House of Commons - Public Accounts

Select Committee on Public Accounts Sixth Report

1 The contribution of renewables to the UK's wider energy and environmental policy

1. The Government's Energy Policy[2] has four objectives:

· Protecting the environment. The Government's Climate Change Programme aims to reduce UK carbon dioxide emissions by 60% by 2050. The Government is currently reviewing the Programme which is expected to deliver around a 15% cut in carbon dioxide emissions between 1990 and 2010,[3] against a target for a 20% reduction.

· Energy security through diverse and reliable sources.

· Affordable energy for the poorest.

· Competitive markets for UK business, industries and households.

2. The Government wants renewable sources of energy, which include the sun, the wind, waves, the flow of water, and biomass, to make an increasing contribution to UK energy supplies in the years to 2010 and beyond (Figure 1). This growth in renewables is intended to improve the security of the longer term electricity supply and contribute to the Climate Change Programme. It should also assist the UK renewables sector to become competitive in home and export markets and in doing so provide employment.[4] The Department expects that renewable energy could deliver around a fifth of reductions in carbon dioxide emissions by 2010.[5] Figure 1: Major Renewable Technologies and their stage of development

Each of these technologies produces no carbon dioxide or, in the case of biomass, only the carbon dioxide already absorbed from the atmosphere when it was growing.

Technology Description Stage of development

Hydroelectricity Exploits the energy of flowing water (e.g. from a reservoir or river) to drive a turbine connected to an electricity generator Proven technology. Large sites are commercially viable but smaller sites, meeting certain conditions, can receive support under the Renewables Obligation

Wind Harnessing the power of moving air by using turbines mounted on a tower. Onshore wind is a commercially viable technology under the additional support provided by the Renewables Obligation.
Little UK experience of operating offshore wind sites and thus the Department has provided additional financial support by way of capital grants.

Landfill gas Biodegradable waste breaks down in landfill sites. Carbon dioxide and methane extracted and burnt in a gas turbine. One of the cheapest sources of renewable generation. But scope for further expansion is constrained by environmental legislation which encourages recycling of waste.

Biomass Use of plant material, such as straw, or animal waste, such as chicken litter, as a fuel. Costs vary from site to site. A small number of sites viable under the Renewables Obligation alone. Capital grants are also available to help industry develop new sites.

Marine The extraction of energy from ocean waves or tidal streams, which are high velocity sea currents caused by periodic movements of the tides. Both technologies are at the stage at which pre-commercial demonstration projects can be tested. In January 2005, the Department announced details of a scheme to provide financial support for such projects.

Source: C&AG's Report, Department of Trade and Industry: Renewable Energy (HC 210 Session 2004-05), Figure 2 and Appendix 3

3. Levels of renewable generation in the UK have been low by international standards and are currently about half the European Union average. In part, the levels have been low as there has been less pressure in the UK to find alternative sources of energy because of the extensive resources in coal, oil and gas.[6] In the late 1990s, the Government wanted to provide a new and strong drive to develop renewable energy. It set a target for renewables to account for 10% of energy supplied in Britain by 2010, subject to the cost to the consumer being acceptable. A supporting target of 5% by 2003 was not achieved. The Department decided that its previous policy for supporting renewable technologies - the Non-Fossil Fuel Obligation - was not bringing forward plans and proposals quickly enough. It therefore wanted to provide stronger incentives for the renewables industry to identify and develop sites where low cost energy could be generated.[7] It concluded that a renewables focused policy instrument was the only way to achieve the increase in generation required to attain, in the Department's words, the "rather heroic 2010 target". An incentive to reduce emissions across all sectors of the economy, such as a carbon tax, was unlikely to have yielded sufficient levels of renewable generation.[8]

4. After four years of development and consultation the Department introduced the Renewables Obligation in April 2002. The scheme requires all electricity suppliers in Britain to source a growing percentage each year of their total sales from renewable sources. Suppliers purchase Renewables Obligation Certificates from renewable generators who receive them free from the Office of the Gas and Electricity Markets (Ofgem) when they produce electricity. The generators can sell the Certificates with the associated electricity or separately. Suppliers demonstrate compliance with the Obligation by surrendering Certificates to Ofgem. If a supplier surrenders an insufficient number of Certificates in any year they pay a premium related to the size of the shortfall. The premium is at a level which provides a strong incentive for suppliers to obtain Certificates. The revenue from the Certificates increases generators' income, thus helping them to cover the higher cost of producing electricity from renewable sources and providing the renewables industry with an incentive to build new capacity.[9]

5. Projections of renewable generation up to 2010, commissioned by the National Audit Office, suggest that provided that electricity prices remain buoyant, capital and operating costs continue to fall as the industry's experience grows, and new planning policy[10] eases the problems developers have faced in getting sites commissioned, the Department could still achieve the 2010 target. Under less favourable price and cost conditions, the level of renewable generation in 2010 could fall to around 7.5% of electricity supplied compared with the 10% target.[11]

6. The Government's aspiration is for renewable energy to account for 20% of electricity supplied in Britain by 2020, and has stated that renewables will need to contribute at least 30% to 40% of the electricity supply by 2050 if the 60% cut in carbon dioxide emissions is to be achieved.[12] To encourage such levels of generation, the Department will need to help industry develop and bring into use new renewable technologies, as the potential for the existing mature technologies to contribute to a larger and secure renewable electricity supply is constrained. There are practical and environmental limits on increasing output from landfill gas and hydroelectricity.[13] The intermittent nature of wind power means that generation levels are uncertain, so back-up generation is required, and as the proportion of electricity generated from intermittent sources increases the costs of maintaining stable supplies also rises.[14]

7. The Department's research and development programme has been running for 30 years and has provided grants worth £230 million (at 2002 prices) in the last 16 years.[15] The programme has a poor record of helping the progress of renewable technologies. The onshore wind sector has been dominated by Danish and German technology.[16] The cost of generating electricity from the Department's currently favoured demonstration technologies - wave and tidal - currently remains much higher than that of mature renewable technologies, despite research funded by the Department as far back as the 1980s.[17] Biomass has also been slow to get established. It accounted for only 11% of electricity generated from renewable sources in 2003-04 even though the Department has supported research and development into biomass for over 20 years.[18] More recently the Department has worked with the National Lottery to make funds available from the lottery to help industry develop individual sites.

8. Whether or not the Department succeeds in achieving the Government's 2020 aspiration, the contribution of renewables to both reducing carbon dioxide emissions and improving security of supply could be offset by other factors. Most of the UK's existing nuclear power stations are due to close by 2020, and consequently generating levels are expected to fall to about a third of current output. This fall will largely offset the projected growth in renewable generation over the same period (Figure 2). It is therefore likely that the Department will need to encourage the growth of other sources of low or zero carbon generation by 2020 if it is to achieve both the Government's climate change and energy security objectives.[19] Figure 2: Percentage of total electricity generated from nuclear and renewable sources

Sources:

1. Table 5.6 of Digest of United Kingdom Energy Statistics 2004, Department for Trade and Industry.

2. Updated Energy Projections, November 2004 - Addendum: Projections Beyond 2010, Department of Trade and Industry, which assumed that the level of renewable generation would not grow after 2015. The figure for 2020 above assumes that the Government achieves its aspiration for renewables.

Note: Renewable generation includes output from technologies, such as large scale hydroelectricity, which are not covered by the Renewables Obligation.

2 Energy White Paper, Our Energy Future: Creating a Low Carbon Economy, 2003, para 1.18 Back

3 Updated Emissions Projections, Department of Trade and Industry, November 2004, Annex 6 Back

4 New & Renewable Energy: Prospects for the 21st Century - The Renewables Obligation, Statutory Consultation, Department of Trade and Industry, August 2001, para 1.10 Back

5 Q 3 Back

6 Q 63 Back

7 C&AG's Report, Department of Trade and Industry: Renewable Energy (HC 210, Session 2004-05), paras 1.9-1.11 Back

8 Qq 4, 8 Back

9 C&AG's Report, para 1.12 and Figure 7 Back

10 In August 2004 the Office of the Deputy Prime Minister issued a new planning policy statement (PPS 22) on renewable energy in England Back

11 C&AG's Report, paras 1.18-1.19 Back

12 Energy White Paper, 2003, paras 4.5, 4.11 Back

13 C&AG's Report, para 3.18 and Appendix 3 Back