Guest Blog Filippo Gaddo – How much are we paying for renewables?

Brace yourself for a big claim: compared to our Continental neighbours, British bill payers have had it easy so far when it comes to coughing up for renewable energy subsidies. […]

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By Vicky Ellis

Brace yourself for a big claim: compared to our Continental neighbours, British bill payers have had it easy so far when it comes to coughing up for renewable energy subsidies.

So why can I say that? As ever, you just have to look at the numbers. The Council of European Energy Regulators recently published a report which outlines the level of subsidy and support for renewable electricity in Europe. It may be a dry read but numbers don’t lie. Whether the UK will always pay less is another matter.

How do the numbers stack up?

The 17 European countries surveyed spent a total of €25 billion in renewable electricity subsidies in 2010 – the latest year when data is available for all countries. On average such subsidies have added a cost of €9.35/MWh to the electricity price across Europe. But averages can be deceptive.

This one hides large differences between countries: in the UK for example, so far consumers have had it easy. Subsidy ‘only’ added costs of €4.38/MWh for a total of €1.4bn, or about £20 per person.

That’s small compared with Germany, where the level of support is four to five times as much at €17.98/MWh, for a total of €9.5bn or about £100 per person. In Italy it is €10.4/MWh and Spain gives renewables €20.6/MWh. Only in France, out of the big European economies, the level of support is lower at €3.40/MWh.

So what’s behind the stats?

Put simply, two things affect these differences: the amount of renewables in the electricity mix and how much support they get (i.e. how much do they cost).

Let’s take a look at the UK again: the share of renewables from the energy used is 6.7%. As for our neighbours, the share in Germany is 15.6%, in Italy is 9.3% and in Spain is 23.4%. This tells us that one reason for the high burden of renewable subsidies is how much renewable energy is on the system. EU powerhouse Germany and sunny Spain may well be the leading nations for the size of their renewable assets, but their consumers are paying for it.

Secondly, we should look at the actual cost per unit of renewable subsidy. Here again the UK compares relatively well: in 2011 the average cost in the UK is €59.9/MWh versus€115/MWh in Germany, €112 in Italy, €86 in France and €82 in Spain. Conclusion? Germany, Italy and Spain lead the pack now because they’ve spent more.

The only way is up for renewable costs

What lesson can we draw from this? By international standards, until now the level of support for renewables in the UK has been relatively low. But as the nation increases its share of renewable energy and more expensive technology is brought online, the cost is only going to go up.

Looking at other European countries’ experience, levels of £20/MWh and around £100 per person are not unreasonable.

Second, you get what you pay for and you pay for what you get. Countries ahead of the pack in terms of renewable energy deployment are paying for it (with the exception of countries with large scale hydropower). The success of Germany and Spain does not come cheap for their consumers.

Whether people are happy to pay for the growth of renewable energy all depends on whether they think the economic benefit of having their own renewable industry is worth it.

Scrap subsidy and copy US-style tax breaks instead?

Changes to the way renewables are supported could trim the burden on consumers and make them more acceptable. Some commentators now reckon it’s worth copying the US system of tax breaks – where the major federal support scheme for renewables, (the production tax credit  or PTC), gives tax breaks for renewable generators of $2.2\kWh for 10 years. They suggest it’s a more progressive policy compared to the European system of subsidies broadly loaded onto customers’ electricity bills, usually through a tax or sometimes via an electricity retailer obligation.

But in the current economic environment, the real debate should be around a ‘social contract’ for renewables, where consumers are honestly presented with a choice of paying more for their energy in exchange for a range of direct but more often, indirect benefits.

Until that happens we can’t expect a full public acceptance for more ‘green’ energy.

 

Filippo Gaddo is an independent economic consultant who previously worked at Ernst & Young and the Department of Trade and Industry before it was replaced by BIS.