UK energy crisis: why renewable subsidies help avoid price shocks

Rising energy costs have made wind farms the first to significantly refund their environmental levies, demonstrating that wind power costs are likely to be the solution, not the cause, of skyrocketing bills.

environment | January 14, 2022 analysis

by Adam Bourne

Clyde wind farm in South Lanarkshire, England

Simon Butterworth/Alamy

Amid an increasingly heated debate over what the UK should do about soaring energy prices, it has been repeatedly proposed to target a green levy as a way to mitigate rising costs.

The boss of the UK’s largest energy supplier wants to pay for his energy bills in general tax. Green-minded Conservative MPs agree. Some Conservative lawmakers were critical of the cost of climate change and wrote that it should be completely abolished, and later made it clear that it should at least temporarily stop it.

But a new milestone announced this week points out that these environmental levies are the solution, not the problem, when avoiding energy price shocks.

The green burden, along with social burdens such as efforts to alleviate fuel poverty, accounts for 15% of the average double fuel bill of households in England, Scotland and Wales. One of the main green levy items is a plan to encourage the development of new wind farms known as contracts for difference (CfD).

As a result, energy providers typically pay generators, such as wind farm owners, the difference between the wholesale electricity price and the strike price, which better reflects the cost of generating renewable energy. For example, the strike price of some older wind farms is 114 per megawatt-hour. At normal times, UK wholesale prices are in the 50/MWh range, in which case the wind farm owner receives 64 charges.

However, the cost of gas exceeded the strike price when wholesale prices were so high from July to September 2021 that the money turned around. During those three months, the plan returned funds to energy suppliers. 39.2 million to be exact. In fact, renewable energy has helped curb rising energy prices for supply.

Jim Watson of University College London said it was always intentional, but that never happened before. Jess Ralston of the Energy and Climate Intelligence Unit think tank said it marks a turning point in the UK’s net zero transition as it becomes clear that early renewable subsidies are paying off.

This is an important milestone, says Josh Buckland of consulting firm Flint Global. Support for renewables has added material costs to the bill over the past decade, but sharp cost cuts and rising fossil fuel prices mean they are now actually lowering costs for energy suppliers for the first time.

The money flowing to the supplier will be temporary as wholesale prices are still high and you can expect to stay there for months or years. Figures for the fourth quarter of 2021 have not yet been provided, but it is likely to continue, Watson says.

But Buckland says consumers may not see a big windfall. Unfortunately, bill payers are still paying the historic green levy. In other words, even if the cost is reduced, you will not fully benefit from it.

But it helps with home energy bills as CfD initiatives and other green levies are changing our energy mix. As Ralston points out, gas rates have recently risen faster than electricity rates. This is because the levy has helped install wind farms and solar panels, which means that electricity is not entirely gas-dependent.

Those who want to blame low-carbon technology for its high cost are completely wrong, and this milestone shows why the money is being returned to the supplier. He added that the way to avoid energy price shocks in the medium term is to continue to support the rollout of low-carbon technologies and enforce stronger policies on energy efficiency. The International Energy Agency agrees.

Even if wholesale prices fall, renewable projects of the future may cost zero to consumers or even return money to suppliers as they do today. The CfD awarded to wind farms due to go into operation in 2025 is already lower than the more common lower wholesale prices. And later in the decade, CfD’s new auctions for wind, solar and tidal projects will be even more helpful, says Ralston. The UK needs to cut gas to further protect itself from these price spikes, she says.

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