Environmental Audit CommitteeWritten evidence submitted by Vestas Wind Systems
Summary of Vestas Key Points
Implicit subsidies for fossil fuelled power stations in the UK are significant. Health and carbon costs of fossil fuelled power stations in the UK amounted to between €6.8 billion and €10.4 billion in 2009. This is a huge implicit subsidy. Such subsidies distort the electricity market, making it unnecessarily difficult for technologies not in receipt of such subsidies, such as wind, to compete.
Once the electricity market is a truly level playing field it would be reasonable to expect that subsidies for mature renewable energy technologies such as onshore wind can be phased out. A truly level playing field requires an end to implicit subsidies for fossil stations and a robust and meaningful carbon price to be established.
Direct, policy based subsidies tend to receive more attention than implicit subsidies, including in the Oxford Economics report used as the basis for the Committee’s inquiry. This tends to distort the impression of politicians, the public and the media of the level of subsidies received by wind generators in the UK.
About Vestas
1. Vestas is the world’s largest supplier of wind turbines, having supplied over 46,000 turbines in more than 70 countries, more turbines in more countries than any other supplier. Vestas designs, manufactures, constructs and maintains wind turbines, both onshore and offshore. We are a pure wind player; we believe in wind and do not have interests in any other technology.
2. Vestas employs around 500 people across the UK, from R+D, construction and operations. We are currently manufacturing and testing the 80 metre blade for our dedicated offshore turbine at our world leading Technology Centre on the Isle of Wight.
3. Vestas has experience across a wide range of markets, most in which wind is subsidised to some extent, others where the dynamics of the market mean that wind is economically viable without support. We would be happy to share our experience with the Committee.
(i) Has the Government identified the extent of energy subsidies and measured them?
4. It is important that this inquiry takes account of the extent to which energy sources do not incur costs which reflect their impact on both society and the environment. Any shortfall between the full societal cost and the costs borne by an electricity generator is an implicit subsidy. For example there are significant health costs as well as environmental costs associated with fossil fuel use which are not borne by fossil generators.
5. The European Environment Agencyi calculated that in 2009 the health costs (excluding carbon costs) of the UK’s thermal power stations were between €2 billion and €5.4 billion per year. These estimates exclude the cost of heavy metals and organic pollutants. These health costs are not borne by the thermal stations that create them but by society and the health service more widely. This creates an implicit subsidy for those thermal stations. The benefit of avoiding such health costs delivered by non-polluting forms of power generation such as wind deliver are similarly not reflected in the market prices.
|
Health costs of UK |
Health costs of UK |
|
|
All thermal |
€2bn–€5.4bn |
€6.8bn–€10bn |
|
Coal |
€1.8bn–€5bn |
€4.9bn–€8bn |
|
Gas |
€144m–€400m |
€1.8bn–€2bn |
|
Source: European Environment Agency report “Costs of Air Pollution from Industrial Facilities” 2011 |
6. The EEA estimated that in addition to the €2 billion to €5.4 billion for non-carbon costs, the carbon related health costs of thermal plants amounted to EUR4.8 billion. Based on these cost figures and reported electricity generation in 2009, the total implicit subsidies for coal is very approximately €45 to €75/MWhii and for gas very approximately €11/MWh to €12/MWh.iii Regardless of the rudimentary calculation, this represents a significant implicit subsidy.
7. The Government does take into account the health costs of its policies in its impact assessments to some extent (see example from the EMR impact assessment below). The monetised health benefit of renewable energy often, however, fails to gain the same attention as the cost of direct, policy based, subsidy cost. This appears to have been the case in the Oxford Economics report for the Committee, which does not mention health costs and the implicit subsidy given to thermal plants by them not being borne in the market. This is a considerable oversight and one which the Committee should ensure is not reinforced in its final report.
Table 32
MONETISED BENEFITS OF THE EMR SCENARIOS RELATIVE TO THE UPDATED BASELINE FOR IMPACTS IN 2025 (NPV 2010–30, REAL 2009)iv
|
FiT CfD |
Premium FiT |
|||
|
Relative to updated baseline |
Range |
Central |
Range |
Central |
|
NPV |
£505–£732m |
£643m |
£347–£503m |
£442m |
8. There are also impacts on ecosystems and the natural environment, which are not included in the impact assessment for the Electricity Market Reform.
(ii) How well does the identification match up to best practice?
9. Vestas is not in a position to comment on this question.
(iii) How does the scale of subsidies compare with other countries?
10. It is very difficult to do a fair comparison of subsidy costs between the UK and other markets, as the treatment of renewable energy projects is very different. For example in the UK a renewable plant is treated as any other type of plant connected to the system. It pays the same transmission costs, incurs the same balancing costs and is constrained as any other plant is. In many other markets renewable projects are given treated differently. This means they incur more implicit subsidies which means they incur less market costs, so require less subsidy.
(iv) Does the Government have plans to reduce or eliminate subsidies?
11. Removing implicit and direct subsidies for fossil fuels and nuclear is the first step to creating a truly level playing field. Under a truly level playing field most mature forms of renewable energy such as onshore wind would be able to operate without subsidy. Onshore wind has been receiving subsidy in the UK for around 20 years. This pales into insignificance given that 50 year old coal stations currently receive implicit subsidies for their continued operation. Offshore wind which is globally a much less mature technology than even onshore wind, has been receiving subsidy for less than 15 years.
12. A long term policy that gives investors the certainty to invest in high capital cost technologies such as wind is needed. Investors must be confident that the market environment will remain stable, that the carbon price will be maintained throughout the life of the project, that they will have access to the market through the grid and interconnections with other market. Government plans to develop new interconnections and transmissions lines within the UK will also help remove the implicit subsidies given to existing capacity. The electricity network was built to reflect the location of the UK’s fossil fuel resources. The fact that thermal stations have convenient access to the existing grid should not mean they do not have to pay towards the cost of building lines to locations where new forms of energy resources, such as wind, are located. Socialising the cost of building new transmission lines is no different to socialising the cost of the cost of building the national grid in the 1950s.
(v) Government progress in reducing harmful subsidies
13. Some measures in the Government’s Electricity Market Reform will help reduce subsidies; others are likely to increase the level of subsidies. It should be expected that as the Carbon Price Floor increases the implicit subsidy to thermal plant will reduce. Similarly as the Emissions Performance Standard prevents new coal stations being built and the Industrial Emissions Directive closes some coal stations, the implicit health cost subsidy should fall.
14. The amount of new capacity likely to be covered by a Contract For Difference is likely to lead to a considerable increase in the amount of direct subsidy in the market, at least in until 2020. The actual level of subsidy will depend on the electricity price, as the subsidy in the contracts is the difference between the electricity price and the contract price. If the electricity price increases above the level of the contract price generators have to pay back the difference, so they would represent a negative subsidy.
References
i EEA Report “Costs of Air Pollution from Industrial Facilities” 2011 see http://www.eea.europa.eu/pressroom/publications/cost-of-air-pollution
ii Health costs of UK coal stations listed in the European Environment Agency report, divided by UK coal station power generation in 2009 as stated in Digest of UK Energy Statistics
iii Health costs of UK gas stations listed in the European Environment Agency report, divided by UK gas station power generation in 2009 as stated in Digest of UK Energy Statistics
17 June 2013