Wind Power and Subsidies
Unlike the coal industry (where subsidies can be for example given to a local plant to support local employment) or the nuclear industry (let’s not even talk of decommissioning costs!!), the renewable energy industry exists completely without subsidy. The Times article is really not very helpful in this matter and is rather incorrectly worded. What the article is actually referring to is ROC’s (Renewable Energy Obligation Certificates) – this is market fixing mechanism that the government uses to encourage the take up of renewable energy in order to meet their EU (and indeed global – Kyoto) targets.
The contribution from Government to the operation of windfarms (and thus UK taxpayers) is £0.00. The money referred to in The Times article actually comes out from the wholesalers and thus from the electricity price to consumers. Perhaps you could say this is semantics – it is the bills for business and domestic consumers that provide the finance, but believe me if we fail to meet our Kyoto targets then the UK government will be fined and THAT penalty will be much harsher and will be totally taken out of the tax payers' contributions.
In case you think that this is all pulling the wool over people’s eyes, there are Market Price Fixing Mechanisms everywhere – from supporting British farmers to the production of cars (the only reason Mercedes make Smart cars and BMW owns Mini is because they are compelled by market legislation to sell a percentage of cars that are small and efficient – if they want to sell cars at all in the UK – it’s exactly the same deal and the costs are spread over all of their cars). It is worth noting that onshore wind production costs are essentially comparable with Gas fired electric plants (making both wind and Gas the UK’s second cheapest option after nuclear).
The exact mechanism for ROC's is as follows (and please, I'm not an expert so this may skip over some finer detail):
1. SLP (the owner of the facility) produces electricity and sells it on the wholsesale market - straightforward. Wholesale prices have crashed somewhat since last year, currently hovering around £40/MWh - and appear to be at the bottom of the curve. This time last year they were about double! Largely tracking the oil price. Up until this point there is no difference between wind farm and any other production mechanism - it's all electricity.
2. For each MWh produced the owners are then awarded a ROC - the certificate. This is part of the "Renewables Obligation" (RO). Different renewable technologies are also scaled by the type of ROC - thus for example, onshore wind certificates are worth a scaling factor of 1 i.e. 1:1, offshore wind is 1.5x, wave energy is 2x.
3. Energy Retailers are obliged by the RO to procure a percentage of their electricity from renewable sources (the percentage scales upwards over time). This is achieved by the procurement of ROC's from the open market - mostly traded by the NFPA (Non Fossil Fuel Procurement Agency). Again this is an open market and the price awarded to a ROC certificate will vary day to day, month to month in accordance with market forces. The current trading level is approximately £90 / MWh for wind. Trading takes the form of a twice annual auction of supplier's certificates.
4. The retailers have to demonstrate via the return of certificates to the Government at the end of the year that they have satisfied their obligations under the RO. If they fail to do so they will be fined. These punitive measures (plus the ambitions of the company, their overall scale of supply and their own internal generation) all feed into the market thus establishing the RO price. Thus many suppliers (the big ones) have their own renewable programmes to ensure they are not at the mercy of the market price for renewables.
There is more detail, there are other schemes at play as well (slightly older versions of similar efforts) but that in a nutshell is how the mechanism works - as you can see the only role for Government is to set the level of the fines and to implement the legislation thus with this effort they manage to get massive amounts of money and effort to work on achieving the Govt targets for renewable energy generation. The public benefits as this is then spread over suppliers and we get to choose Who to source our electricity from - for example those that manufacture their own renewables will in theory be able to benefit from selling any surplus of ROC's and thus reduce their prices to the consumer.
Note that as far as am I aware there Forward Trading in ROC's is prohibited given the need to return them to Government and due to them being awarded for production itself in the first place. Thus this element of the return is spread over the life of the equipment. What you are more likely to find is that once a project is in place and generating (or actually once it has passed planning) there is then a substantial asset value to the project and it will quite often be sold to one the majors for the reasons outlined above. SLP are very unlikely to remain the owner of the project in the longer term (although to be fair I haven’t checked their policy on that).
Dr Chris Minto