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Dummies Guide To Renewable Subsidies–Part II

June 16, 2020

By Paul Homewood

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By popular demand, Dummies Guide to Renewable Subsidies – Part II

Last week I looked at the mechanics of how renewable subsidies are paid, now I will look at just how much they are costing us all.

First of all we need to check out the wholesale market price of electricity in the UK, as this is integral to the calculation.

Prices are £/MWh, and the graph is interactive, if you click on the link:

 image

https://www.energybrokers.co.uk/electricity/historic-price-data-graph

As a rule of thumb, wholesale prices in the last few years has hovered around £50/MWh, but prices began dropping last year to under £40/MWh, even before COVID. With falling oil and gas prices and low demand this year, prices are now around £20/MWh.

Government projections of fossil fuel and power prices have for many years assumed a trend rising above inflation. In turn this has given them an excuse for baking in higher renewable costs. The reality has been the opposite.

Now let’s look at the subsidy costs by sector:

Offshore Wind

Older offshore installations, up to 2015, are funded by the Renewable Obligation system. According to the Renewable Energy Foundation, there is 6.6GW of capacity under RO. On average they receive 1.9 RO certificates (ROC) for each MWh. One ROC is currently worth £50.05, so in addition to the market price of electricity which they sell offshore wind farms under RO receive a subsidy of £95.09/MWh. Based on a current market price of £20/MWh, they will receive total revenue of £115.09/MWh.

Since 2015, new offshore projects are subsidised via Contracts for Difference (CfDs). These guarantee a strike price for each unit of output, regardless of the market price. There is a range of CfD prices, depending on which year the auction was held, but they range from £139.35 to £173.96/MWh.

The table below shows a weighted average strike price of £162.10, in other words a subsidy of £142.10/MWh, based on a current market price of £20/MWh.

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Onshore Wind

Apart from a tiny amount of capacity under CfD, most onshore wind is covered by RO. (Note – this does not include small scale wind farms, which receive payments via Feed in Tariffs (FITs), for which there are no detailed figures available).

On average, onshore wind farms receive 1 ROC per MWh, making a subsidy of £50.05/MWh.

Plant Biomass

Two biomass units are covered by CfDs. Drax 3 has capacity of 645MW and a strike price of £116.49. Lynemouth’s capacity is 420MW at a price of £122.23/MWh.

The weighted average is £118.75/MWh, meaning the subsidy is £98.75.

There is a further 3.6GW of biomass capacity operating mainly under RO, receiving 1.7 ROCs per unit, worth £65.06/MWh.

Solar Power

About two thirds of solar power is covered by ROCs, with the rest falling under FITs. These earn 1.4 ROCs per unit, worth £70.07/MWh.

Others

ROCs are also given to other miscellaneous renewable sources, such as hydro, anaerobic digestion and landfill gas. The cost of these was £454 million last year.

Feed in Tariffs

As noted earlier, small renewable installations are subsidised by FITs. No breakdown is available, but the OBR estimate the total annual cost of the subsidy at £1.6bn.

Summary

If we try to knock this lot together, we get:

image

Note, that I have included the £1000 million cost of the Renewable Heat Incentive, which is funded from general taxation.

Remember as well that these costs don’t include the cost of providing standby capacity via the Capacity Market, which amounts to another £1.1bn.

14 Comments
  1. June 16, 2020 8:51 pm

    Reblogged this on Jaffer's blog.

  2. It doesn't add up... permalink
    June 16, 2020 9:28 pm

    You should add in the extra £1-2bn a year in balancing costs that we are now being subjected to, including the cost of curtailment. Then there all those extra grid assets needed to route power from Scotland and export surpluses to the Continent (requiring capacity over and above normal delivery of supply to Southern demand) – and to cater for the reactive power problems that wind farms create. Now there’s the new 12.5GVAs of inertia to be added in too. THe list seems never ending.

    • OlldFogey permalink
      June 17, 2020 1:38 am

      I agree with “It doesn’t add up…”, in suggesting you update the table to add in Curtailment payments (ie payments made to wind generators when they want to generate, but the grid doesn’t need any more power, or if there i insufficient grid infrastructure to carry the power from Scotland to southern England).

      https://www.ref.org.uk/constraints/index.php states that the cost of constraint payments is: “overall weighted average of £74 per MWh” However I don’t know what is the total cost per year. I suspect it is non-trivial.

      As a side issue, if you look at https://stopthesethings.com/2020/06/15/how-long-do-wind-turbines-last-10-years-or-until-the-subsidies-run-out-whichever-occurs-first the article suggests that the cost of running an on-shore wind turbine is around AUD$25/Mwh (ie GBP15/Mwh) simply due to wear and tear – off-shore turbines will be even more expensive.

      Two questions immediately arise:
      a) how much power the generators _claim_ they could generate if they were not “constrained”. Presumably it is nameplate rating for every turbine in the wind-farm – regardless of its condition
      b) whether the grid operator reduces the payment by the forgone cost of operation ie if the operator is saving GBP15 /Mwh because the turbines are idle and not wearing out, then they should have their payments reduced by that amount. Somehow, I bet that doesn’t happen !

      I think it is too hard to price all the new grid infrastructure, amortise it over its expected life and work out a “cost per year”. That’s not to say it isn’t worth doing, but it might simpler to just add a guestimate of a nominal $1 billion per year, and the comment “to be confirmed”

  3. jack broughton permalink
    June 16, 2020 10:00 pm

    Great summary of the massive subsidies: even our non-numerate politicians ought to be able to see the folly in this. The sad thing to me is that we have scrapped a reliable and economic power system for a vastly inferior one that has created work for foreign suppliers and costs far more than the replaced system.

    The UK has to finance / earn the money to pay foreign owners guaranteed subsidies, then pay for 50% of our gas as imports. We had energy security and reliability even after closing the mines, as coal is storable energy and by a long way the cheapest!

  4. Mack permalink
    June 17, 2020 12:36 am

    But, but, but…. Hollowbrain and the Beeb keep telling us that renewables are cheaper than ever. Does that actually mean that they were even more ridiculously expensive to the poor old mugged bill payer previously than they are now or is it just more (non fossil fuelled, naturally) smoke and mirrors? My bet is on the latter.

    Even Boris might understand this analogy. Say all renewable sources of energy were petrol stations. Within five miles of your house you have 6 petrol stations. The first is Mr Gas. The price for a litre of petrol there is £1. Next is Mr Coal. He’s a tad more expensive at £1.05.Then comes Mr Nuclear at £1.10 Further down the road is Mr Biomass, who comes in at £1.53 followed by Mr Solar at £2.70, but he’s only open daytimes and, charging up the rear, no pun intended, is Mr Wind at £3, who’s only open when the wind blows in the right direction. Now, who, in their right mind, would choose to fill up their cars at the latter three unless you were lost, desperate and about to run out of fuel or the government either rigged the market or taxed the former three to make them completely uncompetitive? Ultimately. the only loser is the bill payer and the poor. And, unbelievably, no government edict has ever, in the long, long history of humanity proved to have been able to change the weather.

    And, as biomass, wind and solar are neither environmentally sound nor economically competitive in comparison to what we have already the only point in their widespread distribution is to sabotage our current way of life or to enrich their backers. Tu bene?

    • Gerry, England permalink
      June 17, 2020 2:35 pm

      Yes, even one as thick as Johnson is could understand your analogy but nobody in the bubble he dwells in would ever present such a thing to him. The same problem will arise with his successor, probably some time next year.

    • June 17, 2020 5:57 pm

      “Hollowbrain”!! I love it Mack, lmao.

  5. John Cullen permalink
    June 17, 2020 12:07 pm

    Paul,

    As I understand your calculations, the roughly £10 billion per annum subsidy is based on an electricity cost of £20/MWh; this is an historically low figure (at least in recent history!). How do the sums work out for other electricity costs? And if all your calculations are linear then it should be a simple matter to create a simple formula that would tell us what the break-even electricity cost for these renewables would be.

    Of course, such a break-even cost would in reality be a lower bound because of all the other costs that non-renewables and the network itself have to bear in order for the latter to support the non-dispatchable, unreliable, and very expensive renewables.

    Apologies if I have misunderstood your text.

    Regards,
    John.

    • June 17, 2020 12:27 pm

      The market price only affects CfDs (as ROCs are a fixed subsidy). On my calcs, I reckon a market price of £50/MWh instead of £20 would lower the total subsidy by £573m

      • John Cullen permalink
        June 17, 2020 2:51 pm

        Paul,
        Thank you. Your figures therefore suggest, based on linear interpolation, that:-
        S = 10,562 – (19.1 C) where
        C is the cost of electricity in £ per MWh,
        S is the annual subsidy in millions of £.

        The above formula shows that the subsidy will fall to zero if the cost of electricity rises from its current approximately £20/MWh to a jaw dropping £553/MWh. This would represent a factor of 27.6 increase in the electricity price over its current level. Ouch!

        The above is a measure of the financial mess our politicians have got us into – not to mention the stress and strain that all the renewables have put on the electricity grid.

        [Note that the above sum is based on your statement that the subsidy would fall BY £573m and not TO £573m.]

        Regards,
        John.

    • It doesn't add up... permalink
      June 18, 2020 3:46 am

      I doubt the government was using a price of £20/MWh in its forecasts of CFD liabilities. it appears that the OBR used a £45/bbl assumption for oil price this year in their March budget work (yes, pounds, not dollars), so I imagine they were expecting more like £40/MWh – perhaps more. The CFD bill is going to be a lot higher. On the other hand, it seems that renewables obligations may be slightly less of a burden. The market is valuing them lower – and I think the reasoning runs like this: Last October the government performed the statutory calculation to estimate how may ROCs per MWh supplied retailers have to buy. This includes an uplift that is designed to create an artificial shortage that forces at least some of them to buy additional cashout ROCs. However, since then demand has fallen, but production of renewables power won’t fall as much, the uplift may not be enough to force the purchase of cashout ROCs, or in any event, rather fewer. Since payments for cashout ROCs are recycled to those who present ROCs that originated with generators, an ROC has a value that includes the expected cashout premium. As that premium is evaporating, so is the market price of an ROC.

      Quite a bit of information of interest in the annual report on ROCs here:

      Click to access ro_annual_report_2018-19_v1.1.pdf

  6. Philip Verslues permalink
    June 17, 2020 3:29 pm

    U.K. subsidies = “look ma no brains”

  7. James Broadhurst permalink
    June 20, 2020 9:43 am

    I read that the government pocketed over £1bn annually in Carbon Price Floor levies. These, aka Climate Change Levy CCL, were collected by Energy companies from their business customers and then paid to the Treasury? This is another back door subsidy for renewable isn’t it?

  8. jack broughton permalink
    June 25, 2020 9:43 am

    The Climate Change Committee have just issued their June report: 190 pages of extremely dangerous drivel about how the UK will meet its climate commitments. They have not read the dummies guide it seems! Be very afraid as carbon taxes and credits are going to dominate our lives in terms of our homes even.

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