The large subsidies paid by electricity users to fund the drive towards wind power are generating profits for existing wind farm owners – without producing many new turbines.
A huge expansion of wind energy is needed to meet the government’s climate change targets, and the amount of subsidy paid to renewable power generators through consumers’ electricity bills will rise from more than £600m a year to £3bn a year by 2020.
Most customers are unaware of this, as it does not appear on bills. But the format of the subsidy system, known as the renewables obligation (RO), combined with bottlenecks in the planning system, mean these cash injections are enriching the operators of existing wind farms well beyond their expectations.
The proportion of electricity coming from renewable sources has scarcely budged in recent years – it rose from 4.2 per cent in 2005 to 4.6 per cent in 2006, the latest year for which government figures are available – mainly because of lengthy delays in the planning system.
The amount of new wind capacity added in 2007 was less than three-quarters of that built the year before.
Ministers have pledged to reform the planning system but even this may not deliver the desired surge in wind farms as changes will not come into effect until at least 2009 and will not cover smaller wind farms which are now seen as the major driver of progress.
Under the current regime, and thanks in part to high power prices, wind turbines can pay for themselves within about five years, out of a working life of at least 20 years.
In its energy white paper last year the government described the RO as the “primary mechanism” for meeting its goals of reducing fossil fuel dependency. However, Andrew Wright, managing director of markets at Ofgem, the electricity regulator, told the Financial Times: “The RO is a very expensive way of providing support for renewables.”
Peter Atherton, head utilities analyst at Citi Investment Research, said: “It’s a bonanza. Anyone who can get their nose in the trough is trying to.”
Alive to the fast returns which can be made, the big electric utilities have been snapping up wind farms from small operators, and slowly building their own. But they do not disclose how much money they make from them.
Ofgem told the FT that wind farm owners could make more than £100 per megawatt hour.
Assuming industry averages apply, RWE Npower, which owns the most onshore wind farms, could expect to turn over more than £90m a year from them at these rates.
But Npower said Ofgem’s estimate was too high, and wind farms were receiving about £75 to £85 per megawatt hour.
Npower said its renewables turnover, including a small number of offshore turbines and some hydro electricity, was “closer to” £80m. Kevin McCullough, director of renewables, said: “If you did not have the RO, you would not see any wind farms being built.”
The RO requires electricity suppliers to derive a proportion of power, known as renewable obligations certificates (ROCs), from renewable energy generators.
The cost of these is passed on to the consumer.
The RO means consumers in effect pay the same to assist the renewable industry whether a lot or a little renewable electricity is produced.
If too little is produced, the subsidies are shared out among a smaller band of producers, giving them higher returns but not securing the building of new wind farms.
The Department for Business said: “Since the RO was established in 2002, we have increased our electricity being generated from renewable sources to 5 per cent and we expect to increase this to 15 per cent by 2015.”
By Fiona Harvey and Rebecca Bream
4 February 2008
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