Jon Ferris, head of energy markets, at Utilitywise, looks across changes in the landscape of green levies and subsidies
Government acted in July to try to keep the Levy Control Framework (LCF) below the cap of £7.6 billion in 2020/21.
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 benefiting either consumers or the green economy.
Energy secretary Amber Rudd 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 the Department of Energy and Climate Change’s (Decc’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. Figures published by the Office for Budgetary Responsibility (OBR) show that in 2014/15, £2.5 billion raised from the Carbon Reduction Commitment (CRC), Climate Change Levy (CCL), Carbon Price Support (CPS) and EU Emissions Trading System (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 £450 million in 2015/16. In total, these costs are expected to increase by 36% to £3.4 billion.
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% 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.
Support for renewable generation from the RO, Contracts for Difference (CfDs) and FiT in 2014/15 was £4.1 billion. This meant that 38% of green taxes paid by consumers went straight to the Treasury, a figure that will increase to 40% in 2015/16.
In addition to budget changes for CCL, the renewables sector has also faced 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 past 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.