Are Renewable Feed-in Tariffs Dead?

  • Date: 21/07/18
  • Dr John Constable: GWPF Energy Editor

Feed-in Tariffs for renewable electricity have been a disaster wherever they have been tried, resulting in over-deployment ahead of the learning curve, and vast long-term cumulative subsidy liabilities. Germany and Spain are already desperately moving to extricate themselves. The United Kingdom has in the last few days confirmed the closure of its own scheme to new entrants early in 2019. Coincidentally the Australian Consumer and Competition Commission (ACCC) has called for the immediate termination of the various Small Scale Renewable Energy Schemes (SRES) applied at state level, and most importantly the transfer of legacy costs to general taxation at state government level, making those authorities electorally responsible for their own policy costs. There is a clear global tendency here, to which the various renewables industries are responding with a disingenuous call for “subsidy free” tariffs, which are in truth covert subsidies. Once bitten, rather badly, one would hope that governments will be more than twice shy.

On the 11thof July the Australian Consumer and Competition Commission (ACCC) published a major study of electricity pricing, Restoring Electricity Affordability and Australia’s Competitive Advantage. This robust title raises expectations, and the text does not disappoint, being remarkable for the clarity of its diagnosis and its candour in allocating blame:

“High prices and bills have placed enormous strain on household budgets and business viability. The current situation is unacceptable and unsustainable. The approach to policy, regulatory design and promotion of competition in this sector has not worked well for consumers.”

Prices are dangerously high, and policies are to blame. Doubtless that is so in Australia, but it could be said of other countries too, the United Kingdom amongst them, yet the relevant national regulatory and advisory authorities are muted in their criticism (Ofgem, the National Audit Office) or actively covering up the facts (the Committee on Climate Change).

Thankfully things are very different in Australia, and the remedies recommended by the ACCC are broad, covering improved competition not only in retail, a distracting obsession in the UK, but also and much more importantly in generation, where market coercions in favour of renewables have increased overall costs to consumers.

The ACCC’s study is clear about both the general trend of increasing costs to consumers and the role of policies in that increase. The general trend is described thus:

“Residential consumers have faced a real increase of 35 per cent in their bills and a price increase of around 56 per cent in real terms over the period from 2007–08 to 2017–18.”

It is particularly welcome that the ACCC has not only described billincreases but has also noted the crucially important priceincreases. A price increase of 56% over a decade is highly significant, and policies are a large part of this effect. The ACCC estimates that environmental policies are directly responsible for 15% of this price increase, with network costs, a considerable part of which seems likely to be related to renewables, accounting for about 38% of the price rise.

Price increases are of particular concern to those without sufficient capital to protect themselves by investing in subsidised photovoltaics. The ACCC comments:

“Solar customers are paying, on average, $538 per year less than non-solar customers, suggesting that affordability concerns are most acute for those customers who have not (and possibly cannot) install solar PV.”

The ACCC is therefore unsurprisingly recommending the prompt winding down and closure of the Small Scale Renewable Energy Scheme not only in order to assist in restoring the Australian economy’s competitive edge, but also on the grounds of social justice. The ACCC writes:

“Removing unnecessary costs for customers is a vital economic reform with at least two important economic benefits. First, it improves equity as low income households pay a much higher share of disposable income on electricity. They should not be paying more for electricity because of poor past decisions or inappropriate market behaviour. Second, our recommendations will boost our overall welfare as we avoid industries closing due to paying unnecessarily high electricity costs.”

A blinding flash of the obvious, yes, but exactly the sort of plain talking that has been so signally absent from policy discussion in Europe.

Very importantly, the ACCC not only recommends the winding down and closure of the support for still active Small Scale Renewable Energy Schemes, but also that the legacy costs of the preceding premium feed-in tariff schemes should be transferred to general taxation levied at state level, a step already taken in Queensland. This would have the effect of mitigating iniquitous wealth transfer from poor to rich, and also of making state governments electorally responsible for the costs of their policies. The scale of this political impact in certain states, where renewables have been a particular ministerial enthusiasm, for example South Australia, famous for its blackouts, can be judged from this chart showing the scale of environmental costs in consumer bills by state in 2017-2018:

Figure 1. Environmental costs in residential customer bills by state, 2017-18, real $2016-7. Source: ACCC, Figure 9.1. LRET = Large scale Renewable Energy Target; SRES = Small scale Renewable Energy Scheme; State = other state schemes; FiT = Premium Feed-in Tariff.

It is interesting for British readers to note that the ACCC has decided that no action is necessary in relation to the costs of the Large Scale Renewable Energy Target (LRET), the purple bar in the chart, since the Australian schemes were purposely designed so that when the targets were met the subsidies paid would fall away (see p. 216 of the study). In the United Kingdom, as is notorious, the government expressly introduced “headroom” into its Renewables Obligation so that the certificate price could never fall even if the targets were exceeded. Another lesson to learn from Australia.

That said, the UK has imposed a moratorium on new subsidies to renewables, winding down the Feed-in Tariffs with Contracts for Difference (FiTs CfDs), a sophisticated variant of the FiT intended to support large scale technologies, and on the 19thof this month the government has moved to fulfil its decision, first announced in 2015, to close the smaller scale technology Feed-in Tariff to new entrants from the 31stof March 2019. The government’s Impact Assessment estimates that the FiT closure will save consumers some £90 million a year (in 2011/12 prices) from 2025 onwards. Good, but much bigger savings could have been made if this decision had been taken and implemented earlier, and there would, of course, have been still bigger savings if the Conservatives had not jostled the then Labour Secretary of State for Energy, Ed Miliband, into introducing ludicrously generous Feed-in Tariffs in the first place.

Even when Miliband foolishly decided to follow this course many knew that Feed-in tariffs had been a disaster wherever they have been tried, and there is certainly no doubt about it now. Germany is currently trying to extricate itself through the introduction of competitive bidding; Spain has simply closed the schemes, and it seems that Australia will probably  shortly follow.

Japan, the last to try this approach, and perhaps the most affected by the sectoral overheating that feed-in tariffs inevitably produce, must surely now take action. Under its first FiT scheme Japan approved nearly 90 GW (90,000 MW!) of solar PV capacity, and though the Ministry for Economy, Trade and Industry (METI) has suceeded in cancelling some 14.5 GW of these contracts, there is already approximately 50 GW of solar photovoltaic generation already installed, and nearly as much again, some 45 GW with contracts and awaiting construction under the new FiT scheme. This is a very powerful economy, but it is doubtful whether even such a Titan can withstand for long the staggering cumulative cost burden of this much non-market, non-dispatchable electricity. The problem is well understood by the Japanese government, but a solution has so far proved elusive.  Prompt closure to new entrants and the transfer of legacy costs to taxation, as suggested by the ACCC, may be exactly what is required.

Clearly, Feed-in Tariffs and other renewables favouring market coercions are dying all over the world. The renewables industries have responded by claiming, falsely, that they are market ready, and lobbying for what they disingenuously refer to as “subsidy free” contracts entitling them only to the wholesale market price. Of course, such contracts would be anything but subsidy free. A unit of electricity from an uncontrollable source, solar or wind for example, has much less value than that from a controllable source, and would more often than not command only a small fraction of the wholesale price if offered in a liberal market. Sometimes it would have to be given or thrown away. A contract guaranteeing the wholesale price to low value electrical energy is still a very generous subsidy. Secondly, as should now be well known, renewable generators are not saddled with the very significant system costs that their presence entails, namely grid expansion and special operational management measures to guarantee security of supply. This avoided cost is also a subsidy. Apologists who point to projects, solar projects say, that hope to combine large battery schemes with renewable generation omit to note that these batteries are planning to bid for long term contracts under the Capacity Mechanism or perhaps for Enhanced Frequency Response (EFR). This will provide a reliable income stream that is readily monetised in the price obtained when the project is sold on, as it almost certainly will be within a few years.

In effect, having run out of road with Feed-in Tariffs proper, the renewables sector is now seeking to obtain other, rebadged, non-market, long-term de-risking contracts at the expense of already stretched consumers. This is a devious trick, and governments should reject it. If these technologies are market ready as is claimed, then they should be offered no favours whatsoever.

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