Energy subsidies – fossil fuels versus renewables

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The costs and benefits of different energy sources for electricity generation is a popular choice for student projects but specific data can be difficult to come by.

Following a recent discussion, Tommy Gilchrist – a former geography student at the University of Reading and currently working for the Secretary of State for Education Rt Hon Nicky Morgan MP – was able to provide the following information from the House of Commons library. With thanks to Tommy and the House of Commons library research staff for this.

The first thing to say is that a range of renewable subsidies do currently exist. These include the The Renewables Obligation (RO) Renewable Heat Incentive (RHI) and Feed-in Tariffs scheme (these are all being transformed by the Contracts for Difference regime) arising from the 2013 Energy Act.

The extent to which fossil fuels have been subsidised in the past 20 years depends on the definition of what constitutes a subsidy. Many organisations have argued that tax breaks or other incentives should be incorporated into the Government understanding of subsidies. Most recently the Environmental Audit Committee looked into this and recommended that linked tax breaks and other financial assistance should be better accounted for. The Committee Commissioned Dr William Blyth of Oxford Energy Associates to set out the theory and practice of energy subsidies and to review how the various definitions that are available apply to the UK.

Their report, from November 2013, found that “the UK has progressively reduced subsidies to fossil fuels over the past 30 years” but that there are still subsidies for all types of energy. His analysis showed subsidies totalling at least £12.7bn, with the most significant levels being for gas (£3.6bn), nuclear (at least £2.3bn) and renewables (£3.1bn). However in terms of subsidy relative to the energy output involved, nuclear and renewables are the most subsidised:

  • Coal: 20p per MWh
  • Oil: 55p per MWh
  • Gas: £4 per MWh
  • Domestic electricity: £6 per MWh
  • Nuclear: at least £33 per MWh
  • Renewables: £50 per MWh

The main elements of these subsidies were the reduced rate of VAT (£6.2bn), renewables (£3bn) and legacy nuclear costs (at least £2.3bn). The latter figure is the Government’s net contribution to the Nuclear Decommissioning Authority, but there is uncertainty about the eventual size of the decommissioning liability which could increase this figure.

The Government’s Response to the Committee’s report agrees with the assertion that various methodologies can be used to calculate subsidies but does not consider that current tax breaks that are provided for oil and gas exploration constitute subsidies.

The position in the Government’s response was countered in this article authored by Dr Blyth in March this year.

The arguments have progressed a little in recent months with more international comparison around fossil fuel subsidies being made available by the IMF and the International Energy Association publishing comparative information in April. This BBC article provides information. In addition the OECD monitors international subsidies for fossil fuels and their data estimates for the UK are charted below.

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