As the energy crisis continues there are regular calls to scrap the green levies, as if there is some magic wand that can be used by Government to simply decide not to have them to reduce costs. Maybe the rule of law isn’t a thing anymore, but assuming it is, below is a simple guide to the size of the costs that need to be recovered through some other route.

Whilst cancellation may be popular in some quarters, doing it would be complex, given that generators have watertight contacts that entitle them to payment- the only way investment could be encouraged in the past. Cancelling the contracts would almost certainly leave the government in court, and whilst changing who pays from suppliers to the treasury is potentially doable, the costs will remain to be paid by taxpayers in some form or other. Maybe it would be less regressive if paid by treasury, but payment would still be required to generators.

For the future, government should also look at the market risk investors hold, as if there is potential to change the rules on a whim, either investment won’t come or return expectations will likely increase to cover the perceived risks. This is true of all areas of the energy market from supply through generation and everything in between.

Whilst my personal view is they the risk/reward profile in existing subsidy contracts is heavily weighted towards the generator, tearing up contracts just because you changed your mind is not really a credible approach; more important is to be clear up front on the potential long-term exposures and manage them in the agreements.

There are 3 broad schemes covering green subsidies for electricity generators. They operate in different ways, although broadly all place cost obligations on licensed electricity suppliers to pay based on the volume of electricity they supply in a particular defined period.

The size of the schemes is also noted – date taken from the relevant 2020/2021 report published by the scheme administrator.

𝐑𝐞𝐧𝐞𝐰𝐚𝐛𝐥𝐞 𝐎𝐛𝐥𝐢𝐠𝐚𝐭𝐢𝐨𝐧

Governed by the Renewable Obligation Order

Levied on licensed suppliers by Ofgem.

Paid to accredited generators – 26599 sites with 35.4 GW of capacity

Cost £5.7 Billion/year

𝐅𝐞𝐞𝐝 𝐢𝐧 𝐓𝐚𝐫𝐢𝐟𝐟

Governed by Feed in Tariffs Order

Levied on licensed supplier by Ofgem

Paid to accredited generators – 869976 sites with 6.43 GW of capacity

Cost £1.76 Billion/year

𝐂𝐨𝐧𝐭𝐫𝐚𝐜𝐭 𝐟𝐨𝐫 𝐃𝐢𝐟𝐟𝐞𝐫𝐞𝐧𝐜𝐞

Governed by Contract for Difference Regulations

Levied on licensed supplier by Low Carbon Contracts Company

Paid to accredited generators – 72 sites with 18.8GW of capacity

Cost £2.29 Billion/year