Taxing the fuel-poor to bolster subsidised companies is a waste of energy

Energy policy in the UK is as badly flawed as banking regulation proved to be.

By John ReynoldsPublished: 6:42PM BST 27 Sep 2009
We have a regressive tax that takes hundreds of millions of pounds from customers – including the fuel-poor – and redistributes it to major companies that have already received subsidies for generating renewable energy.
Equally, the policy fails to address carbon emissions because a tilted playing field transfers this money to some of the least dependable low-carbon generation while providing no financial support to the most reliable.
Of the two low-carbon forms of power generation, renewables – including the use of wind and solar – receive subsidies and are set to do so until 2037. Nuclear, by contrast, is unsubsidised. Moreover, these subsidies are not paid by the Government, but by all electricity customers through Renewable Obligation Certificates (ROCs), which are incorporated into their bills.
According to the most recent figures from the industry regulator, Ofgem, there were more than 16m ROCs in the year to March 2008, worth £872m. That is an extra £872m on the bills of every household and business in the UK supplied with electricity – in just one year. Of this, £565m subsidised renewable generation. The remaining £307m related to so-called "buy-out" payments. Suppliers – in reality, their customers – paid this £307m as penalties for failing to meet "renewable obligations".
Ofgem then distributed this cash pile to suppliers in proportion to their success in meeting targets for renewable generation – a windfall that boosted profits. That is great for shareholders, but not for hard-pressed customers. Partly because of an intractable planning process, insufficient renewable energy is being generated to meet the Government's targets.
But customers are paying the full subsidy as if those targets are being met. And with the target for renewable generation rising each year until it reaches 20pc of energy production (more than 30pc of electricity production) in 2020, subsidies and windfalls will increase further. A House of Lords committee last year calculated that by 2020 renewables will add £80 per year to the average household bill (in today's prices).
The biggest recipients of ROCs are the major generators. These companies are doing nothing wrong: they are playing by the rules as they stand. But the rules are ridiculous: fuel-poverty, or being unable to afford to pay for electricity, is a concern for many people and for struggling businesses. Now that government policy is encouraging unsubsidised nuclear power, arguments for very long-term incentives being paid to renewable generators look weak.
From an engineering perspective, the high variability of output from wind, the most common form of renewable energy, greatly reduces its benefit. Equal amounts of gas-fired generation may have to be immediately available and actually operating to offset the risk of a change in wind conditions.
Renewables also involve spending further massive sums on reinforcing infrastructure to connect remote generation plants to the grid. Private industry estimates suggest that the cost to customers of complying with the 2020 target will total more than £200bn. Given that the benefit of renewables is not clear cut, and that in the long run there is another more reliable and cheaper form of low-carbon energy (nuclear), our ersatz low-carbon measures are transferring wealth from customers to large corporations at the Government's behest – for little benefit. The redistributed payments look like a new form of regressive tax, worthy of the fictional MP for Haltemprice, Alan B'stard.
Renewables that operate most of the time and with relatively high predictability can make a genuine contribution to the environment and to fuel security. The top onshore wind farms in the UK are 50pc more efficient than badly sited facilities. Subsidising less efficient wind farms will create a mass of infrastructure with little real value.
Wave and tidal power offer reliable energy, but technologies are still at a relatively early stage. Generation from biomass can also provide reliable electricity, but will remain small scale. Carbon capture from power stations also offers benefits, but again is at an early stage.
Unlike wind, paying subsidies to early-stage technology – such as wave and tidal – can make sound policy, enabling new forms of production to develop and establishing manufacturing bases in the UK.
How did we arrive here? Energy policy took a potentially disastrous turn in 2003. The then Department of Trade and Industry failed to support new nuclear power. By 2007, this had changed. But four vital years were lost. Nuclear power only took centre stage in 2008 when John Hutton, as business secretary, proposed the building of a new generation of nuclear power plants.
When renewables were promoted in 2003 as the only future form of low-carbon energy, albeit wrongly, redistributing money nonetheless made some sense. However, since 2007, this has made little or no sense. Establishing parity between renewables and nuclear is urgent. When, in around 2020, new nuclear power stations are operational, explaining why wind but not nuclear receives huge subsidies will be impossible.
Despite this, in an 'Alice in Wonderland' moment in 2008, Chancellor Alistair Darling chose instead to extend ROCs for a further 10 years to 2037. With little scope for the further development of high-efficiency onshore wind farms, combined with the prospect of modern nuclear technology, there can be no justification for long-term redistribution of wealth – especially from those on low earnings to major international corporations.
I can only conclude that energy policy – vitally important to everyone in the UK – is designed merely to pass the test of showing some progress towards intermediate targets for new renewable projects. Meanwhile, the real challenges – large-scale low-carbon energy and security of supply in the face of dwindling North Sea gas – have been ducked. In place of an intelligent solution to national problems, we have an unfair and unnecessary, regressive tax and a failure to grasp the problem of carbon emissions.
John Reynolds is chief executive of independent investment bank Reynolds Partners and chairman of the Church of England Ethical Investment Advisory Group.