Renewable Energy Foundation

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Excess Subsidy for High Wind Sites

Summary: In order to meet ambitious and arbitrary renewable energy targets government has to over-subsidise high wind sites by a factor of four in order ensure that low wind sites are profitable. This isn't sustainable.

Roger Harrabin's story for the BBC news website yesterday quoted an energy consultant, Nigel Cornwall, as saying that "developers received the same subsidy for a very windy site as for a less windy site." What Mr Cornwall meant is that they receive the same subsidy per unit generated (roughly a 100% top-up over and above the wholesale market price, about £50/MWh).

Mr Cornwall is then quoted as saying: "That means the single band of support is very generous for some developers but not enough for others."

That is a very interesting remark, and touches on an important truth. However, there's a bit more to be said on this subject.

Let's think it through: Imagine two wind farms of the same generating capacity (MW), one at a windy and one at a less windy site. For the moment, let's assume that the capital cost per MW installed is roughly the same. In both cases that capital cost is recovered from the generation of electricity, which earns wholesale sales income and Renewables Obligation subsidy. The windy site will obviously get more of both per MW of capacity installed, and consequently will recover its capital more quickly than the less windy site.

Now, put yourself in the position of the government, which has extremely large targets for renewable energy. To meet your over-ambitious targets you need both sites to be developed, so the subsidies have to be set at the level which is sufficient to make the less windy site profitable, but unfortunately that means you will be over-rewarding the windy site.

That's the theory, but it's easy to demonstrate as a matter fact, since we can examine the real world generation data of UK wind farms to calculate the variation in subsidy income per MW of capacity at the least windy and the windiest wind farms.

Taking the REF database performance figures, which we process from Ofgem records, we can see that consumer subsidies paid for a single typical onshore 2 MW wind turbine in the United Kingdom range from £130,000 to £470,000 per annum.

In other words, the windiest sites receive 3.6 times as much subsidy per MW of capacity installed as the least windy sites.

However, it would seem that the subsidies are sufficient to make wind farms at the low end of this range economical. After all, we know of no wind farm going under financially, and of course there are lots of proposals for wind farms in low wind areas.

So, if the subsidies are sufficient for even the low wind sites, it follows that they are well in excess of need for wind farms at higher wind sites, which receive nearly four times as much subsidy for a given capacity.

Of course, it may be the case that building wind farms in high wind sites perhaps is more expensive, but it seems unlikely to be nearly four times more expensive. After all, offshore wind is only thought to be twice as expensive on average as on-shore wind.

So, what do we conclude from this? The basic conclusion is that subsidising wind power to meet an arbitrary target is a fool's game and involves a great deal of excess subsidy, because the subsidies have to be enough to make even the worst sites profitable. That's very bad value for the electricity consumer who pays for these subsidies.

What's the solution? Target windy sites and cut their subsidies? Perhaps, but this would encourage developers to manipulate data to make a site seem like a low wind site, qualifying for high subsidy.

Would capital grants per MW installed, rather than income support subsidies, be better? Not really, because the same sort of problem would arise in a different form. The capital grants would have to oversupport the cheap sites in order to ensure that the expensive sites were also developed.

Another option would be to cap the annual subsidy per MW of capacity installed on a case by case basis depending on the capital costs of that particular site. But this would require developers to release very accurate cost data, and it would have the perverse consequence of driving capital costs up, because you get higher subsidies, and encouraging developers to overstate their costs. So, capping on this basis doesn't sound workable.

Overall, however you approach it, the basic conclusion is that using subsidies to meet targets is economically very inefficient, and exposes the consumer to needless cost. There is a great deal of discussion at present about cutting subsidies a bit, but the truth is that they have to go completely. In the long term interests of the sector, renewables should be expected to wash their own faces, and the sooner the better.

However, in the very short term, with consumers facing real difficulties with energy bills, it's probably best to make a general cut in subsidy to reduce oversupport for high wind sites, even if that means making low wind sites uneconomic. That seems to be what Treasury is now thinking.

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