The subsidy system supporting wind farms in the UK is one of the most expensive in Europe, according to research by the European Commission.
Only Italy’s system, which is of a similar style to the UK’s “renewables obligation” or RO, gives renewable electricity companies a greater expected profit.
The subsidies come not from the taxpayer but the electricity consumer, adding £1bn a year to electricity bills by 2010, rising to £3bn by 2020. But although the subsidies are intended to increase the amount of electricity produced from renewable sources – of which wind is one of the cheapest and most mature – fewer new wind farms are being built, owing to planning restrictions.
Last year about 427 megawatts of generating capacity was erected, compared with 650MW constructed in 2006, according to the British Wind Energy Association.
So while the amount paid in subsidy by consumers increases steadily, the amount of electricity produced from wind, and other renewables, is rising only slowly. Existing wind farms are therefore making bigger profits than ever, from a combination of higher subsidies and a higher electricity price.
Indeed, according to calculations made by Ofgem, the electricity regulator, the high electricity price of more than £50 per megawatt hour means wind farms in favourable locations with strong winds could be profitable without the subsidy.
Ofgem says that some form of financial support is still needed for the wind sector, because the price of electricity fluctuates, but says the current system is too expensive.
Few people realise that about £10 of their household electricity bill each year goes to support the renewables sector. Peter Atherton, head utilities analyst at Citi Investment Research, said: “The consumer pays. It’s a regressive tax on the poor.”
According to an analysis by Ofgem last year, the cost per tonne of carbon dioxide saved under the renewables obligation was £184 to £481 – far more than 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 costs less than £60 a tonne.
The economics of the wind industry are opaque, however, as most wind farms are either owned by electricity utilities which do not break out their revenues from wind in the UK, by renewables specialists with a variety of investments outside wind, or by private companies that do not disclose the breakdown of their profits. According to Financial Times estimates a small, well-sited wind farm with 10 turbines, each of 2MW capacity, can expect to reap revenues of between £3.5m and £5m a year, on an outlay of about £20m with ongoing maintenance costs of up to £400,000 a year.
But some wind companies say the sums they make are much smaller. RWE Npower told the FT its estimate was about £75 to £85 per megawatt hour when the price of electricity and income from the RO were combined, compared with about £100 in Ofgem’s calculations.
Wind farm owners argue that their profits are not excessive, given the amount of risk they have to take on, particularly in regard to the planning process. A protracted planning application can cost a company more than £1m for even a medium-sized wind farm.
Ian Marchant, chief executive of utility Scottish and Southern Energy, said wind farms had started to compete with coal-fired and gas-fired power stations in economic terms as the electricity price and fossil fuel costs had gone up. “But wind energy still needs a special support mechanism. It would not get built without it.”
Willie Heller of Falck said: “The UK is the riskiest country to do wind [because of difficulties gaining planning permission for turbines].”
Wind operators also point out that their costs are rising: the price of turbines has increased by about 30 per cent in the past few years, as there is not enough manufacturing capacity to fulfil demand for them.
Mr Marchant at SSE said: “Any first generation wind farm that got in before the increase in turbine costs has proved to be an excellent investment,” adding that these wind farms have been reaping “double digit” returns on investment.
The renewables obligation will be reformed in the government’s planned energy bill, with higher subsidies available to technologies such as offshore wind farms and wave energy, which have not benefited much so far. But the way cash is channelled to onshore wind farms will not change.
The EU targets agreed by the government would require an eight-fold increase in renewable electricity output by 2020, and a large proportion of this is expected to come from the wind sector.
By Fiona Harvey and Rebecca Bream
4 February 2008
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