In the world of energy, subsidies are a hot topic, and we at Good Energy get lots of questions about them. So I thought it was high time we had a go at separating out a bit of subsidy fact from subsidy fiction.
What is a subsidy?
Put simply, a subsidy is an extra payment on top of the normal amount of money you get for producing or selling something. So if the government wanted lots of carrots for some reason, they might offer farmers an extra payment per kilogram of carrots they grow, on top of the normal price that they get in the market.
Why do we have subsidies?
Governments use subsidies to encourage someone to produce something that is good for society, but where there’s not enough money in for them to do it on their own. In the energy industry there are essentially two types of subsidy: one that is paid to electricity generators who produce clean green electricity, that reduces greenhouse gas emissions and helps avoid dangerous climate change; and one that's paid to generators to make sure there are enough power stations around to keep the lights on (these get paid even if the power stations aren’t actually running).
Which kinds of energy receive a subsidy?
The short answer is pretty much all of them – from wind turbines and solar panels to gas generators and nuclear power stations. There’s often a lot of talk in the media about subsidies paid to renewables, but less focus on subsidies for other types of generators. This coming winter, payments will go to almost all existing power stations on the UK electricity system – whether they are coal, gas, diesel or old nuclear power. Any new fossil fuel plant built will also get a subsidy, as will the new nuclear power station at Hinkley Point in Somerset when it’s completed – click here to read why Hinkley C is a bad deal.
What do subsidies do to energy bills?
This is a really tricky one. In a simple sense, because subsidies on energy are paid for through energy bills, they put bills up. But, investing in renewable energy generation is getting cheaper all the time, and having more renewables on the system actually helps to bring the cost of energy down in the long run.
The total impact on bills of payments to existing coal, gas, diesel, and nuclear power plants is even less clear, but we think that bill-payers’ money would be far better spent on building the sorts of power stations we need for the future, rather than paying money to old-fashioned power stations that will have no place in the intelligent energy system of the future.
This isn’t just an issue in the UK – a recent report shows that G20 countries spend nearly four times more supporting fossil fuels than supporting clean energy sources.
So are subsidies a good or a bad thing?
Well, it depends on what they’re paying for. We think that subsidies to support the development of renewables, which are a fundamental part of the action on climate change, are a good thing. However, when it comes to paying old, often polluting power stations that in many cases would be online anyway, we’re doubtful this makes any sense. We should be putting our money into supporting the shift to a sustainable, flexible, modern, energy system, rather than using it to reinforce the status quo.
So what does the future hold for subsidies?
It looks like subsidies for energy are here to stay, but the type of energy they are subsidising is likely to change. Subsidies have helped to deliver the incredible increase in renewable energy generation in the UK - in 2015, 24% of electricity was generated by renewables. All this development has helped to bring costs down, for example, the cost of solar power has more than halved in just five years between 2010 to 2015. Focus is now moving to newer renewable technologies, such as off-shore wind, and tidal lagoons.
As for the payments to old polluting plant, it looks like they may be here to stay too – we’re now in a world where no new electricity generators are being built without subsidies of some sort. But it won’t be long until the exception to this will be cheap renewables – as prices continue to fall, subsidy-free renewable generation such as solar and on-shore wind is just around the corner. Join Good Energy today to help make the transition to a cleaner, greener, fairer future a reality.