Analysis
License: All rights reserved. Credit: Greenpeace

How much will you have to pay for renewables? (again)

Damian Kahya
Damian Kahya is a former BBC energy reporter and Energydesk editor
License: All rights reserved. Credit: Steve Morgan / Greenpeace

How much will you have to pay for renewables? (again)

Are your bills going to go up by £600 by 2020 (and dizzying incalculable amounts thereafter) to pay for renewable energy?

Two stories, by generally well-informed journalists in The Mail and The Telegraph have suggested this may be the case.

They were based on a report written by the confusingly named Renewable Energy Foundation (REF) a group the Telegraph acknowledges has campaigned against onshore wind farms.  

One might imagine this would give a journalist pause in examining their figures (much as they would figures from Greenpeace), so let’s have a quick look at the workings…

Unlike gas the cost of renewables is predictable (for better or worse) so the amount we plan to spend to reach 30% renewable electricity by 2020 has already been budgeted.

By 2020 this will amount to £7.6bn, or about £63 a household according to calculations from the Department of energy and climate change.  

So how do you get from £63 to £600?

1) Round up and make an assumption: £8bn or £308

REF took the £7.6bn figure and turned it into £8bn, we don’t know why, they then assumed that households would pay the entire cost, rather than it being shared around the economy. We’ll come to that later.

2) Add something that doesn’t actually pay for us to meet our target. £1bn or £38.50

In this case they’ve chosen the carbon price floor.

The price floor is a minimum price that must be paid for each tonne of carbon dioxide emitted by gas and coal power plants collected by the treasury.

REF argues this will push up the price of power paid to all generators, including wind generators, and so works as a subsidy for the wind industry.

They accept that this won’t apply to any wind farm built after 2017 – because the subsidy regime will change.

However, before then, REF projects a rush of new wind power projects, all before 2017 – a little on the ambitious side.

They then predict these projects and those already built, will receive 40% more money as a result of the floor price. Which they put at £1bn a year.

By their slightly absurd calculation (which basically divides the total number by the number of homes) that will cost you about £38 by 2020.

They can’t actually know this – because they can’t know the future cost of carbon – but that is beside the point.

The main thing is that the carbon price doesn’t get renewables built.  It’s effectively a tax on carbon dioxide levied by the treasury which polluters will pass on in electricity costs which vary with the price of carbon and the cost of gas.

Those higher costs may allow clean energy providers to sell their own power for slightly more. The big beneficiary is nuclear but existing wind generators may also benefit.

However because the scale of any benefit is unknown and highly changeable, depending on the price of gas, it isn’t something that gets any wind turbines built.

REF may be right to call the treasury tax unjustifiable, but they are wrong to say it’s a price we pay for building renewables.

3) Add a very large made up number : £5bn or £192

 REF claim to have found a big ‘hidden cost’ of renewables – the cost of accommodating variable wind generation into the grid.

Based on un-reviewed work by Colin Gibson, a retired engineer who once worked at the National Grid and now writes for the Renewable Energy Foundation they say this will add £5bn a year to bills by 2020. Or, put another way, building new power lines will add 2/3 of the total cost of building all the wind farms in the first place.

By their workings that adds about £192 to each household bill.

We’ve got a call in with the National Grid – but it’s not their figure.  They are, however, members of the Electricity Network Strategy Group who have recently estimated the total cost of transmission upgrades at £8.8bn. But that’s the total cost – not the yearly cost. Spread out over the lifetime of the infrastructure and applied to consumer bills it would add about £6.

4) Throw on VAT: app £2bn: £76

The final touch is throw VAT on all the costs, y’know… as happens on your actual energy bill.

Few problems here.  VAT on power is 5%, this seems to assume something in the region of 20%. Second the VAT is actually paid on power – power that would otherwise have to come from other sources.

REF may argue the power from renewable energy is more expensive – but then the VAT they add should only be on the difference between the cost of renewable energy and the cost assuming we stuck with gas, coal and nuclear.  

They’ve not calculated this, which isn’t surprising as they don’t know the gas price, but it’s fair to say the difference in price, on which it is reasonable to calculate the VAT, would be far lower than the absolute price.

In short, this is economic twaddle.

5) Make a wild, economically illiterate, assumption: see numbers above

They argued that all the costs of renewable energy, though paid by industry and business, would ultimately find their way back to consumers through higher costs of living.

The first error here is to assume that all of the money paid for renewable power by business is ‘additional’. That power replaces power they’d otherwise get from gas, coal etc… which costs money – even if you think renewables are more expensive, you can’t believe gas is free.

The second, more fundamental problem, is to assume money only goes one way in the economy, as if it vanishes into thin air. Money spent building wind turbines, infrastructure or even enriching the Treasury ultimately goes back into the economy e.g. through wages, public spending etc.

Given that the IMF amongst others tend to recommend infrastructure spending as a way to boost growth this is a profoundly odd assumption.