Endless subsidies
MARK HODGSON
Six years ago Carbon Brief published on its website a guest post with the heading “The era of ‘negative-subsidy’ offshore wind power has almost arrived”. The inclusion of the word “almost” seems, in retrospect, to have been very wise. The article claimed, somewhat optimistically:
The offshore wind farms auctioned last September in the UK will most likely be the world’s first “negative subsidy” projects – wind farms that will pay money back to the government over their lifetime.
This was a key finding from a study titled “Offshore wind competitiveness in mature markets without subsidy” published in Nature. We were told that the authors’ investigation “suggests that the era of subsidy-free wind farms will begin in 2023, based on recent auctions.” Sadly, we know now that this conclusion has not aged well, and was massively over-optimistic. Far from continuing to decline, AR7 and (putatively) AR8 strike prices under the Contracts for Difference (CfD scheme) are at £92 per MWh for onshore, and at £113 per MWh for fixed offshore wind farms, in 2024 prices. The only year in which the CfD regime resulted in payments to the Exchequer from renewable energy companies was 2022, at the height of the fossil fuel price strike resulting from the commencement of Putin’s war against Ukraine. That net payment of approximately £346 million has been dwarfed by all the payments that have flowed, and continue to flow, in the other direction. David Turver’s article reflecting on the cost of CfD subsidies is a useful reference work. So far as concerns 2025 he notes: “A record total of £2.64bn was paid out in subsidies across a range of technologies, but the largest recipient was offshore wind, taking over £2bn of the total.”. That makes mockery of the optimistic claims being made in 2020 for offshore wind and the brave new world of negative subsidies that was then anticipated.
It turns out (I keep learning about the legislative and bureaucratic labyrinth that is the world of renewable subsidies) that the subsidies under the CfD regime fall within the scope of the Subsidy Control Act (“An Act to make provision regulating the giving of subsidies out of public resources; and for connected purposes”) and The Subsidy Control (Subsidies and Schemes of Interest or Particular Interest) Regulations 2022. A brief explanation of what this is all about can be found on a government webpage here. The guidance set out there “is designed to help public authorities award subsidies in a way that minimises any negative impact on competition and investment, and to help ensure public money is used in an effective and efficient way.” I’m not convinced that it’s working where subsidies for renewable energy are concerned, but what do I know? And how anyone can find their way round the detailed guidance running to 267 pages is beyond me. Perhaps all that complexity is why there is a Subsidy Advice Unit (SAU) whose role is to “assist public authorities by providing independent non-binding advice in relation to certain subsidies”.
Yesterday the SAU accepted a request for a report providing advice to the Department for Energy Security and Net Zero (DESNZ) concerning its proposed Contracts for Difference (CfD) Allocation Round 8 (AR8), which it turns out is a Subsidy Scheme of Particular Interest. The details of this request can be found here. The plan is that the SAU will prepare a report, which will provide an evaluation of the DESNZ assessment of whether the subsidy scheme complies with the subsidy control requirements (Assessment of Compliance). The SAU will complete its report within 30 working days.
The notes offer a very helpful summary of how the CfD scheme works – or, at least, how it is supposed to work:
The CfD scheme has existed since 2014 and aims to encourage low carbon electricity generation. CfDs are long-term (15 or 20 year) contracts between a low carbon electricity generator and the CfD counterparty – the Low Carbon Contracts Company (LCCC). This is the eighth allocation round (AR8) of the Scheme.
Under the Scheme, the generator sells its electricity at a variable market price. When the reference price (a proxy of the wholesale electricity price) is below the strike price agreed in the CfD contract, the generator receives a top-up payment from LCCC for the difference (funded by a levy on electricity suppliers). When the reference price is above the strike price, the generator must pay back the difference to LCCC.
However, as we have seen, with the modest exception of 2022, the money keeps on being paid to the renewable generators. And this is openly acknowledged in the notes explaining the background to the request made by DESNZ to the SAU:
DESNZ estimates that the total lifetime subsidy amount for contracts awarded in AR7 is £40 billion (2024 prices, rounded to the nearest £5 billion), and the largest estimated subsidy amount for any of the contracts awarded under AR7 is £6 billion (2024 prices, round to the nearest billion).
Note the careful wording. These are the anticipated subsidies under AR7 alone. As to the subsidies that are likely to be paid under AR8 (and that are being paid under the earlier ARs) there seems to be a significant degree of embarrassment, with the result that nobody is nailing their colours to the mast with regard to the subsidy levels:
The estimated total subsidy amount and estimated maximum subsidy amount for any individual contract for AR8 may be significantly lower or higher than this figure. Additionally, these estimates are highly uncertain as actual payments will depend on wholesale electricity prices at the time and the amount of electricity generated by successful projects.
The embarrassment grows, as they try desperately to persuade us that these massive subsidies aren’t causing our electricty bills to be higher than they otherwise would be:
Importantly, the total subsidy amount is not the same as the net impact on consumer bills of an allocation round, and in particular, does not reflect the offsetting downward pressure that renewables place on the wholesale price.
Yeah right. Some evidence for that claim would be nice. Naturally none is forthcoming.
Conclusion
The level of the subsidies under the CfD scheme is becoming a political hot potato. As a result, some of the worst excesses are beginning to be controlled. For instance the scandal around surrendered CfD capacity, whereby renewable energy companies could surrender earlier, less profitable CfDs and take up later more profitable ones instead for the same project, is coming to an end. The government is making permanent the restriction on bidding previously surrendered capacity into future rounds to “protect auction integrity and deployment timelines”. Every little helps, I suppose. However, the hubristic claims of six years ago that we were about to enter a brave new world of negative subsidies are dead and buried. I think they were always pie in the sky. We are going to be subsidising renewable energy for many years to come. Don’t expect your electricity bills to come down any time soon – or, if they do, you should expect to pay a lot more tax, because the subsidies have to be paid for somehow.
(UKR)