Select Committee on Environmental Audit Appendices to the Minutes of Evidence


Memorandum from the Electricity Association


  The Electricity Association is the trade association for electricity supply, distribution, transmission and generation companies in the UK, and represents a large and diverse membership. This submission focuses on the means by which the PIU Energy Review targets for renewables could be delivered. However, we would first make some general comments regarding the current policies for supporting renewables.

  We support the general market-based approach inherent in the Renewables Obligation. The approach incorporates support for renewables but coupled with a competitive element to encourage greater efficiency and lower prices. The approach also leads renewable operators towards operating in the same markets as conventional generators and provides for a smooth transition for renewables into the market as technologies achieve commercial viability (rather than the step-change which would occur with, say, the stopping of a subsidy payment). In recent months, a number of electricity companies have been outlining proposals for substantial renewable schemes, signalling an intention to seriously pursue the Obligation targets.

  We would emphasise that the delivery of the renewables targets does not depend on the electricity sector alone, however, but requires the contribution of others. For the longer term progress of renewables, the necessary support for R&D on new technologies is vital and we welcome the extra funding announced by the Government in recent months for this. In the shorter term, the key issues to be resolved remain:

    —  planning issues; and

    —  the technical and financial implications of increasing embedded generation.

  On planning, we welcome the Government's streamlined initiative for offshore wind sites, the locational flexibility for NFFO projects and the identification of possible renewable sites in local structural plans. Nevertheless planning issues represent a significant cost and delay to the developers of renewable projects, due in particular to the continuing NIMBY factor.

  Similarly we welcome the progress made by the DTI's Embedded Generation Working Group but, at this stage, certain issues remain to be resolved. Such as the technical plant and control issues around accommodating intermittent and fluctuating generation on the distribution systems, plus the fair cost recovery of connections, reinforcement, etc. An overarching issue remains the need for a mechanism which ensures that the local electricity customers in a renewables rich area do not unfairly bear the network costs of meeting national renewables targets. Again these issues are not the sole responsibility of the industry but require the participation of the Government, the regulator and others in their resolution.

  The Electricity Association therefore broadly supports the forthcoming Renewables Obligation which will run to 2010. In respect of the longer term view taken by the PIU Energy Review, the remainder of this submission discusses the means by which future targets could be delivered.


  To date, the electricity sector has been the most significant contributor to the UK's relatively good performance on its climate change targets. In the period up to 2010, the sector is expected to deliver a further contribution, including via the following obligations carried by electricity suppliers:

    —  the Renewables Obligation with target increases through to 2010 (and maintained through to 2027); and

    —  the Energy Efficiency Commitment for 2001-05, with a further commitment considered likely from 2005.

  The PIU Energy Review looks beyond 2010 and at possible measures to make further and more significant inroads into the UK's climate change emissions. The review rightly suggests a prudent approach to keeping open the option of nuclear generation which currently provides a significant proportion of zero-CO2 electricity. The review's proposals also include a substantial increase in renewable energy and a "step change" in energy efficiency as part of its programme but notes in relation to its renewables target that this is likely to impose a significant increase in electricity prices while "the review has not come to a conclusion about the means by which the 2020 target should be delivered".

  The question therefore arises as to whether the PIU's ambitions on renewables and energy efficiency should be delivered by increasing the targets under the existing Obligation procedures.

  This submission argues that simply increasing the targets on electricity suppliers could lead to significant and, indeed, undesirable distortions in the energy markets. Such distortions would not be in keeping with the development of a sustainable energy market, and any further obligations should therefore we widened to include all energy sectors.


  In considering climate change, the key impact of fossil fuels is the carbon dioxide (CO2) emissions arising as a consequence of their use. DEFRA provides annual statistics of such emissions and the following graph shows the CO2 arising from the various fuels for 1999, the latest year for which the data has been published.

  Of course, one key use of these fuels is for electricity generation, in particular most coal plus a significant proportion of gas. The following graph reallocates the emissions in relation to the proportion of each fuel used to produce electricity, based on the DTI's Digest of UK Energy Statistics, to give the breakdown of emissions by end-use fuel:

  This illustrates that the direct use of both gas and oil are each marginally higher contributors to the UK's overall CO2 emissions than emissions from the electricity sector. However, by contrast, the electricity industry currently carries two obligations relating to its CO2 emissions (Renewables and Energy Efficiency) while the gas sector has one (Energy Efficiency) and the oil and solid fuel sectors none. Even for the Energy Efficiency Commitment (EEC) which applies to both electricity and gas, the target is set per domestic customer, so that the electricity sector carries a larger burden than gas in spite of electricity's lower net emissions.

  One principle of sustainability which is often cited is that "the polluter pays". Yet while a range of energy sectors are responsible for climate change emissions, the obligations are not currently applied to that same range of energy suppliers. The validity of continuing that situation is questionable since:

    —  climate change emissions are an issue for all fossil fuel energy sectors;

    —  renewables and energy efficiency represent a potential solution for all these energy sectors; and

    —  sustainability requires that the support for renewables and energy efficiency should not distort energy markets.

  The Electricity Association therefore considers that any further expansion of the targets on renewables and energy efficiency needs to include all fossil fuel energy sectors. This would also be in accordance with the sustainability principle of "the polluter pays".


  Renewable energy is an issue which applies to all energy sectors. If serious reductions in carbon dioxide emissions are to be achieved, as suggested by the Royal Commission on Environmental Pollution, then renewables have to gain priority over all use of fossil fuels, not simply their use in electricity generation. While the mix of solutions is uncertain, this shift in emphasis towards renewables needs to take place by a combination of delivery mechanisms:

    —  direct use of renewables (eg burning biomass for process heat or in local CHP plants, or photovoltaics integrated into buildings);

    —  use of fuels derived from renewables (eg biodiesel, or hydrogen produced using renewable power);

    —  use of renewably derived electricity (eg from wind, wave or tidal, energy crops, etc).

  Looking from the perspective of the end-uses, a more renewable energy services sector could include:

    —  transport increasingly driven by biofuels, hydrogen and electric traction;

    —  the needs of industry for process heat increasingly met by biomass, hydrogen and electro-heat technologies; and

    —  the heating of buildings shifting towards greater use of hydrogen and electricity.

  Hence, looking beyond the immediate renewables targets, further expansion of renewables is an issue for all the fossil fuel sectors, and one in which all the sectors should be engaged.


  For many years, the electricity industry has recognised that it is a significant source of CO2 emissions and acted responsibly in seeking to develop appropriate responses. It has already reduced its total emissions by over 20 per cent between 1990 and 2000 through the increased use of gas-fired generation, the improved performance of nuclear generation and the contribution from CHP and renewables. it has played a positive role in working with the Government on the development of:

    —  the UK climate change targets;

    —  the flexible mechanisms such as emissions trading;

    —  the co-operative EESoP programme (Energy Efficiency Standards of Performance) which preceded the statutory EEC; and

    —  the Renewables Obligation.

  In relation to the Renewables Obligation and the EEC, we would emphasise that the electricity industry is not seeking to amend the existing commitments. Indeed, the industry is committed to doing its utmost to ensure that these targets are achieved successfully. However, any subsequent expansion in the targets for renewables or energy efficiency has the potential to produce unwarranted distortions in the energy market if not applied equitably. Thus, while the electricity sector has accepted the existing targets, it would be counter-productive if the increasing targets proposed in the PIU report continued to be placed either solely or mainly on the electricity sector.

  The distortion in the market becomes apparent by considering a further renewable target solely on the electricity sector. The cost of the obligation falls on the electricity suppliers leading to a necessary increase in electricity prices. Fuel sectors outside the obligation do not of course have any corresponding price burden. Hence as electricity becomes increasingly renewable and lower in carbon emissions, the relative price increases compared to fossil fuels so that the signal to consumers is to use more fossil fuels and less electricity, contrary to the environmental objective.

  The likely existence of Greenhouse Gas Emissions Trading in the same timeframe as the PIU's proposed targets further highlights the potential market distortion. The UK is introducing its national pilot scheme and the European Commission is developing a proposal for a EU-wide scheme. Most commentators anticipate that the price of CO2 reductions available through emissions trading will be considerably lower than the cost per unit CO2 saved by renewables, because of the large potential reductions available through low cost fuel-switching and energy efficiency measures which will be available. All businesses would be seeking to comply with any targets for limiting its emissions by the most cost-effective means. A requirement that the electricity sector alone had to bear the cost of more expensive renewables would distort the energy market.

  The Government has also made clear that it is seeking to develop a UK renewables capability not solely on the basis of its climate change aims but for a range of broader economic and social benefits. It is therefore more equitable that the cost of delivering those wider-ranging benefits to the country as a whole should be shared across the whole energy sector rather than falling on just one part.


  The existing Renewables target in the UK is for a defined proportion of electricity to be derived by renewable sources, and the statutory Obligation requires electricity suppliers to fulfil this target. However, it is not implicit that the way in which the target is expressed determines the way in which the target is delivered; so the fact that the target is expressed as a proportion of renewable electricity generation does not imply that the resulting Obligation has to be on the electricity sector.

  One suggestion for addressing climate change in the early days was that, say, petrol companies would pay for forest planting to offset some of the emissions from the use of their petrol. There is no difference of principle in asking those petrol companies to instead pay for renewable generation as the offset.

  This is the logic behind the three flexible mechanisms which are a key part of the Kyoto Protocol:

    —  Greenhouse Gas Emissions Trading.

    —  Clean Development Mechanism.

    —  Joint Implementation.

  Each of these was included in the Protocol to recognise that it is possible for any country, and sector, or any business to make emission savings either directly themselves or by ensuring that the reduction takes place in another country, sector or business. Because climate change is a global impact, the important issue is that the reduction is made, not necessarily where or how or by whom.

  Hence for the time being, the renewable target may continue to be set in terms of a level of renewable electricity generation but this does not imply that it should be paid for exclusively by electricity suppliers. Indeed avoiding distortion in the overall energy market would suggest that it should not.


  The question then arises of how other fuel sectors could implement a renewables obligation if the target were applied to them. The existing Obligation applies to electricity suppliers and is essentially implemented by those suppliers acquiring sufficient renewable Obligation Certificates to satisfy their target in a given period. The Certificates are proof that a given quantity of renewable electricity has been generated and supplied to customers in GB.

  As already discussed in relation to flexibility mechanisms in general, the certificate scheme creates a renewables market wherein an electricity supplier does not need to have bought the renewable output himself; the certificate demonstrates that the production and use of the renewable electricity has taken place. Because of the supplier's target, the Certificates have a value that allows them to be traded such that the extra costs of the overall renewable generation are shared between the different suppliers carrying the Obligation.

  Thus, in the same way that an electricity supplier can support the higher costs of renewables generation without being a renewable generator or having to directly contract with such a generator, any fossil fuel supplier could have a renewables target which they would comply with via the purchase of renewables Certificates.


    —  The Electricity Association supports the existing Renewables Obligation to 2010 and Energy Efficiency Commitment for 2002-05.

    —  The way in which any target is expressed should not determine how that target is delivered or how it is to be funded. This is entirely consistent with the rationale behind the flexible mechanisms under Kyoto. The UK's Renewables Obligation already incorporates its own suitable flexibility mechanisms in the form of tradable Certificates.

    —  It is essential that the means by which future renewables and energy efficiency targets are delivered avoid undesirable distortions in the energy market.

    —  Any future expansion of the targets on Renewables and Energy Efficiency should involve all CO2-emitting energy sectors in a way which better reflects the sustainability principle that "the polluter pays"; this would help put all fuel companies on the path towards a restructured and more sustainable energy sector.

March 2002

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