Yet more subsidies for renewables
The UK government has finally cottoned on to the fact that the hugely lucrative income-support schemes for renewables have been encouraging the import of components manufactured overseas, in countries such as China, with embarrassingly high levels of embedded emissions. Rising costs in the UK, partly caused by renewables subsidies themselves, are in large part to blame.
But rather than admit that the whole green subsidy project, which has been running for over twenty years, is a counterproductive mistake, the UK government is in the process of bribing renewables developers to use a higher share of British goods and services by introducing major capital grants to offshore wind projects that promise to develop local, ‘low-carbon’, supply chains. Only offshore wind will be eligible. This scheme, called the Sustainable Industry Award, is outlined in legal form in the recently published draft ‘Allocation Framework’.[1]
The Impact Assessment for the scheme estimates that the cost of these subsidies will be about £200m a year, drawn from consumer energy bills, but the draft Allocation Framework makes it clear that the Secretary of State has the option of increasing the budget to meet offshore wind targets, so this is effectively an unbounded spending commitment. The Department of Energy Security and Net Zero will simply spend what it takes to meet the targets, and if the eventual cost to consumers is two, three or ten times the current estimate, no one should be surprised.[2] It is important, therefore, that pressure is put on government to ensure that these new subsidy costs are included by the Office for Budget Responsibility (OBR) in their table of green levies published as part of the Economic and Fiscal Outlook.
But this is not the end of the bad news for the energy consumer. In effect the Sustainable Industry Award legislation will make it a legal requirement of bidding for a Contract for Difference that any offshore wind project has undertaken to make provision for local, and low-carbon supply chains, even if it is not actually successful in its application for Sustainable Industry Reward support. Put another way, the UK government is now making it a legal requirement that renewable energy developers applying for subsidy use a substantial share of British goods and services.
This is not only an implicit admission of failing industrial policy but will have the important consequence of increasing the cost of new offshore wind, already extremely expensive, still further. We can therefore expect continuing pressure from the wind industry to increase the guaranteed prices offered in the CfD scheme, with the threat that if more consumer funds are not made available then the Net Zero targets will not be met.
This is a tangled mess, typical of ad hoc attempts to save a failing policy, and it will be interesting to see if any overseas suppliers are sufficiently aggrieved to challenge these subsidies in the international courts as illegitimate state aid. There would be a pleasing irony in seeing the Chinese government give the UK administration a ticking off for unfair business practices.
Perhaps the most threatening aspect of the Sustainable Industry Award is that the addition of capital subsidies for renewables sets an important new precedent in British environmental policy, one that we can expect the Labour Party to exploit if, as seems likely, it forms the next government and actually carries through its promise of creating a body, Great British Energy, to ‘invest in clean energy across our country- for example by making the UK a world leader in floating offshore wind.’[3]
With the UK government now subsidising developmental expenditure, capital expenditure, and topping up the income of offshore wind one begins to wonder whether the Labour Party will declare that these are actually so derisked by the public purse that they are in fact state investments, and on that basis nationalise the lot, possibly with only scant compensation.
Tempting though the offer of yet another layer of jam may be, some more prudent private investors may begin to wonder whether the political risk of investments in offshore wind, and indeed in renewables in general, is not becoming unacceptably high.
Notes
[1] https://www.gov.uk/government/publications/contracts-for-difference-cfd-allocation-round-7-sustainable-industry-reward-allocation-framework#full-publication-update-history
[2] https://assets.publishing.service.gov.uk/media/65f462faaf6a0d001190d50d/cfd-sustainable-industry-rewards-impact-assessment.pdf
[3] https://labour.org.uk/missions/clean-energy/