THE BLOG

Government Awards £1.7billion Handout to Energy Companies

07/01/2015 09:53 GMT | Updated 09/03/2015 09:59 GMT

At the end of last week the government officially announced the results of its first 'capacity market' auction which is a policy intended to keep the lights on. But far from paying for innovative new technologies to reduce energy usage or much needed new infrastructure, it was confirmed that £1.7 billion of new subsidies would overwhelmingly go to power stations that already exist

The subsidies will add an additional £11 to household energy bills in 2018. This comes on top of a 75% increase in people's bills since 2004 - general price inflation was just 23% over the same period.

Any increase in the cost of living should be scrutinised and the government's capacity market is no exception. We need to ask if this money has been spent as best as it could.

Unfortunately it has not and the reason is two fold. Firstly it doesn't meet its own objective of bringing forward substantial new investment in the power sector. Secondly this subsidy package seems to contradict other energy policies, which also come at a cost to the customer.

The subsidies are given to energy companies to ensure that there are enough power stations online in the future. It was originally conceived as a way of encouraging new gas-fired power stations - the government's gas strategy suggests we need 9GW of new gas before 2020. It was also an opportunity to encourage 'demand-side' technologies that reduce energy usage and save consumer cash. Together these would have replaced old polluting coal stations that need to close and could have worked compatibly with the increasing amount of renewable energy on the system.

But only 5% of the total pot was awarded for new power stations and just one new gas plant (1.6GW) got the cash. A pitiful 0.5% went to demand side technologies. 95% went to keep open old stations which has crowded out investment in new capacity.

Many of the old stations receiving this new subsidy are quite rightly being penalised by other policies that are designed to reduce carbon pollution and meet our climate targets in the most cost-effective way.

This includes a carbon price that is designed to encourage a switch towards the cleanest forms of power generation.

But the recent capacity market handed out £293 million to coal generators with the explicit intention of keeping them online. This is clearly at odds with policies such as the carbon price that attempt to decarbonise power generation.

In essence this means that the government is taking away from polluting energy companies with one hand (carbon price) and giving back with the other (through the capacity market). Sam Laidlaw, CEO of Centrica, has pointed out the 'inherent paradox' here. There must be a more efficient way of cleaning our energy system that provides genuine certainty to industry and employees, and comes at less cost to the consumer. Forthcoming IPPR research will set out different options for doing this.

With budgets so tight we need to be very selective about how money is spent. Policies that contradict each other and fail to deliver genuine solutions come at a cost. Rather than handing out subsidies to polluting power stations we should be creating investment and job opportunities in the technologies of the future.