As expected, the government has today announced a reduction in the support for renewable generation in order to try to keep the Levy Control Framework (LCF) below the cap of £7.6bn in 2020/21. The Levy Control Framework is a tool aimed at supporting the control of costs to consumers arising from government energy policies.
The Renewables Obligation (RO) will cease for small scale solar farms, below 5MW from April 2016, Feed in Tariff (FiT) rates will be reviewed, and there will be changes that will allow support levels for biomass and small scale solar to be amended over time.
However, while the LCF provides support for low carbon generation, less attention has been paid to other green taxes that go straight to the Treasury without benefitting either consumers or the green economy.
Hinting at the announcement when appearing before the Energy and Climate Change Select Committee, Amber Rudd (Parliamentary Under-Secretary of State for Energy and Climate Change) challenged the renewables industry to beat its target of becoming subsidy-free by 2020. However, there is growing recognition that renewables will require support in addition to market prices, and today’s announcement increases doubts that renewables will become subsidy free in the future.
A growing proportion of the cost of electricity described as ‘green taxes’ does not actually support the generation of renewable electricity, but instead has become a tax on consumption. From our analysis, in 2014/15 £1.8bn raised from the Climate Change Levy (CCL), Carbon Price Support (CPS) and EU Emissions Trading Scheme (ETS) went to the Treasury.
Changes outlined in the summer Budget will only increase this figure, as the CCL scheme has now been changed so that renewable generation is no longer exempt from the Levy. This removes the support it previously gave to renewable generators and will increase the Treasury take by £450m in 2015/16.
The CPS was frozen from 2015 at £18.08/tCO2, which is just below the level required to support profitability of gas-fired generation ahead of coal, but remains a significant cost to consumers.
While 50 per cent of the revenue raised by auctioning EU ETS certificates was committed to tackling climate change in the EU and developing countries, this commitment is not legally binding. The UK government’s position against determining spending based on the way revenue is raised, means that EU ETS revenue from auctions is not earmarked to fund specific projects.
Support for renewable generation from the Renewables Obligation (RO), Contracts for Difference (CFD) and Feed in Tariff (FiT) in 2014/15 was £4.1bn. This meant that over 30 per cent of green taxes paid by consumers went straight to the Treasury.
In addition to Budget changes for CCL, the renewables sector has also faced the impact of automatic degression of FiT rates, the early closure of the RO to large-scale solar and onshore wind and auctions for CFDs.
The sector has suffered from a lack of clarity over whether subsidies are to support innovation, new industries, decarbonisation or to correct for market failure. As a result, the removal of a scheme can be justified because it has achieved one of these aims, while the other objectives will not be achieved if support is withdrawn.
Wind and solar technologies have matured rapidly over the last decade, with costs falling rapidly, and supply chains have been developed. The CPS premium over EU ETS sets a higher carbon price for fossil fuels. On this basis, a reduction in subsidies would be justified.
However, the current wholesale market structure will not support the cost of inflexible low carbon generation, as evidenced by the increasing prevalence of negative prices at periods of high renewable output.
While consumers benefit from the resulting lower wholesale prices, it pushes the cost at which renewables become truly subsidy free further out of reach.
In response, there have been increasing murmurings that the CFD is not a subsidy if the strike price is less than the levelised cost of electricity (LCOE) of the marginal generation plant. This idea has some merit, as the cost of wind and solar could be lower than gas generation, but will be less profitable as gas can optimise its output to match prices.
This means that renewables will still require support outside the wholesale market, which will be viewed as a subsidy by the public. However, if renewables will always need a form of support, it can be argued that the approach taken by the renewables industry has invited cuts to their subsidies.
Similar changes to the eligibility of large scale solar led to a rush of installations, and also directly contributed to the increased pipeline of small-scale solar projects. This announcement has the potential to cause another boom and bust for the solar industry.
