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We have all heard the stories. The privately financed hospital where it costs hundreds of pounds to change a single lightbulb. The time the army paid £103 for inch-long screws that were actually worth just £2.60.
But is Britain’s energy market that different from a poorly thought-through PFI scheme?
Just as the state enters into these contracts for schools and hospitals, so a single state buyer dominates the procurement of electricity. It either fixes or auctions prices for all new generation that is commissioned, selecting specific technologies and foisting their costs stealthily on a large body of ill-informed consumers. For that pricey lightbulb? Well, it might not be so extreme, but read the costly power we’ll get one day from the reactors at Hinkley Point.
It has dawned on the state that this is not necessarily the cheapest or most flexible way to decarbonise Britain’s electricity. Prices have gone up, while the capacity margin to keep the lights burning has eroded. So finally the Treasury has intervened to curb the subsidies that can be extracted from households and businesses.
Existing contracts with low-carbon generators worth an estimated £10bn a year in subsidy by 2020 will be honoured. A further dollop of £557m will be distributed through an already-planned auction due to take place in 2019. But beyond that, the total amount will be kept within bounds, with any new largesse only coming as and when the overall burden is falling. Essentially that means when more renewables subsidies are running off than new ones are starting to be paid — a date the government estimates should arrive in 2025.
At a time of squeezed incomes and simmering anger about energy bills, a pause is sensible. Ever-rising subsidies sit uncomfortably with government policies that are publicly committed to capping the charges that retail electricity suppliers can impose on the public.
Nor will it exactly pauperise the suppliers of renewables — which, along with nuclear, are the main source of Britain’s low-carbon electricity. Thanks to the party they’ve enjoyed since the introduction of the subsidy regime just after the millennium, they already receive a cheque annually that Centrica, one of the UK’s biggest distributors, thinks adds about 20 per cent to customer bills. And that may rise in coming years, as more of the contracted renewables are delivered and come on stream.
The industry warns that by restricting subsidies, the government risks impeding progress towards cutting the costs of low-carbon technologies. Contractual prices have been falling. The first round of offshore wind auctions in 2015 saw these struck at between £110-£150 per megawatt hour. The latest one, just completed, saw these fall as low as £57.50/MWh, although the projects have yet to be built and may depend on as yet undelivered technological advances.
There is no reason, however, why the gains should not continue. The market for renewables technology is a global one, and developments don’t depend on British support alone. Despite its considerable outlay, the UK accounts for no more than about 7 per cent of the world’s renewables subsidy, based on the latest estimate of global subsidies from the International Energy Agency. Anyway, the government does not believe that the action it has taken should prevent the UK from achieving its green goals.
Applying a corset to subsidy, however sensible, is only part of the answer. The aim must also be to use more sparingly whatever support is dished out in future to achieve the UK’s climate goals. The timing of these targets could also be usefully reviewed.
In the absence of a carbon tax, another way must be found to move away from the flawed PFI model, where a single state buyer coddles favoured generation technologies. In his review of electricity prices, the energy economist Dieter Helm suggests moving to a system of auctions — where producers bid for payments to provide a reliable supply of energy to the system.
These payments would not be restricted to any particular type of producer — conventional, nuclear or green. This is necessary because a prudent system with lots of renewables needs a measure of conventional back-up simply to cover for when climatic or tidal conditions aren’t conducive. The system operator would select the bids that allowed it both to keep the lights on and hit climate goals at the lowest cost — an outcome that would almost certainly be better for consumers than that provided by the present system.
Britain has created a statist electricity market in a fit of absence of mind, which imposes significant costs on households and businesses. There is no simple way to change this. Hence the imperative need to chisel away at costs.