Alternatives to RO

From Energy-Experts

Thanks for the comments on the RO, and the extraordinary nature of Ofgem’s response. I have at last had an opportunity to read it!

Broadly, I find the Ofgem criticisms quite valid. The RO is a baroque, complex and weird scheme that needed some lunatic dreaming up something that would meet a whole host of impossible constraints: market oriented, avoiding cost to the exchequer, and encourage renewables. One might call it cunning – all the costs are carried by future consumers (who have no votes), and there is a gravy train for the banks, who are funding things until future consumers come on stream.

It does seem extraordinary that Ofgem felt willing and able to make such strong criticisms of its sponsoring department. I agree with the comments, and consider it courageous of them to have made it public. It will upset some players in Whitehall, and Ofgem has a lot of enemies already, but perhaps this should win them some friends. What we now have in the RO is a scheme that promises future subsidy to investors in renewables that will be funded by future consumers via a tax to be collected by suppliers.

Although I agree that subsidy is needed, this scheme has major flaws:

1. It makes no statements about how the subsidy will be collected. It is up to the supplier to collect it in whatever way he sees fit. It is like a hypothecated tax the collection of which is subcontracted to a part of the industry to collect in whatever way it can. Subcontracted tax collection has a mixed history.

2. Does this mean the impact will be progressive, with the richer paying more, or the poorer paying more. Broadly, since it is the rich who have market power (and so wot get the gravy), and it will be the poor who will pay (get the grief). So it is regressive, so against stated government values of reasonably progressive taxation.

3. How does this tie in with the white paper obligation to minimise the fuel poverty? It seems just to make the problem worse.

4. Suppliers need have no infrastructure assets – indeed, they are more or less forbidden to own them. Already, the RO has suffered from bankruptcy of suppliers, who have left the RO unpaid, and with no serious means of collecting it. The bankruptcies have been an excellent excuse for some vertical integration, and a hollowing out of any real electricity markets.

5. It is irresponsible for government to pass laws that do not take into account what options future customers (who will be paying the subsidy) may have open to them, and how this might impact their behaviour. These future customers do not have votes, and will be unable to exercise normal market choices. It is a method of live now, and have somebody else pay later. Not right.

6. The cost, according to the Ofgem figures, is absolutely vast. £32 billion. Well, if we are going to blow £32 billion let us at least take care of how we spend it, even if it is not us who picks up the tab. There are better ways (billions of them!).

7. It treats all kWh as having the same value. Yet some (at peak times) are more valuable than at other times, and some are worthless. So it deprives us, and the industry, of opportunities to optimise by minimising costs and emissions. In this it shares it flaws with the REFIT schemes.

If it is now made even more complex by banding, then the DTI energy has so clearly lost its marbles that abolition of the DTI is clearly sensible (bring on Gordon Brown!). However, this would leave the country without any government department responsible for energy policy. Perhaps anarchy would do better than DTI.

So I have concluded that almost anything is better than the RO. It really ought to go, and something more sensible put in its place (preferably without unfairly depriving the investors who have sunk their savings into the wind farms etc.) There are some difficult problems here:

1. Are there current subsidies (yes), and who would lose if they were redirected?

2. Do the current subsidies support undesirable activities (yes, they subsidise coal and coal firing, among other daftnesses)

3. How can we change these subsidies with minimum work and pain? (Do not give the power companies CO2 allowances?)

4. Should the subsidies be for capital? – ie the public makes direct investment in infrastructure for their future benefit; or

5. Should the subsidies be in the form of future promises for funding?

6. From whom will the future funding be collected? Who will enforce collection?

7. Which technologies should we subsidise? How do we choose among them?

I prefer 4, over 5 in that what we are doing is then clear and transparent (not like the RO), and we can assess its impact now, without palming off all our risks to the future.

On 7, there is clearly a political dimension to the decision. My suggestion is that all electricity generation technologies are given an obnoxiousness index. If it is a high number (greater than 1), then the generation technique is clearly unattractive, and should bear extra tax costs. If it is a low number (less than 1), then it is relatively more attractive, and should receive subsidy funding to reduce its costs. It would be easy to normalise the numbers so that the tax is balanced with the subsidy. We can then leave it up to some political process to decide on the obnoxiousness factor that applies to each technology. It might even be decided in a Big Brother way (probably without significant adverse impact!), so that you can call a number to vote for your favourite or least favourite.

This is as adjunct to the normal price discovery of a competitive market. Other costs, such as CO2 and SOx, would still be carried by the generation. It is just that what we collectively consider obnoxious technologies have predictably greater costs than nice ones.

There is also a range decision. What should be the maximum difference between the most and least obnoxious. If 1 is normal, zero is as nice as possible, and 2 is as vile as possible, then could this work? What would zero actually mean? Is there a case for some exponential function to play a role here?

It may well be that the obnoxiousness index will change over time. So we might find that onshore wind moves up and down the OI, depending upon how we feel about it. Nuclear similarly. Coal might have an extra OI just because of the general nastiness of coal (quite apart from its CO2). There are a lot of unpriceable risks to stash onto the nuclear obnoxiousness index, but if, even after this, it proves cheaper (which would be a surprise) then we have had a rational process by which we can accept it.

David Hirst