Page 2007 - Week 06 - Wednesday, 25 June 2008
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is the best on the eastern seaboard and that the gross formula rather than net is the way to go, and he cited examples in Europe. But he has clients and I have a broader constituency. My broader constituency is the one I am concerned about in relation to this matter.
Clearly, this mechanism is intended to create an incentive for investment in renewable energy. It is a mechanism that makes what would otherwise be imprudent investments suddenly quite lucrative and thereby induces investment in these technologies far beyond what could be sustained by the actual value of the electricity that they produce.
Instead of being determined by its actual value in satisfying the wants of consumers, the value of this investment is determined by the effects of arbitrary legislation and unbridled ministerial discretion. By altering the rate of return on energy supplied under the feed-in scheme, the minister can create a massive revenue windfall for renewable energy investors, or, in effect, bankrupt their investment at the stroke of a pen. Such is the nature of such government-backed subsidy schemes.
Forced sales are rather an odd economic mechanism and are rarely used as incentives in government policy. There is quite good reason for this, as they are a measure which creates a great deal of distortion to the market process and leads to a great deal of inefficiency. I suspect that the Chief Minister’s earlier days of reservation about this whole thing is not in any small part due to the very point I am making.
In this case, not only will electricity distributors be required to accept a forced sale, but they will do so on terms that are potentially ruinous to the bottom line. They will be forced to pay almost four times the transition franchise tariff retail price of the electricity supplied to them, meaning that they are certain to suffer significant losses from such a transaction.
The forced sale provisions in this bill create a great deal of inefficiency and moral hazard on both sides of the transaction. On the side of the electricity distributors, there is every incentive to try to prevent the forced sale. This means that any discretion over the acceptance of renewable energy under the scheme will naturally be exercised so as to impose artificially high standards on the energy provider.
I notice that the bill has been amended by Mr Gentleman to remove the former clause 8, which allowed the distributor to impose standards that apply in relation to renewable energy generators that may be connected to their network. This amendment, in itself, is an admission of the serious moral hazard that exists under the scheme.
Similarly, on the side of the electricity provider, there is every incentive to meet the bare minimum standards under the bill and then to make a killing on the forced mark-up imposed by the government. This creates a serious moral hazard problem in which energy sources are chosen for their compliance with artificial subsidy rules rather than their efficiency or environmental qualities.
The irony is that, with such large profit margins, basic environmental and efficiency considerations become less and less important. This system creates a clearly antagonistic situation, made worse by the fact that the profitability of the system rests on the stroke of a ministerial pen. If there was ever a recipe for political lobbying and
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