Renewables subsidies – Benefit or burden?

Group chief executive of Bio Group STEVE SHARRATT takes a critical look at the UK’s subsidy regime for renewables

ARE the subsidies worth it? I could respond “Yes” and leave it at that.

But whilst I might get congratulated by some for brevity, I would be castigated elsewhere for somewhat ducking the issues.

I believe that government’s role is to step back and provide a facilitative framework for business to flourish – it doesn’t understand business (although it should) so it mustn’t get in the way. Regulation needs to be there – but it must be targeted and focused and enforced, to avoid for example, the scandals in banking we are now witnessing. Businesses who comply with regulations, must not be undermined by those who cut corners, break the rules and often seem to get away with it. Regulation can and should provide a level playing field.

So, it might appear that I view renewables subsidies as unnecessary state interference - let’s save the money I hear people cry! As ever, it’s not quite that simple. And here, I must declare a vested (but not conflicted) interest. My business, Bio Group, is a beneficiary of renewables incentives in the form of RHI. So whilst that makes me ‘vested’ it also makes me experienced!

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But government has another key role, in addition to that of facilitator. It is there to address market failure. What do I mean by that? Well in most areas of consumer business, we have experienced low carbon market failure. If I sell round widgets, I cannot force my customers to buy square ones. I can however, agree with my competitors that we will only sell square ones (as the supermarkets did with high energy light bulbs) or I can lobby government to ban the use of energy inefficient square widgets, forcing the consumer to buy the round ones because they have no choice.

The forced reduction of emissions in cars has been one of the major success stories, both in terms of changing consumer behaviour – but also in terms of the ability of business to respond and innovate, to meet consumer and legislative demand. We are seeing a range of cars able to do close to 100mpg with emissions lower than 99g/km. An amazing application of engineering and technology.

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There is however, an intermediate step. If I don’t want to ban square widgets but to encourage manufacturers to make round ones – and consumers to buy them, I can incentivise makers of round widgets to invest in production and marketing and stimulate consumer demand. I see renewables incentives as fitting much more into this category. The typical scale of renewable technologies is small to micro – ignoring off shore wind farms (there is always an exception!). If true market cost and return is brought into account on say a household wind turbine, the payback period is such that virtually no one would make them, as no one would buy them. Think back 10 years ago and how many small scale wind turbines did we see? Come back to now and with the benefit of subsidies, they are a common feature in rural communities.

It goes further, in that without encouragement, we get no economies of scale in manufacturing technologies such as turbines. So the costs don’t come down so the market fails. Go up the scale to renewable energy plants like ours at Bio Group, where the capital investment runs into millions. For capital intensive businesses like ours, we have to generate an attractive rate of return over a sensible period of time in order to secure investors in order to build the facilities. . It simply isn’t possible for us to compete with established fossil fuel energy providers on a like for like basis. For us, without RHI, the returns would be smaller, over 20-30 years and as a consequence, we wouldn’t get funders on board.

But put in place a scaled, costed, time capped scheme to create an industry from nothing and you have a different picture. Businesses can attract investment. They can grow and gain greater economies of scale. As growth continues, demand increases for a competitively priced product that has environmental benefit over fossil fuel alternatives. And within 20 years you have then created an industry that can stand on its own feet, and compete with fossil fuel energy sources and the subsidies fall away.

So what are the pitfalls? Well the government mustn’t use subsidies to pick winners. Successive governments have an appalling track record of picking winners - they shouldn’t try. Subsidies must enable and be designed to meet the policy objective for which they are set. For example, to generate renewable energy, not to create wind farms.

Businesses and investors need certainty. The last two years of subsidy reversals have done nothing but create lack of confidence in business and investors. Deals and projects are simply not happening because of this. Financiers are looking at very viable, subsidised sectors and for example holding back on offshore investment because of the current unfavourable comments from certain parts of government around onshore wind.

It is true to say that investment funds are sitting and waiting because the perceived risk of waiting and doing nothing is less than the perceived risk of investing and government moving the goalposts. Government has to take this lack of confidence seriously and work hard to fight it and restore credibility back. It’s too damaging not to. Arguably most important of all, the creation of a low carbon sector has massive upside for the British economy. Business invests on the basis of a future return and in many ways, renewables subsidies must be looked upon in the same way. In the latest CBI report on green business growth, green business as whole accounts for a �5bn trade surplus – most of it with China as well as a third of economic growth.

Looking forward, compared to the slowdown which the CBI fears could result from the current approach, a green business boost could increase the UK’s growth rate by half a percentage point by the end of this Parliament, a gain of nearly �20bn in GDP. It could add �800m to net exports. That’s a big prize. A massive result! I think renewables subsidies work (when they are left in place) and are a key part of our moving towards a low carbon economy. They are an essential tool in creating an industry from nothing and allowing that industry to develop a competitive, attractive product for the consumer. And perhaps most importantly of all, they can play a major role – along with a growing low carbon sector, in restoring Britain’s economy.

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