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News 27 August 2010: Green policy think tank calls for abolition of Feed in Tariffs

Filed under: Latest News

“Abolish the UK’s FIT Solar subsidy scheme for photovoltaic solar electricity – it is a waste of money”

says the UK’s Policy Exchange think tank, in a new controversial report entitled Greener Cheaper which has inflamed the UK microgeneration industry. Co-authors: Dr Robert McIlveen and Professor Dieter Helm state that:

At the very least, some policies which are wasting money should be abolished, including the feed-in tariffs. These are a hugely expensive public subsidy for microgeneration, [Feed in Tariffs are] a marginal potential contribution to decarbonisation.The £8bn cost of this programme could achieve so much more elsewhere, for example in expediting buildings’ energy efficiency.

Looking at the general case for cost-effectiveness in carbon reduction policy, the report says:

“The idea that environmental policy should be rational is an odd jumping off point for a report: of course it should be. Yet the environment, and climate change in particular, has sometimes appeared to be subject to policy decisions and political debate that seem to be far removed from a rational approach to policy.


The politics of the environment, and in particular climate change, can take on an extremely polarised nature.Those who refuse to accept any of the science clash with those who are determined to see their pet projects put into practice. Proponents of different solutions clash as they seek favour for their preferred approaches. Questioning the cost-effectiveness of particular climate change policy choices can be a political minefield. Pragmatic voices are easily drowned out.


But the significant potential costs of climate change policy should make it a legitimate concern of everyone including those, like us, who take the risks posed by climate change very seriously. Climate change policy should be as cost-effective as possible. Wasteful climate change policy would not only cost more than it needs, but also achieve less – both directly because of limited resources available to tackling it, but also because of the sensitivity of public support for tackling climate change to the costs of doing so.”

Responding to the Greener Cheaper report, Barry Johnston MD of Solar Twin Ltd, who install both PV (electric) and thermal (hot water) solar technologies said today:

“Just as earlier this year the UK’s solar thermal capital grants ran out ahead of time, there are growing fears that the days may be numbered for the Feed in Tariff which currently subsidises users of PV solar power over 25 years.

“The current scope, shape and size and timing of the FIT may shrink, with reduced subsidy, shorter timescale, geographic targeting or means testing – who knows?. If this report is implemented, the Feed in Tariff, which today offers around 5-8% return on investment, may be abolished altogether.”

“Fortunately once people get signed up and on board for their PV feed in Tariff without delay,   they are still secure to be funded for 25 years of subsidy. But if people don’t get on board right now they may miss the boat, for at least for today’s very generous 41p/kWh rate for 25 years.”

The Treasury spending review (ie the list of government cuts) will be published on 20 October.

In summary, the Greener Cheaper report’s controversial recommendations include:

Abolishing the feed-in tariffs scheme for microgeneration.

It says of the FIT: “£8 billion cost cannot be justified by comparison with other options for tackling the problem of climate change. It largely subsidises well-off households, to achieve massively costly carbon reductions. Any alternative public support for microgeneration should be narrowly focused on those technologies likely to be a significant part of the solution to global carbon reduction, and should not be about supporting mass deployment. There are areas where targeted support for microgeneration makes sense – in particular in isolated rural communities or even as part of international development – but not at the scale envisaged under the current scheme.”
Scaling back the aim of the proposed Renewable Heat Incentive from 12% renewable heat by 2020 to 8.5%.

It says of the RHI: “The £7-14 billion net cost of the additional 3.5% of renewable heat cannot be justified by comparison with other measures to tackle the problem of climate change.”

It also calls for other policy measures to be changed, saying that:

The Carbon Reduction Commitment should be simplified, “by cancelling the permitting and cap and trade parts of the CRC scheme. The CRC has the potential to be an effective policy. But the burdens from the permitting and cap-and-trade elements of the scheme are unnecessary and burdensome. They are unlikely to be effective where energy is a minor cost to businesses, on top of the reporting and league table requirements which already appear to be having successful in driving management focus and action on energy efficiency.”

The Renewables Obligation and EU renewable energy target should be reviewed. “The RO and RHI are tremendously expensive schemes, both as innovation and carbon reduction policies. They are driven by the Government’s commitments under the EU Renewable Energy Directive. Government has a role in supporting research, development, demonstration and early stage deployment of low carbon technology. But subsidising mass roll-out of known technologies is inevitably a very expensive way to reduce emissions. A review should identify the full costs to the UK of meeting the 2020 EU renewable target and identify approaches to reducing those costs. Policy Exchange will explore these issues in more detail in future work.”

At a minimum, the Climate Change Levy should reformed so that it taxes carbon. “The preference for coal built into the CCL when founded is illogical, while the effects of the policy have long since dissipated.The CCAs have been ineffective and, along with a wider reform of the CCL, should be abolished.”

This report also recommends the creation of a “true carbon tax” saying:

“1. Introduce an upstream fuel tax as an approximation to a carbon consumption tax, placed upon the main fuels according to their carbon content. This would ideally be net of the EUETS, not additional to it. This would act as a floor price for the EUETS (within the UK) as well as taxing carbon more consistently across the whole economy.


“2. The carbon tax should start at a low level and rise over time. This would maximise substitution of high-carbon for low carbon in the future without damaging the economy.


“3. The tax must be credible over the long term. The report suggests three options for ensuring this: first, rely on the institutional inertia of the Treasury; second, rely on a cross-party agreement over at least 20 years not to abolish or lower the tax; and third, and most radical, task the Climate Change Committee with setting the rate.


“4. A border adjustment to the tax could be used to prevent ‘carbon leakage’ in vulnerable industries. Such a tax would obviously raise many questions. However, assuming this can be designed to be both simple and acceptable under WTO rules, it could approximately level the carbon price paid by all producers, effectively imposing the same carbon price on imported products as domestic production. It should be considered further.”

Responding further to the Greener Cheaper report, Barry Johnston, Managing Director of Solartwin also said:

“This report poses valid but sometimes unwelcome structural challenges to UK’s energy market ambitions. Ideally I would like to see progressively rising taxation of polluting fuels, both carbon and nuclear. This would be by far the simplest and most stable way of supporting microgeneration.

“UK’s current approach to carbon saving is bonkers. The populist approach of giving tax breaks (ie 5% VAT) for domestic fossil fuel is totally unsustainable. In the context of this reduced VAT on domestic fuel, it is even more environmentally counterproductive to impose a whopping 17.5% VAT (due to rise further   to 20% in 2011) on DIY home insulation and DIY solar. Taxation on renewables should be less, not more than for fossils. The polluter should pay according to how much they pollute, and not be subsidised any longer by this dangerous 12.5% VAT reduction.

“We urgently need VAT on nuclear and carbon intensive energy to be increased to the full rate of 17.5% – while also ring fencing much of the extra revenue for a generous mix of measures aimed at alleviating fuel poverty, energy efficiency, renewables and nuclear cleanup. Here is a suggested Parliamentary Question: If VAT on domestic fossil fuel supplies was ever to be increased to 17.5%, how much extra revenue would be gained? What percentage of this sum would have to be redistributed in additional social benefits to reduce fuel poverty to 2% below today’s levels?

Right now the government’s supposed “support” for energy efficiency and microgeneration is contradictory and piecemeal jumble of inherited kick-knacks. Years of perverse stop-start subsidies for micrigeneration have damaged confidence in the renewables industry, as has the tactic of picking different winners from one year to the next! UK’s carbonheads and nuclearheads must be laughing their socks off. Todays environmental imperative means that Government now needs to focus fast on delivering cost-effective carbon savings, not random, sometimes sexy, electoral green subsidy stunts.”


The full “Greener Cheaper” report is here.


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