Feed-in frenzy: How a wind farm subsidy loophole is short-changing billpayers and damaging Britain's clean energy market

The role of onshore wind energy in meeting Britain's future energy needs is deeply contentious, with both the Conservative party and Ukip promising to curtail or scrap subsidy schemes designed to support the UK's burgeoning low-carbon energy system. In this environment, it is particularly important that such subsidy schemes are cost-effective. However, a loophole in the feed-in tariff (or FiT) for onshore wind energy threatens to cost the taxpayer more than £400 million over the scheme's lifetime, and to erode both public confidence in onshore wind and the competitiveness of the wind power market in the process.

The loophole sees developers installing 'derated' turbines – that is, turbines which are 'capped' so that they generate less energy. Turbines are derated in this way so that developers and investors are able to qualify for the more generous subsidy offered to lower-capacity turbines, generating 100–500kW. By installing derated turbines, developers are making larger profits off a feature of the scheme that was designed to support small-scale projects. Currently, the rating of a turbine is declared by the manufacturer and installer, resulting in a lack of external scrutiny of the system.

As well as exploiting a public subsidy, this practice severely distorts the low-carbon energy market, and as a result puts at risk the jobs and supply chain provided by small developers who play by the rules. The derated turbines are also physically larger than correctly rated turbines of the same capacity, and thus threaten to exacerbate public concerns about the visual impact of onshore wind without providing any pay-off in terms of increased electricity generation.

By comparing information on the make and model of installed turbines (received from DECC following a Freedom of Information request) with Ofgem data on recorded onshore wind projects, we believe that, at September 2014, almost half of installed turbines qualifying in the higher-subsidy 100–500kW band were derated. Even allowing for future reductions in the amount of this subsidy, we have calculated that each derated turbine will earn £100,000 in 'excess subsidy' each year, or £2 million over its 20-year lifespan. This means that, by September 2014, the British billpayer was already committed to £175 million in excess subsidy payments on derated turbines.

Assuming the number of onshore wind turbines continues to grow at its historical rate, this total liability will swell to more than £400 million by the end of 2015, if this loophole is not closed.

In order to close the loophole, we make three suggestions for change:

• a change in standards so that a turbine's subsidy band is determined on the basis of rotor size rather than capacity
• an overall cap on how much a project can receive in subsidies, with incentives to ensure the 'best fit' turbine for each site
• a new subsidy band, to help to smooth out the cliff-edge between the higher-paying, lower-capacity band and the lower-paying, higher-capacity band, which currently incentivises developers to exploit the loophole we've identified.