Thursday, 31 October 2013

When is a subsidy not a subsidy?

I don’t know whether the strike price which the UK government has agreed for the electricity to be produced by Hinkley C is too high or not.  But then, neither does the government know; it’s a long-term commitment and only time will tell.  I’m not alone, though, in suspecting that the real beneficiaries will be the French and Chinese governments, which effectively own and control the companies involved.

The UK government has said all along that new nuclear power stations would not receive any subsidies from the UK government.  In a sense they’ve stuck to that commitment; they’ve merely intervened in the market to fix the price for the next half-century or so.  But the difference between paying a direct subsidy out of tax revenues and compelling consumers to pay an inflated price for their electricity bills is a fine one.  Cutting out the middleman (i.e. the government) doesn’t really make it any less of a subsidy.  It does though alter the nature of the “tax”.  An inflated price collected through electricity bills taxes people based on their consumption rather than on their ability to pay - it’s a more regressive tax when implemented in this fashion.
I’m not sure that it’s the whole story on the question of subsidy either.  What I’ve not seen much coverage of is the arrangements for eventual decommissioning.  In theory, the energy prices are set at a high enough level which allows companies to set aside a sum of money during the operational phase to pay for the work at the end.  But there are two problems with that approach.
The first is the (comparatively!) minor little issue that nobody knows what the cost of decommissioning will be 50 years hence.  And therefore nobody knows how large a fund is needed to pay for it.  All we can say with any degree of certainty is that all those involved have a clear incentive to underestimate rather than overestimate that cost.
The second is a rather more important one – this is simply not the way the capitalism operates, even when the “capitalists” are the French and Chinese governments.  Capitalism makes its profits and then walks away.  I have zero confidence that any arrangements put in place can guarantee that these costs will not fall back on the taxpayer when the plant eventually closes.  And I have a fairly high degree of confidence that all, or at the very least a significant proportion, of those costs will fall back on the taxpayer.
In making the agreement announced last week, the government is not only committing all of us to a hugely increased price for energy and putting a significant and important part of energy generation in the hands of foreign governments; it’s also leaving a big clear-up bill to our children and grandchildren.

1 comment:

MH said...

I should have said this before, but it will have to be now. I agree with pretty much everything you've written.

Your point about paying subsidies through bills rather than general taxation being regressive is particularly pertinent at a time when there is so much focus on the increasing cost of bills and fuel poverty.