Ofgem attacks carbon-cutting subsidies 

Investors in renewable energy are profiting from a government-backed subsidy regime at the expense of taxpayers, the energy regulator Ofgem argued yesterday.

Calling for an overhaul, the watchdog complained the system was a “very expensive way of reducing carbon emissions compared to other alternatives”.

Alistair Buchanan, chief executive of Ofgem, said: “We support emphatically the government’s aim of cutting carbon emissions and recognise that renewable generation has a part to play in achieving that aim. But we think that a review of the scheme could provide more carbon reductions and promote renewable generation at a lower cost to customers, who are already facing higher energy bills.”

According to Ofgem’s analysis, the cost per tonne of carbon saved under the current subsidy regime is £184 to £481. This is much higher than the costs of other policy measures, such as the European Union’s emissions trading scheme, at £12 to £70 a tonne, the climate change levy at £18 to £40 a tonne, and the energy efficiency commitment, which ranges from bringing a benefit to a cost of £60 a tonne.

Calling for the system to be replaced, Ofgem said it was “leading to much higher returns for current renewable generators than investors expected or required”.

At present, companies producing electricity from renewable sources such as wind, landfill gas and biomass – fuel derived from plants or animal waste that is burned with fossil fuels such as coal – qualify for “renewable obligation certificates” or ROCs. Under a rule known as the renewable obligation, suppliers must generate a certain amount of their output from renewable sources and they can purchase ROCs from wind farms and other renewable suppliers to make up this amount.

However, the price of a ROC, currently about £40, is linked to the wholesale electricity price. This means that if the price of electricity is high, as it is at present, renewable companies can profit doubly, both selling their electricity for more money and also receiving highly valued ROCs which they sell to generators.

Ofgem argues that this link with the wholesale electricity price should be broken to stop renewable companies making such high profits from subsidies. Its preferred option is a system that would see renewable generators selling their electricity to suppliers based on long-term contracts, containing a fixed subsidy value.

But wind companies said the government risked alarming investors in renewable energy if it changed the subsidy rules.

They claimed that changing the rules now would make it impossible for the government to meet its target of generating 10 per cent of electricity from renewable sources by 2010. At present, about 5 per cent comes from renewables.

While admitting that high electricity prices were the main reason for the extensive profits to be made from renewable generation, the regulator said that electricity prices would have to fall steeply to make ROCs good value for money for the taxpayer.

By Fiona Harvey,Environment Correspondent

Published: January 23 2007

Copyright The Financial Times Limited 2007

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