Home furnishing giant IKEA is a really outstanding and innovative business. It made a profit last year of €3.2bn on a global turnover of €27bn. Its Dublin store alone is the size of five-and-a-half football pitches and has revenues of nearly €2m per week.
So how do you feel about subsidising its electricity bill? Last week, IKEA announced that it was buying a Leitrim windfarm, currently under construction, with a generating capacity of 7.6 megawatts of electricity. The business was bought, for an undisclosed sum, from Mainstream Renewable Power, the Irish renewables company set up by Eddie O’Connor, the man behind Airtricity.
Mainstream bought the wind farm, as a project with full planning permission, as recently as January 2012. Just 18 months later, it has flipped it.
Located at Carrickeeny near Manorhamilton, the project had been brought to the planning approval stage by a company owned by a Danish national who lives in Howth, Inge Buckley, and her business partner, a businessman from Crolly in Letterkenny called John Gillespie. Gillespie and Buckley appear to be small investors who are involved in a number of start-up windfarm projects.
IKEA says the purchase is part of an international spend of €1.5bn in renewable projects to provide power for its operations around Europe. Of course, this particular Leitrim windfarm will not supply the specific electricity to IKEA’s Ballymun store, but it will sell its electricity at a subsidised fixed price, index-linked, to an electricity supplier and on to the national grid.
Because IKEA knows nothing about building or running windfarms, Mainstream will continue to do that on its behalf. It was an unusual move by Mainstream, a company that said it wanted to export wind energy from Ireland to Britain. Perhaps Carrickeeny was just too small or in the wrong place to fit those ambitions.
It is also an unusual move by the flat-pack kings, who specialise in “easy home assembly”. But it is a deal that helps reduce its international carbon footprint. It also doesn’t do any harm to its image as a caring, environmentally-friendly business.
But should we be partially paying for it? Well that is part of a bigger debate about the economic contribution from windfarms. Some countries that have promoted subsidised investment in windfarms have pulled back a little in recent years by cutting the state subvention.
In Britain, the Conservative government cut back on its subsidies by about 25pc. Critics argue this should be expected in a country with such a powerful oil industry. Spain was one of the early pioneers of wind energy, and it has not only cut back on the subsidies, it has done it retroactively. This means it is grabbing around 10pc of the subsidies that were awarded in the past.
This will see some windfarms in Spain having to return money to the exchequer they thought they had already made as profit a few years ago. About 30 legal actions are pending in Spain.
In Ireland, we have decided to go full throttle on wind energy. The public service levy that is charged to consumers to help pay for the costly development of wind energy, was increased last year by €39.1m to €131.2m. Given that the sector employs 2,200 people, it works out at €59,600 per job. Windfarms are not big employers. The new IKEA farm will create about three full-time direct jobs when it is complete.
When other tax reliefs such as capital allowances on development costs are included, the total state subvention is probably a lot higher.
But there are advantages. Ireland has signed up to meet a binding target of generating 40pc of electricity needs from renewables by 2020. We are currently at around 15pc. If we don’t make it, we will have to pay a large sum annually to Brussels.
Windfarm capacity at the moment is around 1,760 megawatts. We will need to bring around 275 megawatts of new renewable energy capacity on stream every year just to meet the 2020 target, according to the Irish Wind Energy Association.
Yet last year, with rising subsidies, we only brought on 125 megawatts of new wind energy. So the number of windfarms looks set to increase significantly.
The industry quotes studies that show how the supply of wind energy actually helps reduce the wholesale cost of electricity, thereby reducing the net cost to the taxpayer. It says that in 2011 the contribution of wind energy reduced the wholesale market cost by €75m. Wind energy also reduces imports of fossil fuels and improves security of supply.
Pension funds like it as an investment because the price is guaranteed for several years. Earlier this year, one of the world’s biggest asset management groups, BlackRock, bought windfarms in Cork and Tipperary, with a capacity of 45 megawatts.
There are strong arguments on both sides when it comes to the environmental impact/ benefit of wind power. But if you want to understand an industry, you have to follow the money.
Wind energy seems to have a small group of local players who invest a certain amount to get planning permission. Then they sell it on.
A company like Mainstream buys it, and sells it on 18 months later. A company that knows nothing about wind energy buys it. At the end lies a rather nice state subsidy.
We have to have a system that rewards risk. But with a guaranteed buyer of the product, and at a guaranteed subsidised price, it isn’t clear who is taking the risk here.
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