Intelligent Energy

UK: Hard lessons on subsidizing renewable energy

UK: Hard lessons on subsidizing renewable energy

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Consumer energy bills soar in Britain, in part because ratepayers fund wind, solar and other green projects. The Energy Secretary wants to lighten the burden and shift subsidies to tidal and wave.

Consumer energy bills soar in Britain, in part because ratepayers fund wind, solar and other green projects. The Energy Secretary wants to lighten the burden and shift subsidies to tidal and wave.

UK consumers pay some of the highest energy rates in the world and it’s getting worse.

In recent months, the country’s six major utilities have all announced big tariff hikes, some as high as 18 and 19 percent. Energy regulator OFGEM recently accused them of jacking up yearly profit margins by a staggering eight-fold since June, from £15 ($24) per customer to £125 ($197). The utilities disputed the claim.

One reason why rates are so high is that ratepayers are funding utilities’ efforts to develop renewable energy like wind and solar.

The U.K. government facilitates this practice through what it calls the Renewable Obligation (RO) program, which allows utilities to pass along renewable costs at varying amounts depending on the type of renewable. It’s a sort of hidden renewable energy surcharge on consumers’ bills – and one that some people suspect the utilities are taking unfair advantage of. Utilities receive so many “Renewable Obligation Certificates” (ROC) depending on how much and what kind of renewable energy they deliver. Each certificate lets them pass on more cost to the end-customer.

Not that the utilities are leveraging their ROCs alone into eight-fold profit jumps. There are other factors. Some people would say greed. The utilities refute the eight-fold increase and say their higher rates reflect the rising and volatile prices they themselves pay for fossil fuels.

But the ROC system does factor into the equation of rising rates.

To help reign in the pass-on charges for renewables, the government’s Department of Energy and Climate Change (DECC) today proposed cutting the total amount of them by between £400 million ($630 million) and £1.3 billion ($2 billion), for the period between 2013 and 2017. It also proposed re-prioritizing renewable types, so that tidal and wave would get more support and offshore wind would get more than what had been planned, albeit slightly less than its current level. Biomass co-fired with coal would also benefit. But certain technologies like hydro, “biomass conversion”, waste and landfill gas will lose out.

UK Energy Secretary Chris Huhne

“We have studied how much subsidy different technologies need,” DECC Secretary Chris Huhne said. “Where new technologies desperately need help to reach the market, such as wave and tidal, we’re increasing support. But where market costs have come down or will come down, we’re reducing the subsidy.”

In his proposal, wave and tidal jump from 2 ROCs per megawatt hour to 5, by far the largest volume of increase or decrease for any of the renewables categories. Hydro falls from 1 to 0, energy from waste from 1 to 0.5, landfill gas from 0.25 to 0, and biomass conversion falls from 1.5 to 1. However, new techniques for “co-firing” biomass with coal increases from 1 to 1.5. Solar stays at 2 through 2014 and dips to 1.9 in 2015 and 1.8 in 2016. Onshore wind would drop marginally from 1 to 0.9, and offshore wind from 2 to 1.9 in 2015- a boost compared to the originally planned 1.5 in 2014. Wind plays a solid role in the approximate 7 percent share that renewables contribute to Britian’s electricity.

In total, DECC thinks the changes will lower consumer bills by £2.00 ($3.16) a year, not a lot.

But there’s more to the high cost of renewables than ROCs. The government also sanctions customer “surcharges” indirectly through another vehicle - its year-and-a-half-old Feed In Tariff (FIT) program. The FIT requires utilities to pay a consumer for electricity that he or she generates via solar panels and wind turbines.

The FIT has been a mixed blessing.

It has indeed spurred adoption of domestic solar power. Rooftop panels have been popping up like daffodils in spring. Perhaps too much so for the immediate economic common good because its success has given utilities like British Gas, EDF, E.ON, Scottish Power, Scottish and Southern, and nPower an incentive to raise their rates. They lose revenue when they pay a homeowner who generates solar power, so they’re tempted to recapture the lost sales by raising prices.

I like what the FIT has done to kick start solar power in this cloudy country. But I firmly believe that it has fed the utilities inclination to raise rates. It certainly hasn’t blunted it.

Another troubling thing about the FIT: It has created a ratepayer version of a regressive “tax”, because the people who benefit from it are the people who can afford the solar panels. The “have-nots” who don’t have access to $20,000 for rooftop installations end up subsidizing the energy bill of the “haves”.

So what’s Prime Minister David Cameron’s government to do to keep bills from continuing to soar while also fostering renewables? If it replaces ROCs and FITs with taxes, it would face a revolt. If it eliminated ROCs and FITs, renewables development could collapse.

Today’s cut back of the ROC was probably a step in the right direction, even if all the details weren’t to everybody’s satisfaction (you probably won’t like it if you’re in the biomass business).

Three months ago, the UK pared back FITs, slashing them by between 42 percent and 72 percent for any installation over 50 kilowatts in capacity, thus stamping out incentives for small utility scale solar farms.

The government is also expected to cut the FIT rate itself.

Now DECC has proposed Renewable Obligation cuts – relatively small in the grand scheme. Part of the idea is that the free market can take over. (You can see the details of all the proposed ROC “bands” for different renewables on the DECC website).

The story will continue to unfold, as DECC opened a consultation period through Jan. 12.

Anyone have any better ideas for how to fund renewables?

Photo: Top, CraveCNET. Bottom, DECC.

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Mark Halper

Contributing Editor

Mark Halper has written for TIME, Fortune, Financial Times, the UK's Independent on Sunday, Forbes, New York Times, Wired, Variety and The Guardian. He is based in Bristol, U.K. Follow him on Twitter. Disclosure