APPENDIX 9
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.
LEVEL OF
THE OBLIGATION
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.
ACCEPTABLE COSTS
TO THE
CONSUMER
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.
EXPECTATIONS OF
THE OBLIGATION
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.
IMPACT OF
ELECTRICITY MARKET
REFORMS
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.
GOVERNMENT SUPPORT
OVER TIME
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.
PLANNING ISSUES
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
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