Jit’s article, “In High Dudgeon”i sets out very clearly the huge value to wind turbine companies of earlier rounds of the Contracts for Difference (CfD) process, which in effect provides massive subsidies to the operators of turbines. Against that background, it’s worth noting that the latest round of CfD (“Allocation Round 4”) is now ongoing, with interested parties having recently (6th August 2021) been issued with the latest “Stakeholder Bulletin” by the Department for Business, Energy & Industrial Strategy (BEIS). This notifies them that the application opening date is 13th December 2021, and that the application window closes on 14th January 2022.
The Bulletin directs interested parties to a CfD microsite.ii The first thing I always notice when I visit these places is the number of logos at the foot of the website, these being the various parties who are being funded to be part of the process. In this case we find: Department for BEIS (not surprisingly); nationalgridESO (it seems capital letters and spaces between words are passé – ESO, by the way, stands for Electricity System Operator); ofgem (again, not a surprise); and Low Carbon Contracts Company (with a little logo of its own – “Powering Net Zero”).
I’m still learning about all these high-quality green jobs shuffling paper (or sending emails), so the Low Carbon Contracts Company is new to me. I thought I’d better look them up. Of course, they have a website.iii The website is shared by the Electricity Settlements Company. We learn that:
The Low Carbon Contracts Company and the Electricity Settlements Company are both private limited companies owned by the Secretary of State for Business, Energy and Industrial Strategy (BEIS) and established to play key roles in the delivery of Electricity Market Reform (EMR), the biggest change to the electricity market since privatisation.
The website is a pretty handy place for a newcomer to begin to learn about the complex system of subsidies and processes that are in place (oh for the days when the UK had a single state-owned energy supplier whose only concern was with supplying energy reliably and efficiently without having to worry about “net zero” and “green” targets). Anyway, back to the website:
LCCC was established to be the counterpart to Contracts for Difference (CFDs), a new incentive designed by Government to bring forward the investment needed to sustainably deliver the UK’s goals for renewable and other low carbon electricity.
LCCC’s primary role is to manage CFDs with low carbon generators throughout their lifetime, which involves management of the contracts as well as the Supplier Obligation Levy that funds CFD payments. Critical to these functions is power price forecasting and settlement activities. In all of its operations, LCCC is led by its guiding principle to “maintain investor confidence in the CFD scheme and minimise costs to consumers”. LCCC also runs Capacity Market settlement operations on behalf of the ESC.
Now we begin to have an idea of the role of LCCC. What about the Electricity Settlements Company?
ESC’s role is to oversee the settlement of the Capacity Market to ensure that regular payments are made to capacity providers who have agreed to provide capacity at times of system stress. These capacity arrangements help to keep the lights on across Great Britain.
Well, they sound jolly important. We wouldn’t want the lights to go out.
Now that we know that CfDs are funded by the Supplier Obligation Levy, it would help us to know what this is, and who pays for it. In fact it’s a compulsory levy on all licensed electricity suppliers in Great Britain, introduced by The Contracts for Difference (Electricity Supplier Obligations) Regulations 2014 (plus at least three sets of amending Regulations to date). Also set out in these regulations is a separate levy on licensed electricity suppliers to enable the LCCC to meet its operational costs (the operational costs levy). Well these green jobs don’t come free, you know. Somebody has to pay for all this administration.
Given that LCCC tells us:
Our key scheme objectives are to deliver low-carbon electricity at the lowest cost to consumers
and given that the licensed electricity suppliers inevitably pass the cost on to their customers (that’s you and me), it would be useful, and one might have thought a vital part of the process, for the annual cost to consumers to be totally transparent and readily available to anyone interested. So what does the website say? Nothing of any use to any end consumer (me, for instance) who wants to know just how much of my annual energy bill consists of “green” subsidies. We are told, very proudly:
Each allocation round has led to lower costs. This is shown in the graph below.
The graph in question tells us that the average strike price has decreased by 69% from £138 to £43. That sounds promising, except that earlier strike prices are built in to the system for years to come. For instance, the LCCC’s first Annual Reportiv said:
Based on the 27 new CFDs awarded in March 2015 and the 12 Investment Contracts previously transferred to the company by DECC, the estimated total cash payments which the company may be required to pay out over the life of these (minimum 15 year) contracts is ￡18.8bn.
There is also the problem that some of the earlier strike prices (e.g. that at Dudgeon referred to in Jit’s article) were higher than the £138 per Mwh referred to by LCCC. It was around £150 at 2012 prices, and is now over £170 thanks to inflation – it’s a cost we all have to keep paying because of the length of the contract.
And finally there is also the problem that as we build more and more (unreliable and unpredictable) “low carbon” electricity supply in to the system, the other part of the subsidy equation will come in to play. You remember – the bit where the Capacity Market ensures that regular payments are made to capacity providers at times of stress to keep the lights on.
What I cannot find anywhere on the website is a simple statement as to how much the Supplier Obligation Levy costs each year, and I certainly can’t find a statement as to how much it costs each household. It’s not just households who pay, of course – businesses do too – anyone does if they use electricity (subject to some minor and temporary concessions to electricity-intensive businesses). If businesses are paying the levy (as they are), then they too will look to pass on the costs to their customers.
There are datasets on the website, and one or two of them look as though they might, in a highly inaccessible format, have the information I’m looking for. But I don’t know if they do – my laptop doesn’t seem to have compatible software. So, if the information is there, it’s not exactly in a format that the average member of the public can access and understand, and transparency certainly isn’t high on the agenda.
There is a dashboard which contains all the historical Reconciled Daily Levy Rates and the underlying Eligible Demandv and someone with more time and enthusiasm than me might find it useful, but why don’t they simply tell us how much it costs each year?
Eventually I found my way to the LCCC Annual Report for 2019/20vi where I learned that in the year 2019/20, CfDs cost £1.8151Bn, while the Capacity Market cost £1.4903Bn, making a total of £3.3054Bn. Given that ultimately, one way or the other, that falls to be paid by the citizens of the UK, and given that I can’t find the figure in a transparent way on the official LCCC website, I thought I’d work out for myself how much that cost each UK household in that year. The Office for National Statisticsvii tells me that in 2020 there were an estimated 27.8 million households in the UK. Dividing £3.3054Bn by 27.8 million gives us an annual figure per household of £117.90. Presumably that figure will increase when Allocation Round 4 is completed.
Certainly these costs are increasing rapidly. By the time of the LCCC’s 2017/18 Annual Reportviii, just two years earlier, CfDs cost £544.3 Million, and the Capacity Market cost £220.7 Million. A total of £765 Million, which LCCC calculated as being a total of £10.22 per household. Presumably (as it’s about half the cost that my style of calculation would have produced) that was the direct cost, and ignored the fact that costs paid by businesses are almost inevitably passed on to consumers. It’s interesting that they provided the information relating to household costs in an upfront and transparent way when they were still relatively modest. Two years later, when the system is costing almost five times as much, the annual household cost figure isn’t mentioned. It’s also interesting to note that as more and more unreliable energy is fed into the National Grid, the cost of the Capacity Market (the bit that “keeps the lights on” when the Grid is under stress) is rising twice as fast as the cost of CfDs.
However, subsidies paid via Cfds and the Capacity Market for “green” energy are only part of the story. Subsidies are paid by consumers in other ways.
Renewables Obligations Certificates (ROCs)
As Ofgemix tells us:
The Renewables Obligation (RO) is one of the main support mechanisms for large-scale renewable electricity projects in the UK.
It came into force in all of the UK in 2002, save for Northern Ireland, where it followed three years later. It closed to new generating capacity in 2017, but energy suppliers are still bound by its rules.
ROCs are certificates issued to operators of accredited renewable generating stations for the eligible renewable electricity they generate. Operators can trade ROCs with other parties. ROCs are ultimately used by suppliers to demonstrate that they have met their obligation.
Where suppliers do not present a sufficient number of ROCs to meet their obligation in the reporting period (one year), they must pay an equivalent amount into a buy-out fund. The administration cost of the scheme is recovered from the fund and the rest is distributed back to suppliers in proportion to the number of ROCs they produced in meeting their individual obligation.
Working out what all this costs the consumer is again far from easy. However, trying to make sense of it, we learn that in 2019/20, UK energy suppliers were confronted with an obligation to source 130,183,968 ROCs in the year. They could meet this obligation by proffering ROCs to Ofgem or by making a buy-out payment to the extent of any shortfall, which would cost them £48.78 per ROC. It is possible, in order to encourage full compliance with renewable obligations, that the ROC buy-out rate is set at a penal level. However, if it actually represents the “market value” of ROCs, then the price per ROC multiplied by the required number of ROCs in the year, amounts to £6.3504 Billion. Divided by the number of households in the UK, that amounts to £228.30 per household. Of course this is a crude calculation, and assumes that the entire cost falls on consumers (though given that businesses will seek to pass the cost on to consumers, I think that’s a not unreasonable assumption, in broad brush terms at least).
Again, according to Ofgem:
The Feed-in Tariffs (FIT) scheme is a government programme designed to promote the uptake of renewable and low-carbon electricity generation technologies.
Introduced on 1 April 2010, the scheme requires participating licensed electricity suppliers to make payments on both generation and export from eligible installations.
Barring some exceptions, the scheme closed to new applicants from 1st April 2019.
The FIT scheme is available for anyone who has installed, or is looking to install, one of the following technology types up to a capacity of 5MW, or 2kW for CHP:
Solar photovoltaic (solar PV)
Micro combined heat and power (CHP)
Anaerobic digestion (AD)
Once more, finding the cost to the consumer of FITs is anything but easy. A useful websitex provides more information:
It [the payment] comes out of the pockets of the supply companies because they are really nice guys!
The suppliers pass on the cost of the Feed-In Tariffs scheme to all their electricity customers.
The scheme includes a fairly complex levelisation process so that the overall costs are spread uniformly across all companies.
They can even charge for the costs of administering the scheme.
Payment is made in two different ways – a generation tariff, and an export tariff. The generation tariff is payment simply for generating the electricity, whether the generator uses it themselves or not. In addition, if they generate surplus electricity, they “export” it to the National Grid, in return for an export tariff. The rates vary depending on the type of generation method (e.g. solar panels are paid a different generation tariff to anaerobic digestors and so on), but the export tariff is paid at the same level for all forms of generation.
It took quite a while to find out how much FITs are costing us all, but I eventually tracked the figure down. Anyone would think the powers-that-be don’t really want us to know. Ofgem’s Feed-in Tariff Annual Report 2019-2020 tells us that
The value of generation payments made grew from £1.41 billion in Year 9 to £1.5 billion in Year 10.
So now we know. We can add an extra £1.5 Billion to our growing list of subsidy costs, or £53.96 per household, a figure which is likely to continue growing for a while, since Ofgem’s report also tells us:
In response to the unprecedented circumstances faced by prospective FIT generators at this time, the government has amended the Feed-in Tariffs Order 2012 to grant a 12-month extension to validity periods for all pre-registrations for community energy solar photovoltaic (PV) installations and all preliminary accreditations which originally expired on or after 1 March 2020.
Not content with forcing consumers to pay hidden subsidies for “renewable” electricity, the Government has now come up with a plan to do the same with regard to “renewable” gas. We have to get used to more acronyms. Ofgem has been named as the intended administrator of this latest scheme, and so it is to Ofgem’s websitexi that I turn for a description of what this will involve:
The Green Gas Support Scheme (GGSS) is a government environmental scheme that will provide financial incentives for new anaerobic digestion biomethane plants to increase the proportion of green gas in the gas grid.
The scheme will be open to applicants in England, Scotland and Wales for four years from autumn 2021.
Registered participants will receive quarterly payments over a period of 15 years. Payments will be based on the amount of eligible biomethane that a participant injects into the gas grid.
The Green Gas Levy (GGL) will place obligations on licensed gas suppliers, including a requirement to make quarterly levy payments, in order to fund the GGSS.
As with the subsidies for “green” electricity, charged to the companies who supply energy to us, the end-user, I think it’s safe to assume that this subsidy will be paid by the companies (because they will have no choice) but will then be passed on to the end-user too. How much it will add to the energy bills of households remains to be seen. It is significant that registered participants are to receive guaranteed payments for 15 years, so if this ends up being an expensive mistake, it will be an expense that households will be stuck with until the late 2030s.
This consideration of subsidies for renewable energy started with the news that the latest auction round for CfDs is almost upon us. The scope of the article inevitably increased, as there is no point in looking at one expensive form of subsidy, with related costs to every business and household in Britain, without looking at the others. I fear I may have missed some. However, I think it’s safe to say that so far this is costing, one way or another, every household in the UK around £400 p.a., and as the “net zero” agenda intensifies, those costs are only going to rise, and will probably do so rapidly, unless a public outcry causes politicians to reconsider. For this to happen, however, the public first need to realise what the agenda is costing them. As things stand, the information is opaque to say the least, and I can’t help wondering if that is intentionally so.
I should stress that my figure of £400 p.a. per household is based on the assumption that businesses pass on to their customers the entire amount of the energy subsidies they have to pay, in the form of higher prices charged to their customers. On the assumption that domestic electricity use is 37% of the total generated in the UK (as the National Grid tells us), then the direct cost to each household in the UK will be nearer £150 p.a., and the remainder of the annual subsidies (equivalent to £250 p.a. per household) is being borne by businesses. We can, in fairness, only speculate as to how much of that is passed on to their customers, but it’s probably a fair chunk of it, and to the extent that commercial business users absorb those costs rather than pass them on, it makes them less competitive internationally.
Finally, on the subject of transparency, if you burrow for long enough into the depths of Ofgem’s website, you may find your way to a pie chart providing their breakdown of an electricity bill, with the information stated to be correct as at 1st January 2021. It states that 22.9% of the bill is attributable to environmental and social obligation costs, which is a bigger proportion than that attributable to either operating costs or network costs. If the British public were presented with this pie chart on every electricity bill they received, I suspect they wouldn’t be happy. Perhaps that’s why it isn’t featured on our bills. So much for transparency.