Bill Payer, Tax Payer and Tax Break subsidised energy

Energy Minister Michael Fallon says that if the Conservatives win the next generation they will no longer subsidise new onshore wind-farms, saying “… we now have enough bill payer-funded onshore wind in the pipeline to meet our renewable energy commitments and there’s no requirement for any more.”

But what is tax payer funded energy? Or put another way, what subsidies apply to the energy sector in the UK, and how do they compare?

I have been part of a team researching an evidence base for skills in the Low Carbon Environmental Goods and Services sector in Cornwall (other people call it green business or Cleantech). As part of the brief the client (Cornwall Development Company) wanted to understand how viable the industry was without public subsidy. The agreed strike prices in the new Contracts for Difference (CfD) up to 2018/19 make the situation for renewable energy very transparent. The current price of wholesale electricity is about £50MWh, so that is the current benchmark and everything paid above this under CfD is “bill payer funded” to use Mr Fallon’s expression. So in 2015 when the Conservatives hope to win the next general election, the cheapest renewable energy from the bill payers perspective is landfill gas at £55MWh, followed by onshore wind at £95MWh. Offshore wind is £155MWh and the most expensive technology is wave power at £305MWh, being 6 times the current price of wholesale electricity. For comparison the strike price agreed by HMG and EDF Energy for the new Hinckley C nuclear reactor is £92.50 MWh. If you think of the strike price as a consensus agreement between HMG and the industry as to price at which each technology becomes viable without subsidy, then the answer to my client was clear – no subsidy equals no industry, be that renewable or nuclear energy.

Strictly speaking, all the above are levies that ends up on our fuel bills, and Michael Fallon seems to think that it is in the bill payer’s interest to pay £105MWh over the current wholesale price for offshore renewable energy rather than £45MWh for onshore. In the strange world of public finance, as long as the total cap contained in the Levy Control Framework is adhered to I guess he is happy?

Back to our research. For the sake of balance I thought I would try to discover what if any subsidies apply to fossil fuels. But whereas the situation for renewable energy is transparent, for fossil fuels it is as clear as heavy crude oil.

In their report Time to Change the Game, Fossil Fuel Subsidies and Climate, The Overseas Development Institute (ODI) does a good job in bringing the research of different agencies together in one document. According to the ODI;  The UK government reports to the G20 that it provides no subsidies for fossil fuels. The International Monetary Fund (IMF) agrees that pre-tax, the UK does not subsidise fossil fuels but calculates that post-tax subsidies amount to £6.5billion per year (2011). The Organisation for Economic Cooperation and Development (OECD) calculates the subsidies in the UK are £4.3b per year.

You can choose to use whatever figure suits your purpose, depending on how you define what a subsidy is. It would seem that the UK government does provide tax breaks for oil and gas exploration, and plans to extend this to onshore shale gas (fracking). The UK Government is also proposing capacity payments to subsidise the building of new gas fired power stations to keep on standby for times of peak demand. The IMF and the OECD include these types of tax breaks in their calculations, but about 90% of the OECD figure comes from the 5% VAT rate for domestic and small business users. The IMF figure also includes “externalities” such as the damage caused by climate change (at $25 per tonne), local pollution, traffic congestion, road accidents and road damage.

Speaking as a middle income UK tax payer and UK gas and electricity bill payer, whether it’s called a subsidy, a levy or a tax break it’s all the same to me. I don’t mind money coming out of my pocket and going into somebody else’s provided it supports a cause I believe in. But having said that with my concern for fuel poverty I prefer to pay via general taxation which is progressive as opposed to paying via fuel bills which hits the poorest hardest. It is my concern with fuel poverty that leads me to suggest that unlike the ODI, and OECD, I don’t think the reduced rate on VAT should be classed as a fossil fuel subsidy and therefore one that should be removed. Partly this is because it benefits renewable energy as well, but mostly because millions of people in the UK are already struggling to pay their fuel bills.

If the rest of the OECD calculation is valid however then that still leaves £430m (i.e. 10% of £4.3b from the difference between VAT rates) of fossil fuel subsidy, compared to a total subsidy to the renewable energy industry, which the ODI report says is about £500m per year. There is a clear logic in supporting what is still a young renewable energy industry, but personally I can see no justification in reducing tax revenues to support the extraction and burning of fossil fuels.

Ian Smith is an EPG Associate with a long track record in the private, public and voluntary sector. He currently runs the is Consultancy.   

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