Saturday, 20 August 2011

Money for nothing

No, this is not a critique of that acclaimed Dire Straits song, but phrases involving words such as trouble, and involving paddles and creaks do indeed spring to mind. This post is about one of the three main driving forces behind the wholesale rollout of wind farms and more specifically, the financial rewards available to anybody who generates electricity from a renewable source and passes it into the National Grid (the grid): the feed-in tariff. The what? I hear you ask. The feed-in tariff has nothing directly to do with the cost of eating-in; it is somewhat more sinister than that. Read on.

The feed-in tariff in the United Kingdom came into practical effect in the twilight days of power of the then incumbent Labour government in April 2010. Essentially, this tariff ensures that anybody generating electricity through certain renewable methods and who connects the output from their renewable generating source to the National Grid, gets paid a guaranteed amount per kilowatt-hour (kWh) of electricity supplied. This tariff is guaranteed for 20 years for wind power generated electricity, and for 25 years for solar power generated electricity. The tariffs paid per kWh are Retail Price Index (RPI) linked and therefore will increase year on year, unless the economy goes into another recession. A more thorough explanation of the tariffs can be found here.

So what is wrong, I hear you ask. Well, fundamentally the feed-in tariff seems like a good idea since it forces the grid to take electricity generated by renewable methods. Sensible in broad principle, after all we have those pesky CO2 emissions targets to contend with and as a nation, we really do need to transition our ageing generational capacity to cleaner more efficient methods. So, there is tick in the box there. Also, small scale schemes (ie, photovoltaic cells on roofs, or micro turbines) are positively encouraged by such an approach since the significant cost of installation can be offset against the guaranteed returns for 20 or so years; all good stuff.

However, the feed-in tariff structure ensures the tariff is paid even when energy is not being generated and fed into the the grid, and for the big installations this is significant since they still get their bag of booty when the grid cannot take their output; essentially, they get paid to  have generating sources doing nothing. How come? With the introduction of essentially private operators generating potentially large amounts of electricity, supply can outstrip demand and the number of times this situation will arise is likely to increase as the output from wind farms continues to increase. Since the grid is obligated to take all the electricity generated by wind farms connected to it, they have to pay out whether they use the electricity or not. This article demonstrates a recent example of this appalling "money for nothing" situation. Although this article focuses on only recent Scottish cases, the same applies elsewhere throughout the United Kingdom.

The feed-in tariffs seem quite generous, money for nothing, 20 years of guaranteed income; I didn't know money grew on trees! Well, it doesn't. Although the energy companies pay the feed-in tariff to the operators, it is the consumer (business or otherwise) who funds it. For domestic consumers, VAT is currently levied at 5% on electricity, but have a look at your last electricity bill and you will mostly likely see that at least 11% of it is in the form of "VAT and government obligations". So, if you consume electricity (as a household or a business) around 6% of your bill is funding "government obligations". This is the source of the feed-in tariff funding. The precise amount paid varies by energy company. However, what is consistent is that the more you use, the more you pay (6% is a percentage after all) but perhaps more significantly, the higher the cost of the electricity you use, the more your 6% is going to be. This percentage acts as a sort of built-in escalator, ensuring that as energy prices rise, more money is made available to fund feed-in tariffs. If feed-in tariffs are going to be funded by the consumer, wouldn't it be better to base it on the amount of electricity used and not link it to the price charged for the electricity? I really do detect some duplicity here. I do however accept that we have to fund renewable energy projects somehow, but the current feed-in tariff is daylight robbery, pure and simple. So, next time you consider switching your energy supplier, you may like to find out what the "government obligations" contribution on your new bill is likely to be, otherwise it could be a nasty shock.

But what of those people who have recently agreed to host some wind turbines on their land, they've still got this 20 years of guaranteed income once they come on line haven't they? Well - yes and perhaps no. The feed-in tariff structure will be reviewed periodically, with the first review due in 2013. What will happen then? We don't know. However, our current coalition government has demonstrated its remarkable ability to implement policy reversals with a deft flick of the wrist. Additionally, by 2013 considerably more renewable energy generational sources will have come on line - all expecting their share of the promised feed-in tariff bonanza. More will doubtless be waiting in the wings. How will this tariff be funded? Will our 6% contribution become 10%? Given that electricity prices have increased a number of times since April 2010, the original 6% has effectively increased (in absolute terms) quite markedly already. We just don't know what will happen, but  I would like to think that the average consumer will not be prepared to continue to fund the feed-in tariffs and stand by to watch their hard earned cash disappearing into the pockets of wind farm operators, particularly if their turbines are standing idle.