Robbing us of renewables

By a shameless ruse, the government is filching the money we pay in our electricity bills to support green energy generation

Oliver Tickell
guardian.co.uk,
Saturday September 06 2008 00:07 BST

Strange but true: every year, as I revealed three years ago, the Treasury raids the mysterious "NFFO fund" to the tune of hundreds of millions of pounds, on the most tenuous of legal grounds: that the enormous surpluses it generates are a "hereditary revenue of the Crown", along with the income arising from treasure trove and the Crown's prerogative rights over royal fish and birds – sturgeons and swans.
This medieval and so far unchallenged legal doctrine has created the very stealthiest of all stealth taxes, invisibly and unknowingly paid by all of us in our electricity bills – purportedly to support renewable electricity generation.
In this time of rocketing energy prices, today's news that the government's "windfall tax" – paid by us, not the energy companies – will reach £200m this year alone, and may exceed £1bn by 2010, may be the nail in this iniquitous tax's coffin. And our first demand must be this: the money is raised from our bills in order to support renewable electricity generation, so let it be spent for that purpose and for that purpose only.
There are two major areas that need substantial additional funding. One is to modernise and extend the grid, which was always designed to carry electricity from big power stations, mainly in the north, and deliver it to consumers according to generally predictable patterns of generation and consumption. But renewables are different. Wind, wave and tidal resources are mainly located on the UK's western seaboard, far away from the grid's main powerlines. And a radical redesign is needed to make the grid able to cope with the inherently unpredictable nature of renewables, especially as their contribution soars from the current paltry few percent of supply.
We also need additional support for the new renewables frontier: the sea. We will soon run out of suitable locations for wind turbines on our small and scenic island, and the bulk of new wind power must surely go offshore where there is plenty of wind but no precious landscapes to spoil. The problem is, of course, that extra costs are involved in developing offshore renewables – whether wind, wave or tidal stream – in construction, maintenance and grid connections.
But more fundamentally the scale of the surplus reveals something important about the renewables obligation, the current system for supporting renewable electricity generation: its remarkably high cost. The NFFO fund surplus arises from the difference in price between the fixed-price contracts that were being handed out to renewables generators in the 1980s and 1990s under the non fossil fuel obligation, and the far higher prices available to renewable generators now under the renewables obligation (RO), which came into force in 2002.
It works like this: the electricity is bought under the old NFFO contracts by the Non Fossil Purchasing Agency, which sells it on to electricity suppliers under the new regime, together with the associated renewable obligation certificates (ROCs). The difference in price is put into the NFFO fund, which is looked after by Ofgem. Then, every autumn, the government grabs the surplus and shoves into the consolidated fund, the Treasury's main pot of cash for general expenditures.
So, this tells us that we are paying far, far more for renewable electricity under the new system than we were under the old. And for what benefit? None. The NFFO system had its problems, mainly that it operated on a competitive basis that pushed the cost down so low that many "winning" schemes were never actually built. But at least it offered one thing investors were looking for: the certainty of a fixed-price contract that developers could take to the bank and get financed.
By contrast, the new RO system is both ineffective and expensive. It operates by way of a complex market-driven approach that creates considerable uncertainty as to the future price. If renewable developers significantly undershoot the renewables target for a given year, then ROC prices are high and they make out like bandits – much as they are doing now. But if they develop too much and go over target, then the ROC price collapses and some unfortunates will be left holding worthless pieces of paper. On top of that, investors have to reckon with all the uncertainties over the electricity price itself. So, the developers and investors demand a substantial risk premium – for which we have to pay in our bills – and targets are significantly undershot.
The RO is, therefore, a poor delivery mechanism for the UK's far more ambitious future targets for renewable energy. In order to meet the EU's target that 20% of all energy supply be renewable by 2020, the UK will probably need to produce 35-40% of its electricity from renewable sources, and the RO is simply not fit for purpose. It will need to be scrapped and replaced with something far more effective, that delivers far better public value. The obvious answer is to give out fixed-price contracts set at fair prices, not on the competitive basis that undermined the NFFO.
Germany's phenomenal recent expansion of renewables, including both wind and solar PV, based on this successful approach, shows us that it could work here, too.