UK shifts renewables subsidies offshore

Change in direction in UK wind subsidies?

The BBC reported this morning an interesting development in UK energy policy. The UK government is set to shift its subsidies for renewable energy towards offshore wind, with support for solar power and onshore wind being cut. From 2015 the fixed prices for offshore wind will be higher, in the hope of driving investment.

While this seems to be a UK only issue, as we have noted at length before, much of UK energy policy (especially on renewables) ultimately comes back to the EU’s overarching targets.

Why not an overall cut?
As is immediately clear, this does not increase renewable subsidies but it also does not cut them, it is as has been noted, a “rebalancing”. The main reason for this is that the UK still needs to meet its EU mandated target for 2020 of 15% of energy, and 30% of electricity, from renewables. If it has any hope of doing so, a cut in subsidies seems impossible.

Why offshore wind?
Given the size of the jump in electricity production needed (currently just over 11% is produced by renewables) offshore wind is the only realistic option. Solar is unlikely to ever be viable as a key source of electricity production due to the UK’s climate, while onshore wind is severely limited by the lack of viable sites which both provide enough wind and are politically acceptable.

Will this have any significant impact?

• As noted above, this is mostly shifting around funding, albeit to possibility more realistic areas. That said, it remains incredibly uncertain whether offshore wind can deliver the level of electricity needed to meet the UK’s demand.
• Firstly, the costs of offshore wind look set to increase, this is because the wind farms are increasing in size meaning they need to shift to deeper water. Clearly, this means increased costs in terms of installation and maintenance (as well as some very serious technical challenges to be overcome). It will also increase costs of linking the farms back into the UK’s power grid. The working assumption from the government’s side, is that these costs and challenges will be offset by higher output due to more wind at the deeper locations, but there is little evidence to support this so far. Added to that increasing the subsidy at this point seems to imply that the costs of offshore wind will remain stubbornly high raising further questions about its long-term sustainability.
• Secondly, given the intermittent and uncertain nature of wind, the UK will need to install significant extra capacity as well as a huge standby energy reserve to ensure peak demand can be met. This will increase costs across the board.
• The hope is that these new higher prices will help drive investment into offshore wind. While action is necessary, it once again highlights that investment is lagging behind where it should be in the UK's vital renewable technology. It also adds to the growing anecdotal evidence that there are serious issues with attracting investment into the UK's energy market, at least under terms which don't involve higher fixed prices (see Hinkley Point C deal).
• The deal also does not bode well for the hopes of declining energy prices and bills in the future. It essentially locks in a price of £140 per MWh under offshore wind. This remains well above market prices for fossil fuels (its around £70 - £80 per MWh for gas) and keeps the price well above the target of £100 per MWh laid out under recent government studies. Any decrease in costs in the future is unlikely to filter through to prices. 

The key point here is that the UK government is trying to respond to the changing circumstances and changing public opinion, however, it remains locked into a very restrictive framework due to the targets agreed at the EU level. As we have said before, we can’t help but feel that as long as this is the case the UK’s energy woes, both in terms of prices and supply, will continue.

When the lights go off who will be to blame the UK or EU?

Will EU policies switch off the lights?

When 100 years ago a British Foreign Secretary observed that:

"The lamps are going out all over Europe, we shall not see them lit again in our life-time"

he was referring to a particularly bad phase in European politics.

100 years later EU energy and climate change policies mean Europe could soon be trying to relight those same lamps in the face of impending power cuts.

Today OFGEM the UK's energy regulator has issued its latest report on the UK's generation capacity and it makes interesting reading (by candlelight).

Firstly they predict that by the winter of 2015 (election year) there are likely to be several hours of power cuts (figure 24). This has been brought about because of the closure of coal plants and a growing reliance on wind (figure 1). The report names the EU's Large Combustion Plant Directive and the fact that only 17% of wind generation can be relied upon compared to 80-90% for other generation methods. OFGEM concludes "reasonably small changes in conventional generation availability have a material impact on the risk of supply shortfalls". Worryingly wind seems to be there least when we need it most. Key graphs here:



Power cuts in election year?

Gerneration capacity in the UK will be less reliable

So why has this come about? A large part of the problem emanates from climate change policies locked in at the EU-level (it has to be said, promoted by the UK Government at the time). Open Europe has long pointed out that EU policies are riddled with contradictions and inflexible targets. Here is a recap:

• The Emissions Trading System (ETS) - a market based system of cap and trade that in theory should produce the most cost effective emission reductions. In practice, an over allocation of permits and the economic downturn have lead to such a low price of carbon and it is not doing its job.
• The EU's renewables target -This imposes a mandatory level of renewable electricity production from renewable energy. This flatly contradicts the first policy as renewables are not always or often the cheapest way to reduce CO2 emissions. And, even if they were, by mandating them you push the price of carbon down yet further so reducing the pressure for lower emissions in other sectors.
• Large Combustion Plants Directive - this mandates that many coal fired plants should close on pollution grounds.

In the UK these policies have been supplemented by the Treasury's self-imposed carbon price floor which effectively funnels more cash to non fossil fuel electricity production. As renewables are already heavily subsidised this is in effect a subsidy for nuclear. And if no new nuclear plants are built it is really a pointless bung to existing plants.

So how has the UK got itself into a position of not having enough electricity generation? Well underinvestment caused by a changing regulatory environment led by unrealistic and contradictory EU climate policies that have lead to a closure of coal plants and their replacement by unreliable wind energy.