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. 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. 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.
FT 26th Nov 2017 read more »
