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Energy is a worthy target for state funding

How far should the state subsidise the energy sector? It’s an increasingly vexed question, bringing in as it does matters of fiscal, environmental, business and social policy — subsidy directly affects the amount that we all pay for electricity and gas.

It’s a highly relevant argument as well. Just this week Centrica, the owner of British Gas, threatened to pull out of a £2bn project to build a 580MW wind farm 16 miles off the Norfolk coast unless the government guaranteed that it would receive a power price reportedly three times higher than the current market value. Similarly, EdF is haggling over the guaranteed price it will receive for electricity from its planned new nuclear power stations at Hinkley Point and Sizewell, and Horizon Nuclear Energy, owned by Hitachi, will doubtless also be coming to the negotiating table with similar demands to guarantee a return on its planned investment in reactors at Wylfa and Oldbury. A recent survey, as we reported, suggests that subsidy for nuclear is not something which overly concerns the public.

Meanwhile, other energy sectors are also looking for public money: the marine sector, to fund development of wave and tidal technologies and to take forward proposed schemes for tidal barrages in Wales; solar, hoping for support for companies and homes to install photovoltaic and water-heating panels. We’re told we live in a free market economy — what are all these commercial interests doing with their hands out?

Well, what they’re doing is what they’ve always done. Even the most cursory look at the history of the energy industry shows that it’s never operated as anything like a free market: it’s always been propped up by a complex web of incentives, tax breaks, and out-and-out handouts from the government, for a variety of reasons including the setting-up of infrastructure, maintenance of competitive edge and keeping down the cost to consumers.

The last of these is the main mechanism for the still-existing subsidy to the oil and gas sector: reduced rates of VAT on gas bills, which is intended to help the vulnerable keep their household costs in check, but which benefits people at all income levels. And it also directly benefits the hydrocarbons industry, to an extent which shouldn’t be underestimated: according to OECD figures, gas benefitted from tax breaks worth £3bn in 2010, dwarfing any subsidies for wind, solar and marine power. Corporation tax advantages, subsidy for oil facility decommissioning and proposed shale gas exploration tax breaks also play their part.

Moreover, the North Sea oil and gas industries were established with the help of subsidy and legislation: the UK’s leading position in offshore technologies, which the renewables sector hopes to utilise in establishing offshore wind and marine energy farms, depended hugely on public money. Any argument that renewables are receiving overly-generous payouts is ignoring this history, not to mention the current situation.

The one area where government money perhaps hasn’t been utilised well by the energy sector is technology development. Most energy companies scaled back R&D dramatically in the 1980s, which has been blamed for the shrinking of the UK skills base, particularly in nuclear. In writing about new nuclear technologies recently, it’s striking how many people have talked about the importance of rebuilding capability in this area; meanwhile, the renewables sector talks about using expertise from aerospace and materials science to establish its own skills base.

When it comes to developing new technologies, the argument always springs up that if you’re spending on one thing, you’re taking money away from something else. Why develop nuclear, when you could be developing renewables? Why spend on speculative fusion projects, when there’s shale gas in the ground? But surely these arguments are bogus. Why should we not be investing in all of them? Why should we not be taking energy research as seriously as we take defence, for example? Maybe it’s time to stop pretending that energy is solely a matter for business and accept that, as it always has been, it’s something that concerns the whole of society - and that includes a claim on public money.

Readers' comments (10)

  • So what we are really subsidising is the dividend paid to shareholders

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  • If we were to treat energy in the same manner as being at War, the state would have to invest in both R&D and subsidy. Energy is in effect a war whereby to sustain comfort for millions of people will soon be so costly as to require such measures

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  • No other issue is more important than our energy security and yet it is being treated with abject flippancy by Tim Yeo and his ECC Committee. They say about the performance of the DECC - "...Crossing one's fingers is not an adequate or responsible approach when the UK's legally binding climate change commotments and energy security are at stake..."

    We depend upon and pay these clowns to guarantee our standard of living and to steer us clear of the life threatening dangers of brown-outs and blackouts.

    We all ought to be contacting our MPs to prevent this tragicomedy playing out.

    Search for - parliamentarian + buffoon

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  • State funding is the death of endevour. The State has failed in all its other attempts to improve matters, why should this be any different? It only costs the consumer more in the end.

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  • Not state funding, we need state control.
    Why should Tax payers fund mostly non-
    British cos.

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  • If taxpayers support pre-competitive research, it can result in establishment of British companies.

  • I contend that not raising taxes on some aspect of an enterprise is not the same as giving it money to do something else.

    The abstention from levy leaves the enterprise in charge of its decisions, whereas the active giving of funds brings in monitoring, verification, disagreement and contention, all of which dilute the value and ential more cost to no benefit.

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  • We do need state control over something as vital a energy policy.

    The current path we are walking is akin the much maligned PFI schemes of old. We are encouraging private investment in electricity generation, and thus avoiding the huge upfront investment, by committing to large generation tariffs and subsidies over many, many years. This is not exactly going to drive the expected efficiencies when we (the taxpayer) are ultimately footing the bill.

    Maybe we should just bite the bullet and once again go down the nationalised route. We might as well take full ownership of the commercial risks which we own in any case.

    Also if you look to the US there are numerous examples of moderately old, privately owned power plants shutting due to commercial pressures with the resulting hikes in energy prices. This could well be us in 25 or 30 years time.

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  • I'd say energy efficiency/conservation is a worthy target for subsidy.

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  • Stuart, with respect, The comment that gas ‘benefited from’ tax breaks worth £3bn in 2010, ‘dwarfing’ (sic) any subsidies for wind, solar and marine power is disingenuous and playing into the hands of (or ‘parroting’?) the warped propaganda of the pro-RE eNGO campaigners and OEM's trade bodies. The total subsidy for UK wind is rocketing up and will soon equal, then surpass, that figure (it is already many £B’s /year in both Germany, Spain and Denmark) , but in any case, the correct comparator is £ per MWh energy delivered, on which basis gas will be found tiny compared with wind or even more, solar FITs. The total per year for non-large hydro RE is small because it still contributes very little in the UK ! Furthermore, the VAT break on gas goes to the end consumer, for social reasons (as mentioned!) ,NOT direct to the gas co’s, so wrong ‘over-simplistic’ inference again.
    - Chris Hodrien, Solihull, Technical Consultant, Timmins CCS Ltd + Expansion Energy Ltd

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  • "help the vulnerable keep their household costs in check, but which benefits people at all income levels"

    The above quotation from the article is assumed to mean the cost of heating. Its all very well subsidising the production of energy, but perhaps there has to be a more consideration given to subsidising the reduction in requirement for energy.

    In terms of reducing household energy bills most experts agree that insulation is the key element. The retail cost of after market insulation bears little relation to the manufacturing cost. There is an argument for subsidy of insulation costs across the board, but cost effective supply direct from manufacturers possibly through government approved suppliers would go a long way to addressing the energy requirements of households.

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