Conclusions and recommendations
1. Even if support for renewable energy achieves
its planned contribution to reducing carbon dioxide emissions,
the Department will need to encourage investment in other zero
or low carbon generating capacity, or energy efficiency measures,
if it is to meet its overall emissions target. Options
for new generating capacity include replacing nuclear power stations
due for closure, or producing both heat and power from the same
energy source. The long lead times for commissioning new generating
capacity mean that the Department now needs to decide urgently
which forms of generation to support and in what ways.
2. The renewables programme will provide value
for money only if it helps industry to lower the cost of renewable
energy to levels which approach the combined financial and carbon
dioxide costs of other forms of generation. Otherwise
the contribution that renewables can cost-effectively make to
the twin objectives of reducing carbon dioxide emissions and improving
energy security is likely to be limited. The Department needs
to set out the expected rate of reduction in the cost of generating
energy from each of the main renewable sources and actively monitor
progress.
3. The Renewables Obligation is currently
at least four times more expensive than the other means of reducing
carbon dioxide currently used in the United Kingdom, which include
levying a charge on nonhousehold users of energy and controlling
the carbon dioxide emitted by key industries.
A carbon tax would be a less complex way of reducing carbon emissions.
The Department and the Department for Environment, Food and Rural
Affairs should manage the range of policy instruments operating
under the Climate Change Programme so that public resources are
applied costeffectively.
4. The 2010 target requires the costs of the
Renewables Obligation to be acceptable
to consumers. But the Department has no means of informing
its judgement on this issue. It should consider surveying consumers
or consulting consumer bodies, such as energywatch.
5. Around a third of the support provided
by the Renewables Obligation exceeds the extra cost of renewable
generation. The Obligation provides the
same level of support to all eligible technologies and sites regardless
of their costs and long term potential to deliver reductions in
carbon dioxide. As part of its 2005 review of the Renewables
Obligation the Department should reduce the excess support in
the scheme. It could, for example, taper or phase out support
for lower cost renewable technologies which have limited growth
potential, such as landfill gas, or limit the number of years
individual generating sites can benefit from the scheme.
6. By including sites within the Renewables
Obligation from the previous support scheme the Department has
raised unexpected revenue for the Exchequer from electricity consumers,
worth between £550 million and £1 billion by 2010.
Prices paid to generators who agreed contracts under the Department's
previous support scheme were not affected by the introduction
of the Renewables Obligation, but the prices paid by electricity
suppliers and passed on to consumers have increased. So the revenue
arising from the output of these sites now exceeds the payments
made to generators, and the resulting surpluses accrue to the
agency which runs the scheme and are transferred to the Exchequer.
7. Predictions commissioned by the National
Audit Office suggest that output from onshore wind sites should
grow from 0.4% of the UK's total electricity supply in 2003-04
to nearly 3% by 2010-11. These sites are
often unpopular with local communities and the likely rapid expansion
of onshore wind power in the next five years could create a public
reaction against renewable energy.
8. In the first three years of the Renewables
Obligation scheme, the capacity of accredited sites generating
electricity from landfill gas has increased by over a third. Public
financial support for landfill gas sites is, however, at odds
with the objectives of environmental legislation which promotes
recycling of waste, rather than its disposal in landfill, and
thus limits the potential of this form of renewable energy.
9. Wind power generation is much less environmentally
intrusive when sited offshore. The Department
should factor in this environmental advantage when considering
the relative costs and benefits of onshore and offshore wind power,
and the level of financial support provided to each.
10. Biomass can provide a secure, stable
and sustainable energy source, but levels of generation remain
low even though public funds have been made available to support
the development of the technology.
Drawing on its experience of providing research funding and capital
grants for biomass, the Department needs to decide whether to
continue to support biomass and, if so, how to make its support
programmes more effective.
The Renewables Obligation has the effect of transferring
substantial sums from consumers to the renewables industry —
over £400 million in 2004-05, rising to £1 billion by
2010 — amounting to some £5
billion over the whole period. But this subsidy to renewables
is not authorised under the annual supply procedure and so, unlike
public expenditure, is not subject to regular Parliamentary scrutiny.
Requiring users to source supplies from uneconomic providers has
the same affect as taxing users to subsidise the providers, but
is not as transparent or amenable to parliamentary control. 11. The
government should make arrangements for annual Parliamentary scrutiny,
and the amounts involved should be reported annually to this Committee.
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