New Realism on UK Renewables Subsidies

Frank discussion of the disadvantage of subsidy costs to renewables is now increasingly commonplace in Britain, amongst parliamentarians and others. This is extremely positive, and should give courage to government. But there is more to the full costs of these policies than income subsidies, and it is crucial that the Department of Business does not fudge its forthcoming study of the whole system costs of wind and solar.Mr Clark’s first major speech, discussed in detail in the previous post seemed to show little realisation that the current illiberal policies posed a significant threat to electricity consumers.Fortunately, the point is not lost on others. In an evidence session for the House of Lords Economic Affairs inquiry into ‘The Economics of UK Energy Policy” (which can be watched on Parliament TV, the former chancellor Alistair Darling, now Lord Darling of Roulanish, questioned Mr Dermot Nolan, Chief Executive of the gas and electricity markets regulator, Ofgem, Lord Darling said very pointedly noted that government was to blame for many additional costs and that it was not clear if there was any control over this spending:

Whatever else this is, it is not a market in the normal sense of the word. So much is determined by the government, you know, climate change requirements, carbon reduction and so on […] Who is looking out for the consumer, the individual, the industrial user or whatever. […] Who on earth is responsible for this, this isn’t a market, this is completely opaque (transcription by the author)

Mr Nolan, accepted responsibility for defending the consumer, not his only act of courage in this session, and noted that it was indeed no longer a liberal market, and that climate change considerations had “complicated things enormously”.Lord Darling asked why Ofgem had no oversight of the Hinkley C project, and Mr Nolan replied “We are not in charge of renewables either” which provoked knowing laughter from several members of the committee and from Mr Nolan himself. As Lord Darling observed, with his characteristic understatement: “This is narrowing the field down somewhat then”. Quite so, as those who enjoyed the joke knew very well, there is hardly any free market left in electricity.Mr Noland went on, courageously, to express his disapproval of current subsidies, and his hope that they would be terminated as soon as possible. Still more encouragingly, while observing that there could be major innovative changes in the electricity industry, he addressed concerns such as those raised in my comments on Mr Clark’s speech, by saying that this transition should not be allowed to create a new generation of rent seekers:

My own instincts suggest that the best way for that to happen is, I would hope through competitive technologies against a relatively fixed carbon price, rather than technologies that race off to government and say ‘I need a subsidy’. […] I’m deeply sceptical of subsidies.

This is straightforwardly good news for the consumer, who seems to have in Mr Nolan a champion who understands the problems and is in a position to do something about it.However, he faces an uphill struggle. Realism about the income support subsidies is welcome, but such costs are only part of the problem with the forced introduction of renewables. The system integration costs are extremely significant, and on some credible estimates, not much less than the subsidies themselves, certainly at the high levels of penetration that are necessary to meet the 2020 target for electricity. It is just possible that government is on the verge of facing up to this fact. In a study on Levelised Cost of Electricity estimates, published earlier this month, BEIS wrote:

The levelised costs estimates presented in this report do not take into account all ofthe wider positive or negative impacts that an electricity generation plant may imposeon the electricity system. BEIS has undertaken a separate project to furthersystematise BEIS’s understanding of the whole system impacts of electricitygeneration technologies. This will be published in due course. (p. 21)

We look forward to it, but as it happens, the facts of the matter are already well known. The comprehensive estimates of Colin Gibson, formerly Power Network Director at National Grid, put the whole system costs of wind at between £60 and £70 MWh. More recent studies such as that of Imperial College's Goran Strbac and Marko Aunedi, for the three renewable energy giants, RWE Innogy, RES, and ScottishPower Renewables, put the onshore figure at just over £40/MWh and offshore at  £48/MWh, with solar at £43/MWh, all on the conservative assumptions of no electricity storage, no Demand Side Response and limited increase in interconnection. These are significantly less than Gibson’s estimates, and worth considering, but they are still very large indeed. If wind were to provide two thirds of the 120 TWh of renewable energy needed for the 2020 that would amount to over £3bn a year in system costs on top of the at least £8bn a year in subsidy payments.With dramatic improvements in storage and demand flexibility and interconnection, Strbac and Aunedi believe the renewables system costs might be reduced to under or about £10/MWh. This is a dream scenario, and must assume that the necessary high levels of flexibility are cheap and do not themselves require subsidy. But as Dermot Nolan’s timely warning reminded us, government will in fact be besieged by subsidy hunting low carbon “solution” providers, and may even succumb to temptation.A competitive market would certainly help, but 2020 is just around the corner, and very large renewable fleets are in the process of being built (there is 26 GW operational, and a further 29 GW under or awaiting construction). Is there time to engineer the cost reductions needed? Probably not. The cool-headed estimates of Gibson, and the conservative “No Flex” scenario estimates of Strbac and Aunedi are the ones that matter, for they are the far from improbable worst-case scenario against which the Department of Business should be insuring the economy.