Onshore wind subsidy increase could only be short term, as renewables strike prices announced
Last week the government announced new levels of subsidy for renewable power. Among the details was a headline catching figure – that the government would guarantee an onshore wind electricity price of £100 per megawatt hour from 2014.
That’s about £10 per megawatt hour more than the technology currently gets, as the weekend’s Sunday Telegraph highlights. The government had pledged to cut onshore wind subsidies by 10 per cent. So is this a change in policy? Well, probably not – and it’s down to the difference between the old and new subsidy systems.
Subsidy increase?
The government has a target to meet 15 per cent of the UK’s energy demand from renewable sources by 2020 (not, as the Sunday Telegraph suggests, 30 per cent). To attract investment, the government is offering low carbon energy producers a guaranteed price for the electricity they generate, known as a strike price.
The changes are part of a larger overhaul of the way the UK’s energy sector operates. A range of electricity market reforms are included in the energy bill currently working its way through the House of Lords.
The differences between the old scheme (the renewables obligation) and the new scheme (known as contracts for difference) make it less than straightforward to work out whether renewables are going to end up with more money. To calculate that, the wholesale price of electricity and the length of the contracts – not just the strike price – also need to be considered.
The new scheme effectively offers onshore wind generators the possibility of receiving less subsidy overall in exchange for the government guaranteeing a price for electricity that is slightly more than they currently receive – albeit for fewer years.
While onshore wind generators are getting a higher price than before, they’ll get it in the form of 15 year contracts, compared with 20 years under the renewables obligation system. So although price per megawatt hour has gone up, onshore wind generators may get less support over the lifetime of a contract.
Generators also get the benefit of a guaranteed price for the electricity they produce in the new scheme, unlike the renewables obligation which acts as a ‘top-up’ on the wholesale price of electricity. Under the renewables obligation scheme, the total amount generators receive decreases if the wholesale price drops – as the subsidy only makes up part of the price they’re paid (currently about £42 in addition to a wholesale price of about £50).
In contrast, onshore wind generators are guaranteed to receive the full £100 per megawatt hour strike price under the new system – insulating them from any future wholesale price plunge.
The amount of subsidy onshore wind generators receive also depends how much power new projects produce and when. The government projects roughly another 6 gigawatts of onshore wind capacity to come online by 2020. The more power produced over the 15 year contract, the more the generators will receive in subsidies.
The first piece of a puzzle
The full details of the government’s reforms are yet to emerge. The strike price announcement is just the first part of a complicated process to shift renewable generation support to a completely new system. The government is expected to announce more details on July 18th – when it should become clearer how the next stage of energy policy is going to pan out. We’re also awaiting a strike price for nuclear power which, when it’s finally announced, is likely to be big news.