Select Committee on Environmental Audit Memoranda


Memorandum from the Electricity Association

  1.  The Electricity Association is the trade association representing the major electricity supply, distribution, transmission and generation companies in the UK. The electricity industry is already delivering the most significant contribution to the national CO2 reductions but recognises that an aim of 10 per cent electricity from renewables by 2010 represents a reasonable, whilst challenging aspiration as one component of the programme to deliver the UK's climate change targets.

  2.  We also support the broad approach of the Government's proposed Renewables Obligation, in terms of:

    —  seeking to encourage a competitive market in renewables while limiting the potential costs for customers;

    —  providing some flexibility for suppliers in complying with their obligations through trading, banking and borrowing; and

    —  bringing renewable generators towards operation in the New Electricity Trading Arrangements alongside the conventional generators.

  The competitive structure of the obligation capped by the buy-out option for compliance provides a self-controlling mechanism based on market principles and avoids guaranteed pass-through premiums. We welcome this approach as being in line with the competition principles which apply elsewhere throughout the UK electricity sector.


  3.  The NFFO scheme supporting new renewable energy schemes delivered an increase from 1.9 per cent in 1990 to 2.8 per cent in 1999. An increase to 10 per cent by 2010 therefore represents a marked increase in the rate of development of renewable energy. Electricity companies are seeking to address this challenging target in a positive way. Nevertheless, as with any business, electricity suppliers are looking for maximum clarity and certainty in order to deliver the Obligation targets effectively and at lowest costs to their customers.

  4.  The pattern of the Obligation as currently proposed was set out in the DTI consultation paper published during 2000. This envisages an Obligation starting at 3.1 per cent in the first obligation period to 2002 and rising to 7.7 per cent in 2010, expressed as the percentage of a supplier's electricity sales. This is different from the 10 per cent target due to the contribution from renewable generation technologies which are outside the Obligation.

  5.  There are two key factors which could impinge on the certainty of the Obligation requirements for suppliers. Firstly, the starting point for the Obligation is not yet clear and relies on the delivery of remaining NFFO projects. In 1999, renewables which would be eligible under the Obligation provided around 1.2 per cent of UK electricity while the consultation paper envisages suppliers purchasing 3.1 per cent under the Obligation during 2002. Therefore, the delivery of remaining projects under NFFO, SRO and NI-NFFO is crucial to allowing suppliers to begin the Obligation on a reasonable footing. If there is any shortfall in these, then the burden on suppliers (and their customers) in the early period of the Obligation will prove to be more onerous than implied in the consultation.

  6.  Secondly, as previously mentioned, the overall target includes renewable technologies which the Government regards as viable in their own right and therefore not eligible for the support provided under Obligation. In particular these are large scale hydro and energy from waste schemes which the Government expects to provide around one third of the renewable total in 2010. In many cases these require significant re-investment to maintain output. If this is not done and/or output from these failed to match the forecast, it would be unreasonable to then change the Obligation on electricity supplies in order to make up the shortfall by 2010. This becomes clear if one considers that the electricity supply sector might, in such circumstances, be forced to pay a buy-out price due to the non-delivery of projects using these technologies when it could instead have paid for them to be up and running, at a lower cost than the buy-out, if they had been classed as eligible in the first place. We would ask for electricity companies to have clear and stable targets under the Obligation from the outset and throughout the period to 2010.

  7.  Potential uncertainty also arises from the need to clarify certain policy aspects of the Renewables Obligation, notably on importing renewable electricity through the inter connector with France. The potential for importing significant volumes (in terms of the targets up to 2010) of "renewable electricity" could affect the prospects for establishing early UK projects and the value of the initial Renewables Obligation Certificates market.

  8.  Uncertainty could also arise later through policies in certain other areas which are linked to the renewables programme. There are, for example, interactions with the operation of the Climate Change Levy and any Levy changes could therefore have implications for electricity suppliers' compliance with their Renewables Obligation. Again, the needs of the industry and the prospects for renewables are best served by clarity and certainty on such issues as early as possible.


  9.  We support the approach of including a buy-out option for compliance in order to limit the potential cost of the Obligation to electricity customers. The proposed buy-out is 3p/kWh which, the consultation paper suggests, could amount to £9.92 (by 2010) on a typical domestic bill for the renewable Obligation. By contrast, some consumer groups have expressed concern at the effect on the fuel poor of a proposed cost of £3.60 per annum per household for the suppliers' obligations under the Energy Efficiency Commitment (formerly the Energy Efficiency Standards of Performance or EESoP).

  10.  We consider that the 3p/kWh buy-out level is about right to stimulate the target level of new renewables, but look to Government to ensure that there is widespread understanding of the resultant impact of the obligation on electricity prices, particularly by consumer groups.


  11.  The final point above reflects a broader issue regarding the Government's Climate Change Programme, which is the need of wider public understanding and ownership of the issue. Much coverage of climate change emphasises the emissions arising from businesses and the energy producers rather than from the individual and the energy consumer. This is not to seek to play down the electricity sector's responsibilities but to recognise that the industry does not function in isolation from the broader society. This is clearly apparent in relation to the Renewables Obligation where the issues of both costs to consumers (as outlined above) and planning and development of renewable schemes are fundamental to the success of the initiative.

  12.  Local planning procedures and justified local concerns are a valid part of the renewables development process. However, in the past many projects have faced ill-informed local objections and at least one planning inspector refused permission for a project on the basis that it, individually, would have made a minimal contribution to overall UK generation. The Government is taking action to help the planning process in relation to renewables and a satisfactory resolution will be vital to delivering the Obligation targets. We do, however, consider that there is a need for Government to seek to instil a wider understanding of the role of renewables as part of the climate change strategy such that the general public, which includes planning inspectors, potential objectors and the electricity customers who will be paying for these schemes, appreciate the broader context.


  13.  The reform of the electricity trading market means that the true role of renewables in the generation portfolio can emerge over time, as the market is not distorted by having to include fluctuating output without compensation. The necessary premium for renewables will be dealt with elsewhere, via the Renewable Certificates and the Levy Exemption Certificates, so that the contract for the renewable electricity output is a deal like any other which can reflect the service to the system provided by the particular generating source.

  14.  A key unresolved cost issue for renewables however, remains the allocation of infrastructure costs to accommodate their network connection. The deployment of significant numbers of renewable projects will require upgrading of many parts of the electricity distribution networks but this will, of course, occur mainly in those areas of the country where the renewable resources are more plentiful. It would clearly be inequitable for the infrastructure costs which will occur in renewable rich parts of the country simply to be allocated to the network customers in those areas. Since the deployment of renewables is strategic for the UK as a whole, the costs of the associated infrastructure needs to be widely borne rather than falling mainly on the few.


  15.  As outlined earlier, we support the general structure of the Obligation as an appropriate mechanism for stimulating the wider uptake of near-market renewables. However, for any given renewable technology, this represents the final stage of a process which would begin with the research and development work, followed by trial installations, before progressing to a point where the Obligation will begin to expand their deployment. The stage beyond the Obligation is then, of course, their adoption on purely commercial terms, outside the phases needing Government intervention.

  16.  The intention for renewable energy in the UK is that the Government's target for 2010 is an interim stage rather than the endpoint. The needs of climate change, and the benefits of securing greater energy self-sufficiency than otherwise, indicate that a substantial shift in energy sources from fossil fuels into renewables is desirable. The future scenarios provided by the Royal Commission on Environmental Pollution in its June 2000 report on Energy—The Changing Climate illustrate the level of change which may be necessary. For this longer term, there is a range of renewable technologies which the UK may wish to consider and to eventually adopt, if and when technically and commercially viable, such as solar photovoltaics, wave power or tidal power.

  17.  At present, the Government is supporting research and development in certain areas and, for offshore wind, is providing capital grants for the bridging stage between research and development and the Obligation. However, it is not clear that there is an ongoing structured approach designed to support developing renewables' progress through these various stages. The research and development and capital grant parts of the process currently appear somewhat ad-hoc. It may be that this approach is only now emerging following the need to establish a replacement system for NFFO. Nevertheless, for the longer term future of renewables approaching 2010 and beyond, the Government will need to put in place that continuum from research and development through to the Obligation (which leads on to commercial application) in order to provide a clearer framework for researchers and companies participating in this necessary work.


  18.  Further to our earlier comments on the general planning regime, there are also planning issues relating to the connection of renewables under the Electricity Act 1989. Under the Act's Section 37 procedures on consents for overhead lines, the network operator is required to demonstrate a proven need for the line and, as currently implemented, it is not straightforward to undertake development in anticipation of need. In extremis, such an approach would mean the costly upgrading of certain sections of the network each time a new renewable development occurs, at unnecessary expense to the renewable developer, the network operator and the electricity customer. A pragmatic consents approach should recognise that subsequent renewable developments are likely in certain renewable rich areas and permit a more integrated approach to the network development essential to accommodating the proposed significant roll-out of renewables projects.

January 2001

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2001
Prepared 9 May 2001