Consumer bills could be slashed by an average of around £140 per household per year if renewables incentives were reformed to give renewable energy generators long term security for their returns. Now, this sounds like a fairytale ending that keeps everyone happy. Is it? Well, it’s for real except that the big energy companies won’t like it. That is because they would prefer to carry on siphoning off profits from the sky-high electricity wholesale prices that are inflating the income generated from renewable energy projects funded under the Renewables Obligation (RO).
These higher than necessary payments for renewable energy generation are artificially inflating what consumers have to pay in their electricity bills. The price cap set by OFGEM would be lower as a result of sensible reform of the RO payments and consumer bills would be less.
The RO funds around 30 per cent of the UK’s entire electricity supply
The RO was ended for new projects in 2016, and since 2017 contracts for renewable energy have been issued using the ‘contracts for difference’ (CfD) method. This ensures, together with the price cap mechanism operated by OFGEM, that renewables generators only get a fixed price for their generation (see here for explanation). The CfD system does not need reforming, except perhaps by issuing the generators with longer contracts (say 20 years) that would produce a lower price for the consumer.
The CfD system of funding renewable energy ensures that there are no windfall profits earned from the fact that most wind, solar and other renewable projects have generating costs that are well below the very high electricity prices. These electricity prices have been very high since last Autumn because natural gas prices have skyrocketed, making (now) very expensive gas power station production the price setter in the wholesale power markets .
However, CfDs so far make up a relatively small (albeit rapidly increasing) portion of the renewables section of electricity generation. The rest (roughly making up 30 per cent of UK electricity generation) is funded under the ‘Renewables Obligation’ (RO). Now, I explained earlier why this has become a very inefficient means of funding renewables (even more than it was anyway!). That is because, in addition to the value of the RO incentive itself, the generators (or the people they sell their power to) will be paid the wholesale price of electricity. Which at the moment is high. Very high. So the big energy companies that own most of the renewable energy schemes are making big windfall profits out of this. Trying to get that money back through some windfall profit tax would be difficult because of the complexity of ownership and the contracts generators have with other people mean that it is unclear where exactly the money goes. But what can be done is to make sure in the future that the renewable generators get a fair level of fixed income that saves money for electricity consumers.
How could the situation be improved?
This could be done fairly simply by Parliament enacting legislation that will end the Renewables Obligation and replace it with a system that meant all schemes funded under the RO were given reasonable long term fixed price contracts to pay for renewable generation. Such contracts would ensure payment of, say, a fixed £50 per MWh for the wholesale electricity costs, AND a value for the renewable obligation incentive they were receiving previously. Different technologies got different numbers of renewable energy certificates (ROCs).
This would save consumers a lot of money. We can easily work out roughly how much (you can miss out the next para, maybe – but just to give an idea of the logic):
Wholesale electricity costs are trading at between £150 and £200 per MWh, and indeed these prices are unlikely to fall by much for some time. Cornwall Energy experts reckon they will stay high until after 2030. Now If we carefully examine Government information on the renewables obligation, we can see that roughly 30 per cent of UK electricity was generated under the renewables obligation. The average household electricity consumption is around 4000 kWh (4 MWh) per year. So, if the savings by the consumer are around £120 per MWh per year (£170 per MWh minus £50 per MWh) we can work out that the annual saving per consumer, at current electricity prices will be about £140 per year.
But will this happen? Sadly, probably not, because of the way interest group politics work. Essentially there is no strong interest group representing energy consumer interests. Renewable energy interest groups aren’t going to give priority to something that might reduce their income and open up a legislative opportunity for anti-renewables lobbies to abolish all future renewables subsidies (even if and when electricity prices fall). The anti-renewables interest groups really are not interested in setting up a system to give long term security (albeit at a less profitable rate) for renewables generators. They just want to have all renewable energy incentives abolished. And of course big energy companies and their allied financial interests will obstruct progress towards such a change because their profits might be reduced.
But there is a glimmer of hope if energy efficiency advocates could mount an argument that at least some of these savings could be funneled into energy efficiency spending. This would require ‘hypothecating’ some of the savings to spend on energy efficiency through an expansion of the existing ‘Energy Company Obligation’ (ECO) scheme.
By David Toke
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