the EU Emission Trading System, and now the perversion of the only pseudo-carbon tax we have (the Climate Change Levy), subsidies are the only way to reflect the imbalance.

That’s not to say that real world economics won’t eventually reveal the reality. In a useful report on energy costs in the EU, the EC Insight team claims that, under the EU’s pricing system, with low marginal cost renewables like PV and wind squeezing out thermal plants and so avoiding fossil fuel costs, by 2030 wholesale power prices will have fallen by an average of €1.6/MWh across the EU and by 2050 by €4.2/MWh:

Is the UK going to miss out on that?

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