4 May 2020

Subsidising renewables is not the way to boost the UK economy

By Andrew Montford and Gordon Hughes

As we start to glimpse a chink of light at the end of the coronavirus tunnel, thoughts are starting to turn to the economic crisis that is now upon us, and a recovery plan that will deliver quickly.

One idea was put forward on this site a few days ago. Sam Hall, the director of the Conservative Environment Network, says that renewables are cheap, and getting cheaper, and that the way to bring about recovery is therefore to keep building windfarms just as fast as we possibly can. He cites in his support a recent report by the trade body for the global renewables industry, IRENA, which claims that there are big economic gains to be had by buying from their members. The benefits, they say, will far outweigh the costs.

It is easy enough to dismiss these claims in Mandy Rice-Davies style: they would say that, wouldn’t they? But it is worth looking at the claims in more detail.

We have been pointing out for some years that hard data shows that offshore windfarms in the UK are only achieving small cost reductions and only rather slowly. A recent academic review of the accounts of UK offshore windfarms confirmed this, finding that the costs are still many times those of gas-fired power stations, even without considering the costs of dealing with their intermittent output and getting the electricity to where it is needed.

Further work using similar data shows that operating costs for onshore and offshore wind farms are increasing at 3–5% per year in real terms, which means that they will be uneconomic once the generous prices guaranteed under the Contracts for Difference regime expire. Hall is keen on what he calls the “promising” technology of floating offshore turbines, but the harsh reality is that they have much higher capital and operating costs. 

He also raises the spectre of peak oil as another reason why our future should be renewables-driven. But the insinuation that we are going to run out of oil in a world that is awash with it does not hold water. Moreover, it is gas that is the chief competitor to renewables, both for electricity generation and for heating. Gas is abundant, cheap and has low carbon emissions. And with gas prices having fallen, the effective subsidy to renewables has become even more pronounced.

It’s small wonder then that the government has tried to “socialise” (for which, read “hide”) many of the costs that renewables impose on the grid. To take a very recent example: SSE has just been given permission to build a subsea interconnector from Shetland to the mainland costing over £600 million. This is solely for the benefit of a large wind project in Shetland. Once built, the capital and operating costs of the link will be pooled with all transmission costs and charged to consumers in, say, Oxford and Southampton, who will gain nothing from it. This is pure subsidy to a Scottish project paid by English electricity users.

All this means that electricity prices, which have doubled since green policies started to be introduced in 2002, will continue to rise inexorably. This, it is fair to say, is not a recipe for a rapid recovery from the virus. In fact it is a clear plan for long-term decline.

The argument that there will be significant benefits from a headlong drive for renewables is equally unconvincing. “Green jobs”, or indeed any argument that policy should be built around job creation is not serious economics. Jobs are a cost of a project, not a benefit.

If the Government is foolish enough to continue with the green agenda and to subsidise renewable energy, the effects will be disastrous. They will be penalising everyone who has to compete in world markets against producers who do not have to bear the costs of such misguided policies, so they will destroy jobs rather than create them. And in the process they will be taking money out of the pockets of energy consumers and taxpayers and handing it to overseas manufacturers and investors who free-ride on UK renewables subsidies.

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Andrew Montford is deputy director of the Global Warming Policy Forum

Gordon Hughes is an energy economist and a former senior adviser at the World Bank.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.