The large subsidies paid by British electricity consumers to fund the drive towards wind power are failing in their intention, instead generating sizeable profits for existing wind farm owners without producing many new turbines.
The UK needs a huge expansion of wind energy to meet government climate change targets, and the amount of subsidy paid to renewable electricity generators through consumers’ electricity bills will rise from more than £600m ($1.2bn, €800m) a year to £3bn a year by 2020.
Britain’s subsidy system for renewable energy, which is not funded through the tax system but is based on charging consumers more for their electricity, is one of the most expensive in Europe, according to the European Commission.
But the proportion of energy coming from renewables in the UK has remained stubbornly low: only Malta and Luxembourg, out of all the European Union members, generate less of their energy from renewable sources. This puts the UK far adrift of its EU targets.
The format of the UK subsidy system, known as the renewables obligation (RO), combined with bottlenecks in the planning system, mean cash injections are simply enriching the operators of existing wind farms well beyond their expectations, according to Financial Times analysis.
“The RO is a very expensive way of providing support for renewables,” said Andrew Wright, managing director of markets at Ofgem, the electricity -regulator.
The RO requires electricity suppliers to derive a -proportion of power from renewable sources, penalising them if they fail.
Wind farms and other renewable energy generators receive RO certificates for each unit of electricity they produce, which they can sell. The cost of buying these pushes up the price of electricity for consumers.
But high electricity prices mean wind farm operators could be making enough from selling electricity alone to be almost profitable, while the amount they receive from RO certificates in effect doubles their income.
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.”
The RO means consumers pay the same to subsidise the renewable industry whether a lot or a little renewable electricity is -produced. If too little is produced, the subsidies are paid out to a smaller band of producers, giving them higher returns – which in turn are supposed to encourage the building of new wind farms.
But the proportion of electricity demand met from renewable sources has scarcely budged in the past three 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. This is partly because more wind farms are stuck in the planning system than have been built.
The result is that the RO, measured by the cost per unit of electricity produced, is one of the most expensive renewable incentive schemes in Europe.
Wind turbines are now paying for themselves within about four to five years, out of a working life of at least 20 years, whereas most operators based their profit assumptions on turbines paying for themselves in about 10 years.
Those in the wind power industry say its returns are less than Ofgem has estimated and the subsidies are needed to encourage companies into the sector.
The Department for Business said: “The government brought in the RO to provide an incentive for the UK’s liberalised market to deploy large-scale renewable electricity generation.
“Since the RO was established in 2002, we have increased 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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