Select Committee on Environment, Food and Rural Affairs Written Evidence


Annex

 A CLA INTRODUCTION TO RENEWABLE ENERGY POLICY

  For many years, Government and most commentators (including environmental NGOs) have confused renewable energy generation with renewable electricity. All supply side efforts have been addressed at the electricity sector, and the prospects for renewable heat and transport fuels have been largely ignored. Policy in these sectors has been addressed at efficiency of use and savings, rather than in new, renewable sources of supply.

  This is particularly disappointing as in the UK the residential and tertiary building sectors have been shown to be the largest overall end users of energy, mainly for heating, lighting, appliances and equipment. The energy consumed in buildings in the UK amounts to 46% of the national total (27% from the domestic sector and 19% from the non-domestic sector). This equates to about 235 million tonnes of carbon dioxide every year-or about 63.5 million tonnes of carbon per year (MtC/year).

  Renewable road transport fuels have largely been ignored in UK policy to date, partly owing to a confusion about the land use implications. Government seems to be willing to incentivise growing biomass for electricity production, and to harbour concerns that if biofuels were also taken up, this would in some way conflict with land availability for Short Rotation Coppice and Miscanthus. Given the need for new and profitable non food uses for land, the potential CO2 savings from biofuel use, and the income opportunities it offers to growers, the CLA considers these concerns to be misplaced.

  Further, recent concerns over security of supply, together with the EU Biofuels Obligation has pushed the renewable transport fuels debate to the top of the agenda.

CURRENT ELECTRICITY POLICY

  1.  The Government has adopted a target that 5% of all electricity shall be produced from renewable resources by the end of 2003, and 10% by 2010. Technology has improved so that the pollution caused by traditional electricity generation can be reduced through the treatment of flue gases to reduce acid rain, but CO2 is an inevitable by product of burning hydrocarbons and is believed to be the main contributor (by volume) to global warming. The true cost of nuclear power is still uncertain: whilst the generation of power is claimed to be cheap, and does not involve CO2 emissions, the costs of decommissioning closed power plants and the storage of nuclear waste are, as yet, unquantifiable. The Cabinet Office Performance and Innovation Unit recommended that options for future nuclear electricity generation should be kept open, but made no firm proposals for replacement of the existing nuclear power stations, which are due to be decommissioned in the next 10 years.

  2.  The use of coal, the traditional source of energy for electricity generation, has been much reduced over the last decade, which has involved the restructuring of the coal industry and significant price reductions. There is currently an abundance of natural gas but reserves are limited in the medium to long term. The technology to allow it to be used for the generation of electricity (in Combined Cycle Gas Turbines or CCGT) at a competitive price has been developed, and accordingly it is becoming a major source of power. Its waste emissions are much less polluting than those of coal (though greenhouse gases are still produced). Whilst this source will help to address the pollution limits in the short term; the position for the longer term remains uncertain. Moreover, uncertainty over supplies contributes to price volatility, which saw bulk prices for gas jump by 100% in 2000-01, and directly lead to a fall in electricity generated from gas, and an increase in coal fired generation. This increased the CO2 emissions from the sector in 2002-03.

  3.  During the 1980s and 1990s, Government provided limited encouragement for more environmentally friendly, renewable sources of energy through the "non fossil fuel obligation" (NFFO). This allowed renewable energy promoters to bid for renewable electricity supply contracts at premium prices to overcome the inherent risks of the high capital cost of new and emerging technology and uncertain performance of alternative energy projects.

  4.  This mechanism was replaced under the Utilities Act 2000 by a new procedure, the "Renewables Obligation". This (briefly) provides that any retail seller of electricity is required to source a percentage of what it sells from renewable resources. The first Renewables Order (RO) was made in April 2002.

  5.  It is estimated that the majority of the Government's target of 10% renewable electricity by 2010 may be created in the form of wind energy. A significant proportion will be offshore, subject to sufficient grant aid with the additional costs of offshore generation being made available, but most will be land based turbine proposals. DTI projections include a significant place for biomass electricity in the mix. Unless biomass generators come forward, it is likely that the Government's 10% target will not be met.

  6.  At the same time, the Utilities Act made provision for the replacement of the electricity trading and pricing mechanism. Previously, the "Electricity Pool" produced a half-hourly price determined by the seller's cost of generation. The top bid that satisfied market demand became the pool price for contracts made in that period. Smaller generators (like biomass and wind) were able to make sales contracts by reference to the pool price, which offered administrative convenience and secure returns.

  7.  The New Electricity Trading Arrangements (NETA) are far less advantageous to small scale generators, and particularly bad news for small scale combined heat and power generators. Under NETA, bilateral contracts are the norm, with balancing of supply and demand taking place only at the margins. Government aims to ensure by this that electricity retailers will be able to negotiate cheaper prices for their customers for guaranteed supplies. Unfortunately, in the nature of things CHP electricity is an intermittent resource and is penalised on price under the marginal trading arrangements. It seems likely that CHP generators will seek to bundle their output with other renewable resources (such as wind or hydro) in order to be able to offer a more stable renewable electricity supply to the market. However, such bundling services are only now being made available and inevitably involve an additional cost. In the interim, the electrical generation output of CHP in the UK has actually fallen, and many environmentally beneficial CHP projects have been abandoned or shelved. The electricity regulator, Ofgem, was asked by government to look at the impediments that NETA throws in the way of the development of renewable energy, but failed to deliver.

  8.  One of the key issues for potential renewable generators is whether the value they can appropriate from the Renewables Obligation plus the CCL exemption (see below) is sufficient for renewables generation to be commercially viable. The Renewables Obligation works through a mechanism under which electricity suppliers require renewable certificates to cover the statutory level of renewable production, otherwise they must pay a fine of 3p/Kw Hr. This "buy-out" price has been set at a level which enables wind generation, but not other forms of renewables. Moreover, in the competitive market, renewables generators are not able to appropriate all of the value of the buy-out price or the CCL exemption. In addition, there wider cost reductions have driven down the market price for electricity. These risks mean that other technologies are currently simply not viable.

  9.  As against this, further developments in the field of electricity contracts may improve the long-term viability of renewable generation. The first is the development of a "green electricity", where consumers are offered the opportunity to purchase electricity generated from renewable sources and delivered via the grid. A number of regional electricity retailers are offering green tariffs, but they have not penetrated mass markets.

  10.  The second is the ongoing work to ensure that generators will be offered a credit for delivering energy into the grid at a point closer to its consumption, rather than on the standard access charge which takes account of the preponderance of conventional generating capacity based on large scale coal and nuclear fired plant in areas remote from the demand for the power. This is a key issue as well-located generation capacity can reduce the need for unsightly long distance transmission pylons. At the same time, if "net metering" is introduced it will revolutionise the economics of small scale self generation projects. (net metering gives the small scale generator a credit for the electricity exported to the grid at the same price as the electricity purchased for consumption).

  11.  CLA has long argued that there is significant market failure in that the specific wider public benefits of biomass energy (described in the CLA Biomass handbook) are not recognised. The current Renewables Obligation, combined with NETA, imposes a "one size fits all" or technology blind approach to renewable electricity. This is directly resulting in several damaging outcomes, in our view.

  12.  These include:

    —  Increased requirements for public expenditure by way of direct grant aid necessary to incentivise biomass developments.

    —  A lack of consumer choice in how renewable energy is delivered, and increasing concern amongst communities threatened by inappropriate land based wind turbines.

    —  A failure to deliver the benefits to the rural economy from biomass jobs and incomes.

    —  A failure to deliver the prospects for market driven conservation and environmental improvements from the increase in woodland cover.

    —  A failure to capitalise on UK engineering excellence, leaving the field (and huge potential export markets) to foreign competition.

  13.  The CLA has long argued that a more rational approach would be to "band" the Obligation, so that different technologies could compete with each other within the separate bands, each having a buy-out price that recognises the emerging technology costs and wider benefits they deliver.

Current Heat Policies

  14.  Given that the consumption of energy (and the current contribution to greenhouse gas production) comes largely from the use of heat in domestic and commercial premises, Government has been slow to address the question of renewable heat production. The combined GHG output of domestic and industrial energy use, largely by way of heat, amounts to about 50% of the UK total.

  15.  Policies introduced to date include the Climate Change Levy (CCL), the development of the Carbon Trust (and the grants it is able to offer for energy saving) together with the Energy Savings Trust Community Energy schemes and housing policies providing grant aid for insulation.

  16.  The CCL is a flawed policy tool, from the point of view of the environment, of rural business and of prospects for biomass heat generation:

    —  First, in that it applies only to business use of energy, and therefore fails to address the very large domestic contribution to GHG emissions.

    —  Second, in that intensive energy users have been able to negotiate reductions, but the basis for these has not been transparent.

    —  Third, that the revenue raised has not been redistributed evenly, the National Insurance bills of manufacturing being lower than those of the service sector.

    —  Fourth, that the CCL does not apply to heating oil, which is covered by other taxes.

  17.  Under the CCL, rates currently payable (2002) are:


Electricity:
0.43p/KWh
Natural gas
0.15p/KWh
Solid Fuel (coal coke etc)
1.17p/Kg
LPG
0.96p/Kg


  18.  For more details on CCL, contact the HMCE climate change levy helpdesk—Tel 0161 827 0332, or visit www.hmce.gov.uk/business/othertaxes/ccl.htm.

  19.  In the context of renewable electricity, generators need to seek levy exemption certificates from Ofgem. For direct supply of biomass, or heat contracts using renewables, no levy is payable, which provides a direct saving to the customer. The savings that business customers enjoy may be captured by the energy supplier, or shared with the customer.

  20.  The Carbon Trust is tasked with supporting the transition to a low carbon economy in the UK.

  Particular initiatives that the Carbon Trust are operating include the long standing energy efficiency best practice programme—(see www.energy-efficiency.gov.uk) and it is launching a new initiative—the Foundation element of the Low Carbon Innovation Programme. The aim of this programme is to assist developing technologies overcome technical and non-technical barriers across the innovation chain.

  Details are available at www.thecarbontrust.co.uk/foundation.

  For details of the work of the Carbon Trust contact:

  The Carbon Trust

  3 Clement's Inn

  London

  WC2A 2A

  Tel: 020 7170 7048

  Fax: 020 7170 7020

  18.  Businesses can make very substantial savings in heat and energy usage, and the Carbon Trust has recently set up a free advisory service—www.actionenergy.org.uk/—which is specifically aimed at providing assistance in this area

  19.  The cumulative effect of current support for heat is wholly inadequate for the task in hand. Energy used to provide space heating requirements remains one of the largest sources of GHG.

  20.  Thus the CLA has joined with many other organisations, including the Renewable Power Association, Slough Heat and Power, the Friends of the Earth, the NFU, British Biogen and the Combined Heat and Power Association to argur for the early introduction of a Renewable Heat Obligation, modelled on the Renewable (electricity) Obligation

  21.  A heat obligation, if introduced, promises significant carbon savings at approximately one third the cost of the RO.

  22.  Meetings have been held with DTI Ministers and we are determined to drive the agenda forward.

CURRENT RENEWABLE TRANSPORT FUEL POLICY

  23.  Government has argued that the relatively high level of road fuel duty, and the differentiation between the rates for leaded and unleaded fuels, together with differential rates of road fund licence rates address the environmental outputs of road transport.

  24.  Many commentators seek to downplay the role for renewable transport fuels by promoting the prospects for hydrogen powered cars. This, however, fails to recognise the very significant CO2 output of road transport (approximately 25% of all UK emissions) and the long time frame and huge investment required to switch from petrol and diesel to hydrogen. Moreover, creation of hydrogen requires huge amounts of electricity, and unless this is generated from renewable resources, no CO2 savings are made.

  25.  Policy on urban air quality has lead to the "powershift programme", which provides incentives (including capital grants and a significantly reduced rate of fuel duty) for those willing to switch their vehicles to Liquid Petroleum Gas (LPG) or Compressed Natural Gas (CNG).

  26.  Only in the 2002 budget was a concession made for renewable fuels. Biofuel now attracts a 20p/litre reduction from standard duty rates. Unfortunately, this is not enough to bridge the gap between the costs of production of biofuels (biodiesel and bioethanol) and those of fossil fuels, so is unlikely to create a significant demand for biofuel crops. The current rate may encourage production of biofuels from recovered vegetable oils (from catering establishments) but there is only a limited supply of material.

  27.  Government, under considerable pressure from lobbyists (including the CLA), undertook research into the environmental benefits of growing biofuels and this is available at the sheffield hallam website (http://www.shu.ac.uk/rru/reports.html ). This shows that biofuels save up to 70% of GHG on a whole life cycle basis and improve air quality in addition.

  28.  At the same time, Government (DfT) has this month responded to the European Commission Biofuels Directive. Member states have a wide discretion, and some encouragement, to set targets for biofuel production and provide tax incentives to make it happen. The EU has set a quality standard for biodiesel, which is not yet in place in the UK. This causes concern, as poor quality fuels on sale will tend to undermine the potential market.

  29.  Other European competitors are already well down this road, and biofuel is already commercially available in many EU countries. At the same time, Brazil production from biomass (sugar cane) peaked at just over 50% of "petrol" consumption, or 30% of its road fuels, and currently lies in excess of 35% of "petrol" use. The USA is (2002) massively increasing its investment in this area. In some mid-western states, substitution of biofuels from maize in petrol already exceeds 20%.

  30.  Whilst there are technologies for small scale conversion of home-grown crops to road transport fuels, it is expected that, if Government provides suitable incentives, the market will develop quickly through conventional channels.

  31.  DfT has recently consulted on a draft Biofuels strategy, and we append our response at the annex. The CLA has welcomed the DfT consultation, urged early action to introduce a Renewable Fuel Obligation with appropriate environmental safeguards (not extending to carbon accounting) with a binding obligation applied to suppliers on a rising scale, starting at 2% in 2006, increasing in steps to 5.75% by 2010 and reaching at least 10% by 2020 and argued this should be accompanied by the maintenance of the existing fuel duty reduction to avoid unacceptable fuel price increases.

  32.  The CLA also supports increased grant aid at regional and national level to provide assistance to the infant renewable fuel processing industry in face of established competition.

CONCLUSIONS

  33.  If the UK is to meet its Kyoto commitments, and go further to address the recommendations of the Royal Commission on Environmental Pollution (RCEP) for deep and lasting cuts in GHG emissions, policy action is required on all fronts.

  34.  RCEP has recently published a report on the failure of the biomass sector to deliver, pointing the finger firmly at a lack of joined up thinking in Government.

  35.  Moreover, choosing renewable transport fuels offers an environmentally friendly way of reducing the impact of car use, without attacking the motorist.

  Further information on these issues are available on the CLA website, www.cla.org.uk

  Recent CLA responses to Government consultations are to be found under "policy" "Government responses" and include:

    —  Response to draft PPS22.

    —  Response to Renewable Fuels consultation.

    —  Response to The Renewable Obligation consultation.

    —  Response to the Energy White Paper Review.

  CLA handbooks (priced publications) for businesses interested in developing renewable energy include:

    —  CLA 25: Wind Farms and Wind energy as an enterprise.

    —  CLA 30: Biomass: energy from the land as an enterprise.

11 October 2004



 
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