Renewable Subsidy Myths

One of the claims you will often hear from the anti-renewables brigade is that the only reason why power companies build wind farms or erect solar panels is because they are chasing subsidy money…. that our taxes pay for! This is of course one of the founding myths of the political right and their justification for a near pathological hatred of renewable energy. I think it would be useful to pick apart this myth.

Figure 1: Solar and wind power subsidies are a likely battle ground topic in the next 2015 UK general election [Credit: Good Energy, 2014]

Firstly it should be remembered that not all countries subsidise renewable electricity generation. Some have no formal subsidy system, others merely provide tax breaks (in particular capital gains tax as the upfront costs of renewables can be high while fossil fuel companies get to write off fuel taxes as tax deductible). Even then in most countries where there is a subsidy, those subsidies come not from the exchequer but usually from some sort of tariff on wholesale electricity production. In the UK for example, about 6% of the average bill pays for, amongst other things, subsidising renewable power generation.

Figure 2: Breakdown of an average Bill [Source: BBC (2012) based on Ofgem data]

In the UK, under the present subsidy regime, a power company receives about £30.7 per MWh for wind power installations above 50 MW’s, for a period of 10 years. For solar power the subsidy rate is £63.88 per MWh over 20 years. More generous subsidies are available for smaller installations of both, however as we’re looking at the major energy utilities, they would generally be drawing on these subsidy rates.

While this might sound like I lot of money, its worth remembering that the going rate for the overnight cost of a wind farm is estimated at about £93/MWh according to Ofgem (as I’ll discuss later, other sources suggest the true cost of wind power is lower, but to compare like with like, I’m sticking with the Ofgem subsidy rate and cost figures).

Figure 3: The growth of UK renewables

This effectively means that of the £93 price tag for wind energy, only 33% is initally subsidized. Indeed, given that the subsidy disappears after 10 years, so the adjusted subsidy level is only 13.2%, the remaining 86.8% of the costs is met by the power company and its financial backers. It is dubious at best to suggest that power companies would spend 86.8% of the capital, just so they could claw back the 13.2% via a subsidy….that they end up paying anyway whenever they generate electricity using a fossil fuel power station! What school of finance did this lot study in? Hogwarts!

Figure 4: The price breakdown for a wind turbine (onshore) [Source: RESCO.org.uk, 2013]

So why do the power companies build wind farms? Well the raw costs of building a wind farm is between £55-25 per MWh (depending on how you do you’re sums), i.e. generally below the wholesale current wholesale costs for electricity (about £45-55/MWh at present). The remaining part of the bill for wind power (and again, its worth remembering the industry tends to quote much lower estimated costs than Ofgem) is generally fixed one off costs (wiring the wind farm up to the grid or installing support infrastructure), financing costs, maintenance and the costs of backup. This last one is a bit of a grey area as wind power often gets lumped with a disproportionate share of the bill even thought all energy sources need backing up to deal with an unexpected problem. Either way, this is of course the whole point of the subsidy, as it helps to even up the odds.

Figure 5: Breakdown of the levelised costs of wind energy v’s CCGT [Source: Wind-power-program.org, 2011]

Furthermore, during periods of strong electricity demand and high winds (quite common in winter) the wholesale price of electricity can rise well above the £93/MWh figure mentioned above. Hence, from the power companies point of view, wind power is a useful defence against high gas and coal prices….or Putin turning off the gas! Its very probable that in the absence of subsidies some wind farm would continue, although probably not on the scale we currently see.

Figure 6: The falling price of PV….and how success seems to be “rewarded” by the Tories! [Source: smarthomeenergy uk, 2012]

Similarly for solar energy, given Ofgem’s estimated cost of £145/MWh for solar electricity, this means the subsidy rate over the 35 year life of a PV panel will be at most 25% of the overall costs. The remaining 75% will, again, come from private capital.

To put these figures in comparison it might be useful to compare this with the subsidy system for nuclear power. They are set to receive a fixed price of £92.5/MW inflation adjusted at 2012 prices. This appears to be smaller than the fixed price for wind, however considering the current wholesale price of £55/MWh (and that’s at the upper limit of recent prices), this amounts to a subsidy rate of 68.8%, about five times the subsidy rate for wind power and 2.7 times the rate for solar.

This should demonstrate the hypocrisy of the UK Tory parties plans to limit renewable energy subsidies to £200 million per year. If such a cap were applied to Hinkley C it, given the annual subsidy costs to this plant in the order of £700-800 million per year, it would have to shut down after just a few months having blown the lid off its subsidy cap.

Figure 7: US historical Federal expenditure on various energy sources [Source: DBL Investor Capital, based on DoE data, via Cleantechica.org, 2011]

The only situation where Hinkley C starts to make sense is if the wholesale price of electricity rises substantially…but of course only a modest rise would put renewables into the black (i.e. renewables would be profitable without any subsidy). In short no matter which we we look at it, renewables, notably wind energy give us more bangs for our subsidy bucks than nuclear.

This is of course one of the main arguments behind Angela Merkel’s conservative government’s decision to pull the plug on Germany’s nuclear programme. The amount of subsidy needed to keep nuclear on government funded life support was much larger per MWh than that for renewables, even the then immature sources such as solar power. And given how much solar power prices have fallen since then, this is a decision that appears to have been justified.

Figure 8: Subsidy rates for different low carbon options [Source: Craig Morris, REG, via Cleantechica, 2013]

And similarly, its worth remembering that fossil fuels are not subsidy free. As I discuss in a prior post, both within the UK and worldwide, the vast bulk of energy subsidies are spent propping up fossil fuel consumption. The IEA has estimated that only 16% of global energy subsidies go to renewables, the vast majority of the remainder is spent subsidizing fossil fuel consumption.

Figure 9, Energy subsidies world wide (excluding nuclear) [credit: The Guardian (2012), IEA data]

And ironically, many of these subsidies DO come directly out of our taxes. As this link here discusses, the vast bulk of energy subsidies directly from the US tax payers has historically gone to the fossil fuel and nuclear industry, not renewables.

Figure 10: An expansion of figure 7, breaking down in 2010 billions the amount of historical federal subsidy received by each energy source in the US [Source: DBL Investor Capital, based on DoE data, via Cleantechica, 2011]

And within the UK too, fossil fuels receive many generous subsidy’s ranging from tax breaks and other sweat heart deals to encourage oil/gas drilling, winter fuel payments to the elderly, road building to satisfy the Jeremy Clarkson brigade, or load guarantees issued in support of UK based (but often foreign owned) fossil fuel companies. Indeed, the UK government is currently in hot water over the loaning of £1.7 billion to support fossil fuel exploration in foreign countries. In other words, the Tory’s are willing to spend more money to increase our addiction to foreign owned oil than they’re willing to spend on increasing indigenous renewable energy supplies! And let’s not even bring up the matter of the government’s pre-Christmas hamper to the power industry, in which they gave away many hundreds of millions to the power companies to essentially do sod all.

Indeed the IEA has gone on further recently and suggests that once we assess all energy sources on a levelised playing field, i.e. account for the off the balance sheet costs such as dealing with climate change or the health effects of pollution, back up against intermittency, etc., wind power is actually the cheapest form of energy generation. And in another story a report by the WWF suggests that Scotland’s electricity grid could be carbon neutral by 2030 (if current expansion of the industry continues).

In short if the right wing opponents of renewables truly believed what they claim, why aren’t they clamping down on these stealth subsidies of fossil fuels? Indeed, given that it is the government who has to pay for the clean up costs whenever a storm (made that bit stronger by global warming) wipes out a town, or the state is forced to increasingly act as the insurer of last resort to coastal communities the private insurance industry refuses to insure (thanks to climate change). Well one has to ask, surely the libertarian response would be to impose a carbon tax of some sort to level the playing field and get the fossil fuel industry to pay what they owe?

Of course the answer to this betrays the truth, that renewable subsidies were always a messy compromise intended to get polticans off the hook for their unwillingness to upset too many apple cards by cutting off support for the fossil fuel and nuclear lobby. Rolling back renewable subsidies is more about protecting special interests than saving taxpayers money. An all too common trait of politicians on the right, in particular the hard-right populists such as UKIP and the Tea Party is to tempt people into the delusion that they can simply blame others for their misfortune.

Can’t get a job? its not your fault for being underskilled, nor the Republicans/Tory’s fault for wrecking the economy, its those nasty evil hobbits immigrants coming into the country. Stuck in a traffic jam? Its not because of a lack of public transport/investment in road infrastructure (thanks to tax cuts!), its the fault of foreigners clogging up our roads (even thought they make up less than 10% of UK drivers!). Taxes too high? Its not because of the $1.1 trillion spent on a war for oil, but those lazy migrants or “inner city youths”, who when their not busy working….or driving around aimlessly…are presumably claiming benefits….in what little spare time they have, one assumes!

Similarly when it comes to energy, those on the right also practice dog whistle politics, blaming “subsidies” for all manner of things, which they are not in any way responsible for. Indeed, if the hard right has its way, the results are likely to be entirely counter productive. More state money spent on energy sources (likely nuclear and fossil fuels) on projects that are in the long term, not viable, probably leading eventually to a lot of very expensive white elephants that will never generate any actual electricity.