Imagine an A-level economics question: “What the UK is doing is the most expensive way of making emissions reductions”. Discuss. So let’s discuss it.
More than ten years ago, I got a quote on a solar powered photovoltaic (PV) installation for some outbuildings with a south-facing roof. At the time there was a generous government grant of (as I recall) about 30% of the capital cost. But we looked at the quote, and found that even after the grant, the value of the electricity we’d get would show only a 1% return on capital. At the time I could have got 4% in a Building Society – and with a Building Society, you can get the money out again! So we didn’t do it.
A couple of weeks back, I received a mailing for PV installations, with details of the current “Feed-In Tariff” for the electricity generated. And on the kind of typical domestic installation that we might look at, the tariff is 41.3p a unit. Bear in mind that the typical cost of a unit of domestic electricity is around 10p (depending on a variety of factors). So they’re offering to pay four times over the odds for the electricity you generate – despite the fact that it comes in penny packages for limited periods, and depends partly on the weather.
How do they do it? Does the government pay the subsidy? No. The electricity company has a legal obligation to buy this extraordinarily expensive electricity. And what do they do? They pass the cost on to all their customers, of course. So while it isn’t paid by the government or the tax-payer directly, it is in effect paid by all of us, because we all use electricity. The inflated price of one man’s PV unit is paid by his neighbours (and by industry) in their electricity bills.
It gets worse (or better, depending on how you look at it). This extraordinarily inflated tariff is guaranteed for 25 years. It’s inflation-protected. And it’s tax free.
I’ve seen estimates from several suppliers indicating a return on capital employed of between 8 and 10%. Tax free. Consider that today there is simply no deposit account available that so much as covers inflation, after tax. You’d be lucky to get 3%, and most deposit accounts offer much less. Yet here is the government offering us up to 10% tax free on our investment. Is that profligate, or what? For an older person facing retirement, you can get an annuity rate of around 5% (if you’re lucky). And you pay tax on the income. But you can invest the same money in PV, and get 10% tax-free!
The government (and the scheme was put in place under the previous Labour administration) seems to recognise that this can’t go on, because it’s a starter offer that will cease to be available in March 2012, when the Feed-In Tariff will go down to 37.8p (I have the OfGem leaflet in front of me) – though the tariff remains for the full 25 years for those who buy-in before the deadline.
This poses a moral dilemma. Do we take the outrageous Tariff that the government is offering? Or do we seek to protect our neighbours and the common weal by refusing it? I suspect we fall back on the arms dealer’s defence: “If I don’t do it, someone else will”.
As public policy, it is sheer lunacy, and demonstrates the proposition with which we started out. But as an economic proposition to the householder, it is close to irresistible.