A guide to how on-shore wind turbine electricity is subsidised in the UK

 Why is even our area of rural Kent under threat from these monstrous turbines; a possibility none of us would have ever considered possible. The reason is that the wind development companies are scrambling to position themselves before their gravy train hits the buffers.

 The present subsidy system for on-shore turbines is likely to change by the end of the decade and the new system will have increased subsidy for more complex technology, less for the simpler on-shore turbine technology. However, it has also been made clear that all turbines/windfarms, operational and feeding electricity into the grid at the time of the change, will be grand-fathered in and will continue to receive the present, excessively generous, level of subsidy. Hence the rush.

 The British Wind Energy Association (BWEA), in its response to the government’s consultation paper on the new arrangements made a statement that says it all “Most of the best sites have been used, or are already in the planning system”. The wind companies are now looking at sites that would never previously have been considered since, even they, would have considered them, inappropriate. No longer. Given the push from the government, and their total failure to protect the public with tighter planning controls, anything is possible and, given the high level of subsidy, poor wind levels are not an issue. Hence, this beautiful part of rural Kent is under attack from wind companies desperate not to miss the (gravy) boat.

 How does the system work?

 In this summary we will assume that the electricity generator is the wind turbine owner (e.g Wind Direct ) who then sells to the supplier (e.g EDF )

The subsidy is given to the generator in the form of Renewable Obligation Certificates (ROCs).  Without these ROCs nobody would be building windfarms (confirmed by the CEO of E.ON in 2005).

 ROCs are issued to the generators of renewable energy. Currently one ROC is issued for each Megawatt hour ( MWh) of renewable energy generated and, in the case of wind, the level is currently the same for on-shore and off-shore. The generator can then either sell the ROC to the supplier who buys the electricity or sell the ROC in the open market. In either event the price received will be much the same.

 The Government requires suppliers to source a defined percentage of their sales from renewable sources. Initially set at 3% in 2002/3 rising to 10.4% by 2011/12 and gradually thereafter. At the end of each year the supplier has to prove to Ofgem that their renewable obligation has been met by producing one ROC for every MWh of renewable energy they should have sold to meet their percentage obligation. For each missing ROC the supplier pays a fine to Ofgem, the fine being an amount pre-determined for the year in question, currently set at £34.30. The fines received by Ofgem are then pooled and the total is then redistributed to all holders of ROCs in proportion to the number of ROCs held.

 The value of the ROC, as traded in the market place, is therefore a combination of the value it has to the supplier to avoid the fine (£34.30) plus the amount anticipated to come back to the holder when the fines are redistributed. ROCs are currently trading at £49 which implies that any supplier buying a ROC to avoid the fine must expect at least £15 to come back on the redistribution. 

 The generator  therefore is not only paid by the supplier for the electricity fed into the grid but is also able to generate additional revenue by being able to sell the ROCs received, either to the same supplier or simply in the market. The amount received for the ROCs is driven by the market but the amount the generator receives for the electricity produced is obviously dependant on contractual terms and the wholesale market price of electricity fluctuates enormously. For this example we will use £45 per MWh which is just below the current spot price

 The generator also receives a small additional amount per MWh. All suppliers have to charge business customers a Climate Change Levy (CCL) which is paid over to the government. Renewable energy, however, is exempt so, if the business customer is charged the same price for a renewable MWh as a MWh subject to the levy, the supplier is able to pocket the difference. It’s not clear how this additional profit is split between the generator and the supplier but we will assume a 50:50 split of the current levy which is £4.40 per MWh. And will also assume that business energy counts for 66% of the total energy sold.

 The final piece of the puzzle is the load factor i.e. what percentage of time available does a turbine produce electricity. The overall average for UK on-shore turbines was 27% in 2006 (BERR). Since this includes all the windier parts of Britain , rural Kent will have a significantly lower % but for the sake of this example we will use a very generous 25%.

 The annual income generated by a 2 MW turbine, based on these assumptions is therefore as follows. The total number of hours in the year being 8760 ( 365 x 24)

2 MW (turbine capacity) x 8760 x 25% = 4380 MWh’s of electricity per year.

Revenue therefore:   Wholesale price  4380 x £45                    =  197,100

                                  ROC income*       4380 x £49                  =  214,620

                                  CCL split*             4380 x £2.20 x 66%   =     6,360

                                   Total estimated annual income                =£418,080

The farmer involved might be able to negotiate a rent of, say, 4% of gross annual income. In the above example this would result in an annual income of £17,000. Over the estimated 27 years of the lease this would bring in nearly £460,000.  Enough to make anyone turn “green” and given that this turbine is undoubtedly the forerunner for more one would expect the farmer to have been able to negotiate considerably more than this.

 The capital cost of an on-shore turbine is about £950,000 per MW or £1,900,000 for the 2 MW turbine being proposed at Sheephurst Lane . It therefore takes only about 5 years to pay off the investment. It is then pure profit for the investors for the next 22 years and the subsidy, paid for by us each year through increased electricity costs will go straight into their pockets.

The subsidy represents over 50% of the income.  The government ramped up the monetary value of the ROC in 2000 in order to encourage more off-shore development but, stupidly, made no distinction between on-shore and off-shore and we are all suffering from the consequences of that. This nonsense was confirmed by the National Audit Office’s Renewable Energy Review in 2005 which concluded that the level of subsidy set for on-shore development was twice the level it needed to be to make the on-shore turbines commercially viable. Despite this, the subsidies continue to be paid and the green lobby’s strident support for these projects and refusal to adopt a more coherent and responsible approach continues to ensure that all those involved in on-shore wind development get richer and richer at the expense of our countryside and quality of life, neither of which they appear to have much concern for.

The total cost of these subsidies feeds straight through to the retail price and is paid for by the consumer in higher electricity costs. This is estimated to result in an increase of around 6% by 2010.

John Webley

January, 2008.    Please feed-back any corrections required through the website.

Sources:

NAO Renewable Energy Review http://www.nao.org.uk/publications/nao_reports/04-05/0405210.pdf

Renewables Obligation, and Climate Change Levy  http://www.ref.org.uk/

Wind power subsidy in the UK by Dr John Etherington http://www.countryguardian.net/ROC%20Etherington%202006%201.htm

APXgroup energy prices http://www.apxgroup.com/index.php?id=272

ROC prices http://www.nfpa.co.uk/