A subsidy-free Cfd for onshore wind?

Consumers will pay a high price for government cuts to onshore wind subsidies warns Simon Moore, unless Decc acts to shield them from the fallout costs. A subsidy-free Cfd for this renewable technology might be the answer.

The government has begun this parliament fighting energy policy battles on many fronts. Policies have been cut back or scrapped altogether, to respond to significant over-commitment of spending during the last parliament.

Scaling back the highest subsidies could be in the interest of the environment as well as consumers. After all, we can afford a lot more carbon emission reductions at a low price than at a high one. But that means re-allocating budgets to lower-cost options, not just reducing them. And it is unclear whether this is the path the government is pursuing.

It is proposing to cut back on some of the highest subsidies (through the feed-in-tariff for small scale generation), but has also committed to roll back some of the lowest, starting by blocking future onshore wind farms.

The Conservative Party Manifesto promised that should the party be put in government, it would “end any new subsidy for [onshore wind farms] and change the law so that local people have the final say on windfarm applications”. Onshore wind developments are unpopular with some communities and such developments could be prevented by amending planning laws to give them the final say. Ending all support for onshore wind would go further than this, by also ruling out developments in communities where there are no local concerns or objections. Because onshore wind is a relatively cheap form of low carbon generation, that would come at a cost.

The onshore wind decision is complicated, being in fact two separate but connected decisions. The Renewables Obligation (RO) had to subsidise everyone who applied and met the rules. Changing or abolishing the programme was the only option available to control costs, and the government is proposing to close the RO early for onshore wind. Its replacement, the provision of guaranteed revenues to renewable generators through Contracts for Difference (CfDs), has a more complex way of allocating subsidy, through auctions. In the RO the subsidy rate was fixed, the total amount spent could vary with demand. Under the CfDs the total budget is fixed, the subsidy rate varying with the result of the auction.

With modelling from NERA Economic Consulting, we assessed the impact of excluding onshore wind from future subsidy auctions. The modelling shows that excluding onshore wind from a 2017 CfD auction would increase costs to consumers by around £0.5bn over the term of the CfD contracts awarded, equivalent to around £30m/year. As this only looks at one year’s auction, these numbers understate the impact of the decision. Onshore wind has been, and is expected to be, among the cheapest entrants in the auctions. Taking it out means something else, something more expensive, will have to take its place.

One possible way through this tangle, as has been proposed by several organisations, is the idea of a subsidy-free CfD. In theory, a guaranteed price can be calculated that would represent no subsidy. There are differing views on the extent future carbon prices, or the costs of system integration, should be factored in to this cost. But DECC officials have said the idea is of interest to them. If it allows onshore wind to continue to participate and keep the low-carbon budget from going to costlier alternatives, it will be to the benefit of consumers and the government.