crisis Energy

UK energy crisis: Why renewable subsidies can help avoid price shocks

Rising energy costs have seen wind farms substantially refund environmental levies for the first time, showing they are likely to be the solution to, not a cause of, soaring bills Environment | Analysis 14 January 2022 By Adam Vaughan Clyde Wind Farm in South Lanarkshire, UKSimon Butterworth/Alamy Amid the UK’s increasingly heated debate over what…

Rising energy costs have seen wind farm subsidies for environmental levies significantly increase, which shows they are likely to be a solution, and not a cause, of soaring bills


| Analysis

14 January 2022

By Adam Vaughan

RYFMB1 Aerial panorama showing the 206 turbine Clyde Wind Farm in evening light.

Clyde Wind Farm in South Lanarkshire, UK

Simon Butterworth/Alamy

Amid the UK’s increasingly heated debate over what to do about soaring energy bills, targeting green levies has repeatedly been suggested as a way to soften rising costs.

The boss of the UK’s biggest energy supplier wants them moved off energy bills and paid for by general taxation. Green-minded Conservative MPs agree. A separate group of Tory MPs, some of whom are critical of the costs of acting on climate change, have written that they should be scrapped entirely, later clarifying that they should at least be temporarily suspended.

However, a new milestone was announced this week that shows how environmental levies can be used to avoid energy price shocks.

The green levies, along with social ones such as efforts to alleviate fuel poverty, make up 15 per cent of the average dual fuel bill for households in England, Scotland and Wales. Contracts for Difference (CfD) is one of the most important green levy items. It encourages development of new wind farm.

Energy suppliers typically pay electricity generators (such as wind farm owners) the difference between wholesale power prices, and a “strike cost” which is a more accurate reflection of the cost to produce renewable energy. For example, some older wind farms have a strike price of PS114 per megawatt hour. In normal times, UK wholesale prices are in the region of PS50/MWh, in which case a wind farm owner gets a PS64 top-up.

But gas costs meant wholesale prices were so high in July to September 2021 that they eclipsed strike prices, and the money reversed direction. During that three-month period, the scheme returned funds to energy suppliers: PS39.2 million, to be precise. The result was that renewable energy helped to reduce the rise in energy costs for supplies.

“That was always the intention – but hasn’t happened before,” says Jim Watson at University College London. It marks a turning point for the UK’s net zero transition, as it becomes apparent that early renewable subsidies are payingoff,” states Jess Ralston of the Energy and Climate Intelligence Unit think-tank.

“It’s a significant milestone,” says Josh Buckland at the consultancy Flint Global. “Supporting renewables has increased material costs in bills over the past decade. But, rapidly falling costs and rising prices for fossil fuels now mean that they are actually bringing down our energy suppliers .

As wholesale prices remain high and are expected to remain there for months, or even years, money flowing towards suppliers will not be a blip. Figures aren’t yet available for the final quarter of 2021, but it is likely to have continued, says Watson.

But Buckland warns that consumers might not see a huge gain: “Unfortunately billpayers still pay for historical green levies. This means even though costs are falling, they won’t fully benefit .”

However the CfD scheme, and other green levies, do help household energy bills due to how they are changing our energy mix. Ralston points out that gas bills have increased faster than electricity bills in recent years. This is due to the fact that levies have helped create wind farms and solar panels, so electricity isn’t completely dependent on gas.

“Those who seek to blame low-carbon technologies for high costs have it completely wrong – and this milestone illustrates why,” says Watson of the money be

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